A New Financial Tool for High-Cost Therapies
The biotech sector’s race to develop transformative but expensive therapies has led to the emergence of a new financial tool: drug warranties backed by insurance. This innovative approach aims to mitigate the risks associated with new treatments that may fall short of expectations. In 2023, global insurance broking and risk management firm Marsh partnered with Octaviant Financial to create a specialized drug warranty program, one of the first of its kind in the US life sciences sector.
How Drug Warranties Work
The concept of a warranty is familiar in consumer products, but its application in the pharmaceutical industry is relatively new. Federal rules previously made it challenging for manufacturers to offer refunds for ineffective drugs without triggering government price penalties. The innovation lies in using insurance principles to create a model where manufacturers can guarantee their products’ efficacy without affecting their pricing integrity.
Marsh and Octaviant’s platform structures warranties as insurance-backed commitments. Manufacturers agree to reimburse payers if specified clinical outcomes aren’t met, while maintaining their pricing integrity. For instance, a $3-million gene therapy for sickle cell disease might come with a warranty that reimburses the cost if the patient experiences more than a certain number of vaso-occlusive crises over several years. This approach aligns incentives, boosts payer confidence, and reassures patients, ultimately impacting access to the treatment.
Benefits and Implementation
The benefits of drug warranties extend beyond risk management. They can serve as market differentiators in crowded therapeutic areas and signal manufacturer confidence in their products. However, implementing a drug warranty is complex and requires a bespoke approach. Marsh and Octaviant work closely with manufacturers to understand clinical trial data, endpoints, and real-world risks during the underwriting process.
Initially, manufacturers typically retain 100% of the liability, but as more data is collected and outcomes are better understood, that risk can be transferred to the insurance market. With expansive capabilities, including actuarial modeling and reinsurance structuring, Marsh is laying the foundation for a new class of coverage.
Expanding Access to High-Cost Therapies
In 2024 alone, the FDA approved nine new gene and cell therapies, but access remains a challenge. Drug warranties offer a compelling option for balancing innovation with affordability. While not a universal solution, they are particularly suitable for high-cost therapies with clear, measurable clinical outcomes. As the program expands, Marsh and Octaviant are exploring reinsurance options, potentially making warranties a standard in high-cost therapeutic launches.
“This is not just about managing downside risk,” said Eddie Albers, head of US life sciences at Marsh. “It’s about unlocking access. It’s about making sure the patients who need these therapies can actually get them.”
