The EU’s Pharmaceutical Review Needs To Remain Grounded In Economic Reality

The Review proposes to reduce IP rights across the board, with incentives to prolong them. Can any of these incentives work? Maarten Meulenbelt, Chris Boyle, and Zina Chatzidimitriadou discuss how the real-world effects of the Review have not been assessed, and where there is room for improvement in its critical provisions.

Many of the assumptions of the European Commission (the “Commission”) about how the incentive schemes set out in its Pharmaceutical Review (the “Review”) will work are based on flawed economic thinking. The Review, whose final text was published Wednesday, reduces IP protection. This reduction includes the cutting of Regulatory Data Protection (“RDP”) from eight years to six years. The Review then offers three incentive measures which pharma companies can use to get their RDP duration back up to eight years, or potentially even to slightly over eight years. But each of these incentives is fraught with risks and uncertainties, and the Commission has not assessed whether any of them can work in practice.

Incentive of two years RDP if a product is launched in all 27 EU member states

One year ago, the members of pharma industry body EFPIA committed to submitting their products for reimbursement within two years in all EU member states. As a condition of restoring two years of RDP, the Review requires sufficient quantities of a product to be in a country’s supply chain to supply the needs of patients in that country. But, presumably, the company which owns the product will already have needed to have obtained reimbursement in order to be able to put sufficient quantities of the product into the distribution chain. And this new mechanism may, in practice, be impossible to achieve.

Even if two years RDP for achieving reimbursement in all 27 states would be achievable, the Commission should have assessed whether companies would be able to afford to pay the price for this. If a company has to rush to obtain reimbursement within, say, 12 or 18 months in order to be ready with sufficient quantities of the product to put into the supply chain within two years, then the member state in question is likely to demand a very steep price in terms of discounts. This is because the “RDP restoration” requires every member state to declare that the product has been launched in sufficient quantities within two years. The price of overcoming these effective vetoes by member states – and in particular the final ones to be achieved – could be prohibitive. This could be true both in terms of the level of the net price to be paid by those member states (a significantly reduced price per product), and in terms of the knock-on effect on prices in other member states via External Reference Pricing or disclosure of discounts (the Commission is also recommending more cooperation between member states on pricing).

Surprisingly, EU Health Commissioner Stella Kyriakides said on Wednesday, at the press conference launching the Review, that the industry would “stand to gain” from selling across the EU. But if a company has to incur all the costs of negotiations and launching (which can weigh heavily especially on smaller companies), and has to do it at much lower revenues per unit of product, then this could well be a loss making exercise. Therefore, the Commission should have assessed, from an economic perspective, whether any (or how many) companies would be able to afford to try and obtain the two-year RDP restoration in the real world of pricing and reimbursement.

Incentive of six months RDP for conducting comparative trials with comparator products

To qualify for this incentive, a company would need to conduct a trial with a comparator that was both relevant and the correct comparator. Can this incentive be combined with the unmet medical need incentive discussed below? What will happen if there is no comparator, or if the sponsor believes the comparator is relevant but the member states and authorities think otherwise? In that case a comparative trial would not achieve any extra RDP. The Commission has not assessed whether this measure will incentivize companies to conduct comparative trials that they otherwise would not have undertaken. This remains very much an open question.

Incentive of six months RDP where the product addresses an “unmet medical need”

Under the Review, an unmet medical need is defined narrowly as a meaningful reduction of  “remaining high morbidity or mortality,” taking into account the other products that are already on the market. Can the need to prove this work as a “carrot” or a “stick” incentive? Would companies be able in, say, 2024, to select a therapeutic area where, in 2034-2036, the remaining mortality or morbidity might or might not still be “high”? Would six months of RDP affect that selection? And if the company went into a therapeutic market with few or no products, would there be a basis for the comparisons required to obtain marketing authorization and reimbursement? The Commission has not carried out any analysis of whether any company could be convinced in this way to develop a product that it would not otherwise have developed (or vice versa).

The Net Present Value model

As noted in our previous blog, there is no lack of models for assessing the impact of incentives. For example, the Commission could have asked what the incentives in the Review mean if they are applied to the standard risk assessment model that is used by the industry, the risk adjusted net present value model (“rNPV”), (OHE 2020 and Dolon 2020). The rNPV looks at the development of a product holistically, starting with clinical trials, and considers what needs to be invested at each stage in going through market access procedures. Then it considers the chances of success in getting through all phases of clinical trials and of getting reimbursement. It also considers how long a company would have to wait before generating sales, and how long it would have exclusivity for its product. A business case number is produced which is either positive or negative. It is this number that decides whether a company invests in a product or not.

In particular, the Commission could have asked whether – using a model like the rNPV model – in the brave new world after the Review, companies could ever assume that they would get more than six years of RDP, given the high level of uncertainty of all three incentives. The result of this uncertainty is that, in the real world, the effect of the Review may be that RDP expectations are simply reduced from eight to six years. If a company cannot assign a positive value to an incentive because its effect is highly uncertain, then the effect of the incentive will be deemed to be zero, and therefore it is unlikely to sway any investment decisions in a positive way. For example, a company might not select a product for development simply because there is a small chance of restoring some of the lost RDP, for example six months.

Replacement compounding

The Commission is proposing that any pharmacy serving a hospital be allowed to compound all the drugs needed in a hospital for the coming seven days. There has been no assessment of the impact of this proposal. In practice, it could significantly reduce sales of any “compoundable” product if all the hospitals in a member state organised themselves to carry out weekly production runs. This provision could have a strong negative effect on the rNPV calculation around a product, because a company cannot be sure that it will sell anything even if its product is taken up by prescribers, and in practice it has proven impossible to compete with compounded products which are made without marketing or manufacturing authorisations.

Orphan Medicinal Products (“OMPs”)

OMPs currently benefit from more than 10 years of market exclusivity. This is because the exclusivity is extended by the time it takes to process the generic or biosimilar marketing authorisation (often more than a year). The current system incentivises the holder of the marketing authorisation to develop the same orphan product for a different orphan condition, because it can generate this exclusivity again (if one disregards off-label use), and it can do so several times. Under the Review’s proposals, this will become – for most orphan products – a single protection period of nine years (with one year for the first two additional indications). Under such a system, what is the incentive for any orphan drug company to invest in the clinical trials required for a new orphan indication? The Commission has undertaken no analysis of what this will do to the business case for new indications. Even though a company might want to do develop an OMP from a patient need perspective, this might not be viable.

Critical provisions of the Review that could be changed to make its incentives more workable and meaningful

There are several improvements that could alter the impact of the Review. For example, the definition of unmet medical needs can determine how attractive the EU would be. And the criterion for determining whether a product has launched in every member state can also have a major impact. At the moment, the burden is at the highest possible level (“a sufficient quantity in the supply chain”).

It is to be hoped that the coming months will provide an opportunity for reflection on the real-world impact of the Review for the investors and companies that are expected to develop products addressing unmet medical needs. Read our previous blog post: Six surprises in the leaked European Pharmaceutical Review and Missing Numbers: Seeking to Substantiate The Leaked EU Pharmaceutical Review.