Review of the Council's position on the Transferable Exclusivity Vouchers

Summary

Recently, the Council agreed on its position on the Reform of the EU General Pharmaceutical Legislation, setting the stage for the start of trilogues between itself, the Commission, and Parliament. In their proposed amendments to the legislation, the Council introduced a “blockbuster clause” that would restrict the application of the Transferable Exclusivity Voucher to medicinal products with annual EU gross sales not exceeding €490 million during any of the four years preceding its use.

While the intention of protecting healthcare budgets is understandable, this cap would further weaken an already limited incentive—reducing the TEV’s estimated value from €413M (not risk-adjusted) to €289M—and would make the mechanism less efficient from a public payer perspective.

Regardless of which version of the TEV is ultimately adopted, additional measures will be essential to ensure the development and availability of novel antimicrobials. There is growing recognition that the EU will need to build a broader ‘toolbox’ of interventions—such as TEVs, revenue guarantees, regulatory reforms, and market access strategies—to stimulate investment in antimicrobial R&D and secure global access.

Background

On April 16th, 2023, the European Commission (EC) announced a proposal to revise the EU’s General Pharmaceutical Legislation. [1] The objectives of this reform were to support innovation, enhance the competitiveness of the EU pharmaceutical industry, and improve the availability, accessibility, and affordability of medicines.

Of particular relevance to work being done to combat antimicrobial resistance (AMR), the Commission proposed a specific reform involving the use of Transferable Exclusivity Vouchers (TEVs) to incentivise the development of novel antimicrobials. Under the Commission’s proposal, developers of qualifying antibiotics [2] would be awarded a one-year extension of regulatory data protection. These vouchers can be applied to any product in the developer’s portfolio or sold to another company and the number of vouchers awarded would be restricted to a maximum of 10 over the scheme’s 15-year period. In a supplementary communication, the Commission also proposed that the scheme include supply obligations, ensuring delivery of the antimicrobials when required, and that other EU-based pull incentives be considered alongside the TEV scheme.

Source: European Federation of Pharmaceutical Industries and Associations (EFPIA)

Although the Commission's proposals would provide some incentive for antimicrobial developers and investors, we think that it is unlikely to drive innovation and access to new antimicrobials on its own. Our analysis, which accords with those of many others including EFPIA, Office of Health Economics, Academia, Centre for Global Development and the EU Observatory on Health Systems and Policy, suggests that the TEV scheme fails to meet key criteria for an effective pull incentive [3] (details Appendix 1). In particular, the proposed scheme would not represent the EU’s “fair share” of a global incentive: each TEV is estimated to generate only €413 million, far below the EU’s 34% share of the $3–5 billion (per drug) needed globally to sustain meaningful antimicrobial R&D. It would also be cost-inefficient, with an estimated public payer cost of €1.38–€2.15 per €1 reward.

Shortly after the EC’s proposal, the European Parliament (EP) and later the Council of the European Union (‘the Council’) began the process of reviewing the proposed legislation, making amendments, and adopting their version of the text. Recently, the Council agreed on its position on the pharmaceutical legislation, setting the stage for the start of trilogues between the three institutions (the EC, the EP, and the Council). 

Box 1. The European Parliament’s Position on the TEV scheme

Our analysis of the Council’s amendments 

In their suggested amendments, the Council proposed the introduction of a “blockbuster clause,” which would limit the use of a TEV to medicinal products with annual EU gross sales below €490 million during any of the four years prior to the voucher’s use. While the rationale of protecting healthcare budgets is understandable, we believe this revenue cap would not only weaken an already insufficient incentive but also create a more inefficient mechanism from a public payer perspective.

To better understand the impact of this clause, we can turn to data from the European Commission’s own impact assessment, which provides peak annual sales figures for the top two products with regulatory protection expiry between 2014 and 2024: 

Year (RP expiry)	Top 1 (sales €)	Top 2 (sales €)
2014-2015	978,000,000	493,000,000
2016-2017	473,000,000	120,000,000
2018-2019	469,000,000	386,000,000
2020-2021	703,000,000	408,000,000
2022-2023	1,270,000,000	174,000,000
AVERAGE:	778,600,000	316,200,000

In three out of five periods, the top product clearly exceeds the €490 million threshold. In some cases, even the second-highest-selling product surpasses the cap. To understand what this means for the value of the TEV, we built on the EC’s own modeling assumptions to estimate the maximum theoretical value a company might be willing to pay for a TEV under the revenue cap (see details in Appendix 2). We found that the revenue cap would reduce the value of the incentive from the estimated €413M (not risk adjusted) to a maximum of €289M, assuming a top selling product of exactly €490M. Furthermore, if we apply a time discount and adjust for the risk that the voucher might be rendered useless if sales exceed the cap in any of the 4 years after purchase prior to utilisation, the value of the voucher drops even further to €137M.

Without additional complementary incentives or changes to the proposed TEV design, there is a high risk that the scheme will fail to attract meaningful participation from developers, especially for the types of high-priority antibiotics that are most urgently needed. Furthermore, because the “blockbuster” clause would restrict the amount of products the vouchers could be applied to, it would reduce the competitiveness of the market for TEVs, making them less cost efficient overall. This is especially true in combination with the Council’s second amendment that the TEV can only be applied in the 5th year of regulatory data protection, which would further reduce the pool of eligible products.

Figure 1. Illustrative example of the need for a competitive market for TEVs. Limited products create a situation where the TEV buyer pays less to the developer than they otherwise would, increasing the inefficiency of the scheme

Conclusions and next steps

Regardless of the version of the TEV which is ultimately adopted, additional incentives, support for developers, and regulatory and market reform will be needed to ensure that novel antimicrobials can be successfully developed and brought to market. Given this, there is increasing support for the EU to build a ‘toolbox’ of interventions (TEVs, revenue guarantees, regulatory tools, market access strategies, etc.) designed to increase investment in antimicrobial R&D and access. In particular, we think that the EU Biotech Act, the Critical Medicines Act, and Multi-Year Financial Framework offer good opportunities to continue to push this conversation forward and implement these types of programs.

However, even as a part of a broader ‘toolbox’ of interventions, it’s important that the TEV scheme is as efficient as possible to make the best use of public health funds. Given this, we suggest that the Council’s proposed amendments (both the “blockbuster” clause and the 5th year RDP restriction) be excluded from the final text of the EU’s General Pharmaceutical Legislation. In parallel, the European Commission and Member States should intensify efforts to develop and implement complementary interventions across the EU.

Appendix 1

We analysed various forms of incentives against criteria established by the Global AMR R&D Hub. The full analysis can be found here, but a summarised version can be found below:

Criteria for an effective pull incentive mechanism	TEVs as currently proposed by the EU Commission	TEVs combined with a Revenue Guarantee Model	TEV with “Blockbuster killer”
Represent the EU’s “fair share” (~€1 - 1.2Bn) of a global incentive and be of a sufficient size to drive innovation.	No. Estimates of the cost for the TEV vary significantly. The Commission believes the voucher will generate about ~€413M but others think it will be much lower. The current Commission proposal appears to be more at risk of underpaying than overpaying.	Yes. The TEV could be used to give an initial payout to reward “innovation” whilst the revenue guarantee is used to top this up to “fair share” size and secure ongoing access.	No. This further limits the value of the TEV vs. without the changes which was already not a large incentive.
Ensure cost-efficiency and financial and social proportionality of costs.	No. The value of the TEV will be reliant on the sales of a secondary product (on which the TEV is used) and is likely to be less efficient than direct payment. Additionally, the time/risk value of money reduces the incentive. The cost of the incentive is paid by an arbitrary group of patients through blocking access to generics/biosimilars.	Maybe. Still vulnerable to the inefficiencies of the TEV mechanism. However, the combination of the revenue guarantee allows for tiered pricing and a more equitable financial distribution.	No. By limiting the pool of products available for the voucher further, the efficiency is further decreased. The TEV is most efficient when there are several companies willing to pay for it, in the absence of this, the efficiency is reduced.
Paid over time to take account of new evidence on clinical utility.	No. One time payment with no ability to increase/reduce payment over time. Hard to enforce ongoing access and stewardship.	Yes. Products can be regularly re-assessed and the size of the revenue guarantee can increase/decrease based on new evidence.  Requirements to provide access to developed drugs can be included in contracts and payment conditional on ongoing access being provided.	No. One time payment with no ability to increase/reduce payment over time. Hard to enforce ongoing access and stewardship.
Sufficiently predictable to allow for investor confidence	Yes. Investors can have high-levels of certainty that they will receive payment through the voucher should a product successfully be marketed. Investors would have some concern over the eventual value of the voucher.	Maybe. Investors could be confident about the payout of the TEV. Countries are also more likely to participate in a revenue guarantee scheme where they need to provide less funding than in a scheme with no TEV.	Maybe. The two year review point reduces the predictability of the scheme.
Implementable within a realistic timeframe to support the existing antimicrobial R&D ecosystem which is at risk of imminent collapse.	Yes. It can be legislated for and operated at an EU level and does not involve actions by Member States following their approval of the scheme.	Yes. TEVs could be implemented first as they are more straightforward while the logistics of a pull incentive scheme are further developed.	Yes. Easily introduced in legislation.
Capable of rewarding different types of products through a tiered approach to the reward value	No. Value of the TEV will be reliant on the sales revenue of a separate product and cannot be altered based on profile of the antimicrobial	Yes. Both the value of the voucher and the value of the revenue guarantee could be varied	No. Fixed payment based on sales of secondary product
Ensure availability across the EU as needed.	No. This mechanism decouples payment from access, so there is no guarantee that it will be made available across all EU member states.	Yes. Requirements to provide access to developed drugs can be included in contracts and payment conditional on ongoing access being provided.	No. This mechanism decouples payment from access, so there is no guarantee that it will be made available across all EU member states.
Able to support global access and stewardship through conditions.	No. There are some initial conditions on global access and stewardship included in draft legislation, but this is still far from what is needed and enforcement is difficult as it is a one-time payment.	Maybe. Only if sufficient additional access & stewardship conditionalities are added to the legislation.	No. There are some initial conditions on global access and stewardship included in draft legislation, but this is still far from what is needed and enforcement is difficult as it is a one-time payment.
De-link revenue from volume to allow for appropriate stewardship	Partially. The TEV itself is delinked, however, unless contractual obligations are added on pricing, increased sales volumes would result in increased revenue	Yes. Assuming sales do not exceed the revenue guarantee level, which is highly unlikely	Partially. The TEV itself is delinked, however, unless contractual obligations are added on pricing, increased sales volumes would result in increased revenue

Appendix 2

The following calculation illustrates the maximum value the developer could expect to sell a TEV for under the revenue cap, based on the EC’s methodology:

• Suppose the peak sales value of the top product is the maximum €490M (an ideal condition which is unlikely to be reached), and that peak sales for the second-highest product is €283M (page 56 of the EC’s impact assessment Annexes). Using the Annex’s calculation logic, the winning bid would be the average sales of the top 2 products, hence (490 + 283) / 2 = €387M 

• However, the voucher buyer would only stand to make €490M x 59% = €289M in maximum additional profit from a year of RDP extension. Since this is less than the €387M that they would need to pay for the winning bid, the actual value that a buyer would be willing to pay would be reduced to less than €289M. (This 59% accounts for a profit margin of €490M in sales, calculated here, following the EC calculation logic.) 

• Note that the €289M additional profit does not include time-discounting for cost of capital and the risk that the voucher may be rendered worthless in the case that sales exceed the cap in any of the 4 years after purchase prior to utilisation. Using 10% cost of capital and a conservative 10% risk of voucher nullification, the maximum risk-adjusted net present value of using the voucher drops to €137M. This strengthens the conclusion that prospective buyers would not find the voucher commercially attractive. (See this spreadsheet for how the cost of capital and risk adjustments are calculated.) 

Therefore, developers (i.e. voucher sellers) risk having no purchasers if this revenue cap or “blockbuster clause” is implemented, which would defeat the purpose of the TEV scheme as an incentive. Even if there are buyers, they would not be willing to pay more than €137M, since paying more would cancel out the maximum additional profit they could gain from a year of RP extension, as calculated above. As it stands, the existing proposal would already undercompensate developers vs. a fair share of ~€1–1.2 billion. Reviewing our calculations above against existing literature, we see that it may even be an overestimate as previous analysis (without the “blockbuster clause”) has produced similar results: 

• The EC’s impact assessment report estimates that if 1 voucher is awarded per year, higher than the 10 in 15 years cap stipulated by the scheme, then the developer can only expect to earn ~€413 million per voucher

• The Swedish Dental and Pharmaceuticals Benefits Agency's (TLV) comparative analysis predicts a lower €142 million

• The most optimistic estimates come from an extensive analysis in 2019 by the Office of Health Economics (OHE) based on real historical data from IQVIA on the top 30 products by sales in the EU/EEA in 2018, which calculated an average willingness-to-pay price by the purchaser (i.e. developer / seller revenue) of €584 million, but importantly this analysis does not restrict product eligibility to RDP products only, which the EC impact assessment notes have average annual peak sales -60% lower than for special protection certificate (SPC) and patent protected products. Applying this -60% discount as a simple proxy for filtering out non-RDP products from the top-30 sales list above would yield a voucher reward of €252 million

Footnotes

[1]  The proposal adopted by the Commission revises and replaces the existing general pharmaceutical legislation (Regulation 726/2004 and Directive 2001/83/EC) and the legislation on medicines for children and for rare diseases (Regulation 1901/2006 and Regulation 141/2000/EC).

[2]  Eligibility for this scheme would be restricted to “game-changing antimicrobials” that address antimicrobial resistance (AMR) and the priority pathogens recognised by WHO.

[3]  As defined by the Global R&D Hub

[4]  In this context, the TEV is more efficient when the difference between the "use value" (the amount of money the buyer gets from the RDP extension) and the "transaction value" (the price the buyer pays for it) is minimised.

[5]  This example is illustrative. It could be the case that the cap rules out a single blockbuster product (say €1Bn) and creates a competitive market of several products with sales around the maximum level of the cap. However, in general the more products that can be used for the voucher, the more efficient the system would be. 

[6]  ‎In their comparative study, TLV calculated an even lower compensation level of €88M. However, this contained a number of assumptions applied to all incentive models they compared, which make this number incomparable with the estimates from the EC. When these are removed from the calculations, the estimated compensation to the developers becomes €142M