As the biotech sector races to develop transformative but expensive therapies, a new financial tool has emerged to mitigate the risks of new treatments falling short of expectations.
Drug warranties are providing pharmaceutical manufacturers with a novel way to manage financial, reputational, and clinical risk.
Global insurance broking and risk management firm Marsh teamed up with Octaviant Financial in 2023 to create a specialized drug warranty program that’s among the first of its kind in the US life sciences sector.
As the market evolves, the program’s approach may shape future reimbursement models and redefine how payers evaluate risk in high-cost therapies. Marsh and Octaviant are now looking to expand the drug warranty program to territories outside the US, particularly single-payer healthcare systems.
Emad Samad (pictured on the left), CEO and co-founder of Octaviant Financial, told Insurance Business that the novel program significantly alleviates risks for drug manufacturers and can help them broaden patient access to advanced gene, cell, and specialty therapies.
“We’re talking about products that cost two or three million dollars per patient,” Samad said. “If (the treatments) don’t work, the financial burden on the healthcare system and the reputational risk to the manufacturer can be significant. A warranty adds a layer of accountability.”
The concept of a warranty is nothing new; many consumers expect one when they purchase products such as a washing machine or a car. But in the pharmaceutical industry, where stakes are immeasurably higher, warranties have only recently become feasible.
Under federal rules, if a manufacturer refunds the cost of a drug that doesn’t work, the refund could be considered a discount, forcing the company to report a lower “best price” to Medicaid and other government programs. In turn, this can dramatically erode revenue for the manufacturer.
“The innovation here is using insurance principles to create a model where manufacturers can stand behind the efficacy of their products without triggering government price penalties,” explained Eddie Albers (pictured on the right), head of US life sciences at Marsh. “It’s not a rebate or a discount. It’s a guarantee of performance.”
Marsh and Octaviant’s platform structures warranties as insurance-backed commitments. Manufacturers agree upfront to reimburse payers if specified clinical outcomes aren’t met, but they do so within a financial vehicle that preserves their pricing integrity.
Consider the case of a $3-million gene therapy for sickle cell disease. Its promise is remarkable: fewer vaso-occlusive crises (VOCs), the painful events that define the disease. “But what if you’re in the 5% of patients who don’t respond?” Samad posed. “That’s a serious concern for payers like large self-funded employers or insurance carriers.”
With a warranty in place, the therapy’s manufacturer might agree to reimburse the cost of the treatment, or a portion of it, if the patient experiences more than a certain number of VOCs over the next several years. This aligns incentives, encourages payer confidence, and reassures patients.
“Ultimately, it impacts access to the patient,” Albers said. “If payers are more comfortable with the risk, more patients can get the treatment.”
While the benefits are clear, implementing a drug warranty is not simple. Every warranty is bespoke, according to Albers. Marsh and Octaviant work closely with the manufacturer to understand the clinical trial data, the endpoints, and the real-world risks of the treatment during the underwriting process.
If there’s a subset of patients who historically don’t respond as expected, the warranty can be calibrated to reflect that risk. Initially, most of the financial risk remains with the manufacturer.
“At the outset, they typically retain 100% of the liability,” Samad said. “But over time, as more data is collected and outcomes are better understood, that risk can be transferred to the insurance market.”
The benefits of drug warranties extend beyond risk management. They can also serve as market differentiators in crowded therapeutic areas, especially where several drugs offer comparable efficacy. In such cases, a warranty may be the edge that convinces a payer or a physician to choose one therapy over another.
“Think of two competing drugs for age-related macular degeneration,” Albers said. “One has a warranty, one doesn’t. Even if the warranty-covered drug is slightly more expensive, it’s offering an assurance that the other can’t match.”
For manufacturers, warranties also signal confidence. “It shows they believe in their product,” said Samad. “That’s powerful messaging in a market increasingly driven by outcomes.”
Marsh’s expansive capabilities, from actuarial modelling through its Oliver Wyman unit to reinsurance structuring via Guy Carpenter, make it possible to operationalize these programs at scale.
“Once enough warranties are in place and the risk is known, the reinsurance markets can step in,” Albers said. “We’re laying the foundation for a new class of coverage.”
In 2024 alone, the FDA approved nine new gene and cell therapies, but access remains a challenge. A 2023 Gene Therapy study estimates these therapies could add over $20 billion per year to US healthcare costs.
As the pharmaceutical sector looks for ways to balance innovation with affordability, drug warranties offer a compelling option. However, they aren’t a universal solution.
According to Samad, not every therapy lends itself to a warranty model. Manufacturers must be able to outline clear, measurable clinical outcomes. High-cost therapies – those costing from $7,000 to $3 million per dose – and treatments requiring only a single dose are also good candidates for warranty.
As the program expands, Marsh and Octaviant are looking at potentially developing reinsurance options. Albers is confident that warranties could become a standard in high-cost therapeutic launches.
“This is not just about managing downside risk,” Albers told Insurance Business. “It’s about unlocking access. It’s about making sure the patients who need these therapies can actually get them.”
