Pharmaceutical Pricing Strategy (PH153)

Pricing Reimbursement Strategy Report Sample

The following excerpt is taken from Chapter 1, "Pricing Team Structure and Resources." The full chapter explores how companies prioritize their products and shows detailed structure, staffing, outsourcing and spending benchmarks.

Reasons to Create a Structured Pricing Team

Survey respondents provided several reasons for the move toward more structured pricing teams. First, and most important, companies need a way to communicate their pricing decisions to all stakeholders. One pricing manager highlighted the pitfalls of not having a pricing team and having the different pricing decisions made essentially in the dark. He stated that his company, without a formal pricing team, "didn't really have a good way of communicating and controlling the information about pricing within the company, so nobody knew what the prices were anywhere." This breakdown in communication can also be felt in profit: when decisions are made without considering the ramifications on other groups, problems are bound to happen.

Increase Communication

Not only is communication an issue when pricing a product for an individual country, but the problem also grows when there is no dialogue for setting prices in different countries. One pricing manager discussed the complications caused by lack of communication for pricing decisions between countries, describing cases where all the right stakeholders were not always informed of prices set in other countries. Having a designated pricing team that is aware of everything pricing-related within and between companies is vital to help eliminate potential negative implications.

Maximize Profit

Communication between global teams is not only advantageous to making informed pricing decisions, but it is imperative. If one country is able to choose a launch price without the global launch sequence in mind, this decision can result in financial losses down the line. For example, if a brand is launched at a low price so as to yield a massive volume of sales, profit will look promising - initially. When that same brand is then taken to another country, however, the company will likely not be able to increase the price and may lose out on potential profit.

As a result, pricing teams work closely with affiliates when setting prices. When deciding on a price, the pricing team maintains a clear sense of the floor and target prices. Depending on the affiliate's proposed price, a business case may need to be created and passed up through the ranks to justify a lower cost. The process of placing a price between the floor and target price is "a cost-benefit balancing act," said one interviewed executive. "If the benefit in this country with the lower price is enough to outweigh the negative consequences for the other countries, then we make a recommendation to approve that price."

The following is excerpted from Chapter 2, "Pricing Activities." The full report explores several teams' and departments' involvement in pricing activities at different points of the product lifecycle, as well as various strategies that impact pricing decisions.

Involvement of Health Economics and Outcomes Research (HEOR) Teams

At many companies, the pricing group will develop the package of studies that would be required to prove the product's value and determine a realistic pricing strategy, and the HEOR group will capture the data requested by the pricing group.

The HEOR group provides information on whether a product can prevent surgery, hospitalization or any other cost-intensive outcomes at a later point; these benefits help to justify higher prices. This group also models the budgetary impact of pricing the product at a range of prices. Finally, HEOR also focuses on the impact a price will have on patients, such as increased or reduced therapy access. Patient-focused companies often face painful decisions on maximizing revenue or reducing patient access, and companies must pay attention to both their mission statements and their bottom lines when making these difficult choices.

At some companies, it can be difficult to draw a line between HEOR and pricing activities. Pricing groups tend to focus on a product's pricing strategy; once the pricing group has identified several different potential pricing strategies and launch sequencing schedules, it will work with HEOR to design a set of studies that will provide the conclusions necessary to determine a pricing and launch approach. The HEOR group is then tasked with carrying out (or outsourcing) the studies and providing the information to pricing. According to one executive, pricing executives often have strategic marketing or strategic consulting backgrounds, and HEOR executives have experience in more scientific and technical disciplines such as economics or statistics.

Because HEOR and pricing activities are often aligned, they both begin work fairly early, as seen in Figure 2.6. [which appears in the brochure downloadable from this website]. Like pricing teams, HEOR groups are involved in pricing activities at most companies by Phase 2. HEOR groups begin pricing involvement in Phase 2 at 46% of surveyed companies and before Phase 2 at 30% of companies. Health economics groups remain involved in pricing activities beyond a product's launch at 54% of companies.

The following excerpt is taken from Chapter 3, "The Effects of Global Currents of Change on Pricing." The full chapter analyzes life sciences industry perspectives on eight key trends. This sample explores the effects of government-specific price cuts.

Ripple Effects in Other Nations

Between economic policies and price cuts, many countries are directly affected by these two trends. Indirectly, however, nearly every pharmaceutical and device market will feel the ripple effects. With each country and payer eyeing other countries and payers, a 2% price cut in Germany will lead to price cuts in other European nations, the United States and even in emerging markets that follow Germany's lead. Reference pricing's dominance in the pricing sphere will mean price adjustments every time a referenced country's price changes, which leads to the primary fear among companies - a never-ending environment of price cuts.

One Small Country's Impact on the Rest of the World

Though not a large country and arguably not a major contributor to the EU economy, Greece, over the past two years, has been viewed as a barometer for the pricing market. The nation's economic crisis exacerbated the larger EU economic crisis because of its interconnectedness to other EU countries. With countries such as Germany requiring strict austerity policies in exchange for financial aid, Greece entered the price cut trend much earlier than other countries. Now companies look at Greece as the tip of the iceberg and a vision of what could happen in other nations in economic crisis if they cannot right the course.

One of the first austerity measures taken in Greece was to drastically cut major pharmaceutical prices almost across the board, sparking a frenzied response within the industry.  Many companies debated whether or not to continue marketing therapies in Greece; some considered leaving altogether, shutting down research centers and affiliate offices. While some did leave, most companies adjusted their strategic initiatives in Greece because they understood that the environment in Greece was little different than in many other European markets. As European economies become more austere in coming years, companies should watch the market in Greece to see how to approach pricing operations in other markets.

Aftershocks in the United States

Across the pond from the austerity policies, the United States hopes its usual isolationist position will protect the life sciences industry in the country. Even so, most companies see this as a pipe dream and have begun to prepare for what they consider inevitable: a less-friendly United States. After bailing out the economy, the auto manufacturers and financial institutions, the US government saw its debt skyrocket. The growing debt, combined with a president intent on reducing overall healthcare costs at the same time as giving more people access to healthcare, means cost-cutting measures must be taken - and odds are that the healthcare industry will be hit hard.

According to one US-based executive, the negotiations for the healthcare reform bill were major steps in removing more stringent cost-containment policies from debate. Though these discussions occurred before many of the most severe austerity measures went into effect in Europe, for now, they are helping to stem the tide in the United States. This general strategy should continue. There will be aftershocks in the United States; the government will act. It will be in the life sciences industry's best interests to be part of the discussion when it comes.