New pharmaceutical products are not cheap and often attract complaints from patients, doctors and those in charge of policy. While this perception is recognised by the pharmaceutical industry, and the reason behind these high prices has been explained, some people are simply failing to grasp the reasons.
The current approach to pricing
The key to understanding the pricing system for pharmaceutical products starts with understanding the difference between breakthrough products and those considered “me-toos”; that is the biosimilars, generics and lifecycle extensions. Depending on what a company can negotiate in varying markets, the latter are simpler to price. However, if a new product delivers value over the current standard of care, then pricing can be trickier.
Cost of research and production, together with profit for the company form the basis of the price based on the cost-plus concept. But projects that have failed are not taken into consideration and therefore, do not reward the efficiency of R&D, and this could result in an industry that is driven to non-innovative projects that are considered safe.
A price that reflects the value a product gives, based on its profile, is value-based pricing. According to doctors, this builds in fair pricing, and people are willing to pay. However, this does not always provide a suitable argument in defence of pricing, doctors and patients often differ on what they consider fair pricing, and sometimes the profile of the product does not represent broader issues or the real world. There is no obvious relationship between price and value in entrepreneurial pricing, which can be high.
Setting a price you can explain
When it comes to defining prices, there are a number of principles that can help:
1. Ability to reason the price is fair for that product – while pricing needs to be fair, it should stimulate innovation. Pushing prices to the limit of what is acceptable is good practice.
2. Bring all important information to the discussion – morbidity and mortality, real-world effectiveness, unmet needs, patient numbers, cost-effectiveness and budget impact – all of these are included in real-world pricing negotiations.
3. Ask the correct people – Debating price with experts in pricing has the most value
4. Price research is just one part of the price making decision – Fair pricing is important, but there are more elements that matter in terms of the final pricing decision:
A. How much will management push?
B. Which future commercial strategies will affect price?
C. With this product, where do the geographical priorities of the company lie?
D. Will the price hurt the company image?
Price implementation must follow price finding
A price is set within a company. This is followed by discussions with the pricing authority, and then marketing authorisation occurs. There is always negotiation on the final price.
In order to achieve the pricing strategy, you must prepare your company to negotiate. Your negotiators must be in possession of the full value story; everything used during the price finding process. The authority’s negotiators will be experienced, so they need to be able to hold their own. Market access training can play an important role in ensuring everyone is ready to play their part.
It is very important to consider base negotiation training as well as in-depth training that looks at the value story, and also to roleplay with “payer experts”. These are all very important aspects of becoming successful at implementation. By giving your employees the tools, they need to be good at what they do rather than by defining a sturdy pricing floor you are helping to create those all-important successes with the validation of your new pharma products.