Navigating the Maze: A Guide to Evaluating Innovative Contracts in the Pharma Industry

In the continuously evolving pharmaceutical and life sciences industry, value-based contracting methods, which we broadly refer to as innovative contracting (IC), have become a mainstay for gaining market access. While there’s ample discussion around the theory of innovative contracting and various case studies illustrating its successful implementation globally, accurately measuring the impact of these agreements remains a relatively uncharted territory.

Why Evaluate?

The assessment of innovative contracts enables a thorough understanding of the effectiveness, profitability, and risk factors associated with different agreements. Evaluation requirements are different depending on the type of contract being monitored – ranging from simple financial arrangements to complex outcomes-based agreements or even investment in service-based models such as evidence collection infrastructure and diagnostic testing. However, all contract evaluations need to have the following elements:

1. Data collection
   Gathering all pertinent data relating to the contract’s operation

2. Profit & Loss statement
   Understanding the financial performance of the contract

3. Sensitivity analysis
   Identifying how changes in variables affect the contract’s outcome

4. Risk/mitigation measures
   Evaluating potential risks and devising ways to mitigate them

5. Performance assessment
   Assessing performance across contract, product, customer and execution to ascertain efficacy of implementation

Conducting a P&L Analysis for IC

A profit & loss analysis for an IC invariably includes sales, units, cost of goods sold (COGS), expenses, gross margin, contribution, and payback. Depending on the contract scheme, it may also incorporate the cost of patient assistance programs or free samples. Here’s how to conduct a P&L analysis for IC:

1. Develop a “base case” P&L without IC for comparison
   Serves as the control group to assess the impact of IC

2. Demonstrate impact on net price calculation
   Highlight how IC influences the net price

3. Identify break-even points and alternative scenario analysis (based on rebate tier)
   Determine the point at which total cost and total revenue are equal

4. Align analysis to business case for IC
   The findings from the P&L analysis should support the business case for implementing the IC

Conducting a Sensitivity Analysis

A sensitivity analysis, conducted at the contract level, reflects the combination of all constructs used in the contract. It helps to understand the robustness of the contract under varying conditions. Here’s how to conduct it:

Perform analysis on key outcomes measures, rebate tiers, and other inputs (such as patient volumes)

Consider the following key points:

1. How low is the net price in the best/worst-case scenario?

2. What are the expected revenues at each rebate tier?

For ongoing reporting and modelling, consider using a Value at Risk (VaR) model, especially where contingent outcomes are involved in the model. This risk measure calculates the maximum loss expected over a given period for a specific level of confidence.

Conclusion

The evaluation of innovative contracts is a complex process that requires a detailed and methodological approach. Alongside a well-designed VBC framework, by effectively utilising the technique of P&L and sensitivity analysis, organisations can unlock deep insights into the performance of these contracts and make data-driven decisions to optimise their market access.

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Author

Adam Buckler
MPharm, PGDip GPP
Senior Business Consultant Verpora & Former Oncology Pharmacist, Royal Marsden Hospital, London
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Adam is an experienced pharmacist having worked in the UK NHS for over ten years in acute Trusts and an internationally renowned oncology/ haematology centre. Acting as the lead pharmacist for Electronic Prescribing & Medicines Administration (EPMA) and being responsible for the Education and Training of pharmacists, Adam developed a breadth of experience. With an expertise in healthcare data systems and capabilities, Adam is an expert in the field of electronic prescribing. At Verpora Adam leads Innovative Contracting consultancy projects and client contracting capability program builds. Adam is a certified member of the BHBIA & registered with the GPhC.