Pharmaceutical Pricing Principles Lecture 4 PDF

CHAPTER 3 Pharmaceutical Pricing Principles 1 By: Mona M. Eltamalawy, PhD. Try to sell this in antique bazar and in ordinary market ▪ The primary principle that should guide every pricing decision is that the price should reflect the value of the product to the customer. ▪ The other elements of...

CHAPTER 3 Pharmaceutical Pricing Principles 1 By: Mona M. Eltamalawy, PhD. Try to sell this in antique bazar and in ordinary market ▪ The primary principle that should guide every pricing decision is that the price should reflect the value of the product to the customer. ▪ The other elements of the marketing mix-product, promotion, and distribution--each add or create value. 2 ▪ The physical product itself should have clinical and economic value. Through distribution the value of the product is enhanced by providing place utility. Having the product available where and when it is needed adds tremendous value. ▪ With elective promotion, the value of the product is enhanced by explaining to the customers the best use of the product. 3  4 Each pricing decision is unique, depending on the company, the medication, and external factors that affect both. There is no one "best'' or "right'' way to set prices, but certain considerations and processes do provide the company the best chance of making informed, and profitable, pricing decisions. Factors affecting pricing ▪ The pricing of pharmaceutical products, as with the pricing of any product or service, should be market based. Contrary to the widely held notion that pricing is simply a matter of adding up costs and establishing a markup. ▪ Pricing experts agree that costs may help to establish a price floor but the market provides most of the information for the pricing decision. As competition within pharmaceutical markets, especially price-related competition, heats up, the need for market-based pricing will continue to grow. 5 General rules, or considerations, that should he included in every pharmaceutical pricing decision: 1.The prices, product features, and past actions of the competition. 2. Specific patient characteristics. 3. The economic and social value of the therapy itself. 4. The decision-making criteria of prescribers and those who inf1uence that decision. 5. Characteristics of the disease treated by the medication. 6. Company needs, in terms of market position. revenue, and other issues. 7. Company abilities, including available budgets and willingness to support the product. 8. The current and anticipated environment for insurance reimbursement. 9. The public policy environment. 6 1- Competition 7 Competition ▪ Typically, the first pieces of information gathered when arriving at a price recommendation are the prices of competing drugs. ▪ In addition to the current polices of competitive agents, the price histories of products in this class should be examined, to assess any recent changes in the price positions of the various products. Anticipated competitive product launches must also be considered. 8  Price sensitive market concept The range of prices for branded products in this market, from highest to lowest, should also be examined. If the price levels seem to be related to relative market success of the agents (e.g., those with the highest market shares seem to have prices that are either higher or lower than their less successful competitors), this could indicate the presence or absence or significant price sensitivity. High-priced market leaders imply little or no price sensitivity, whereas lower- priced leaders may imply the opposite. 9  The pricing approaches 1. Skimming: The product, anticipating little direct competition, is priced above existing levels to maximize profits. Prilosec the first proton pump inhibitor, was priced in this manner, substantially above the price levels of the H2 antagonists, although consistent with the value that it delivered. 2. Parity: The product is priced equivalent to the current price levels in the market. This is the most common approach used by firms launching products into already established markets. 3. Penetration: The product is priced below the current market level. Many products have been launched with this approach. Because the market is generally unresponsive to price differences, it may be concluded that most firms using this approach have chosen to make price a "nonissue" in the marketing of their products. 10 11 2- Patient Characteristics 12 2- Patient Characteristics ▪ Although in many markets the patient bears no direct financial burden, this is not the case in all markets. ln markets without universal coverage for pharmaceuticals, the patients who will be the final users of your new agent must be considered in the pricing decision. ▪ The fact is patients who are unable to afford a medication will often not take their medications. Compliance, both with the daily dosing and the length of therapy is a growing concern and a source of significant unrealized revenue. It is not uncommon for 50 percent of patients prescribed a medication for a chronic disorder that is relatively asymptomatic to "drop out" in the first year. 13 3-Value of therapy ▪ Early in the clinical development process. It is wise to begin economic as well as clinical studies. Among the first pieces of outcomes a financial profile of the disease must be available for which the agent is being investigated. Doing this allows the fitting of the agent into this financial profile, to determine its potential effect on the cost of treatment. ▪ Ideally any new agent will help to reduce the cost of treatment, especially if other pharmacologic therapies are already available. In theory, the value of a new agent is equal to the cost reduction it provides. Unfortunately, it is not always this straightforward, and certainly not this simple, and many in the marketplace appear to resist the use of such information in product adoption decisions. 14 4- The decision-making process ▪ The specific decision maker for the use of the agent plays a large role in the effectiveness of any pricing approach. Products that will be used primarily on an in-patient basis will be subjected to significant price analysis, as the institutional market is perhaps, the most price-sensitive single pharmaceutical market. ▪ Several studies have shown that clinical pharmacists, through various outreach and educational efforts, can bring about a significant change in physician prescribing behavior. In the outpatient setting, the practitioner can often choose therapies without regard to cost. 15 4- The decision-making process ▪ Primary care physicians are often at more risk than are their specialized colleagues and they are unlikely to adopt a new medication as rapidly as would a neurologist or cardiologist. ▪ New agents whose use will be limited to specialists are unlikely to come under any price scrutiny by the prescriber, since specialists tend to be less concerned with the costs of the treatments they order. It stands to reason that they would be less likely to receive feedback on drug costs from patients than would primary care physicians, who see the patients more regularly and are more likely to operate under systems that force them to bear the costs of their decisions. 16 5- Disease characteristics ▪ The characteristics of the disease itself can provide some of the most valuable guidance in establishing a pricing strategy. Experience shows that disorders of an acute nature, such as minor infectious diseases and pain due to injury, tend not to be accompanied by price sensitivity. ▪ Patients receiving a prescription for an antibiotic or analgesic usually receive no refills and often do not follow up with the physician. Even in situations in which the patient pays the full cost of the prescription, this appears to hold true. ▪ For chronic disorders. however, patients pay the price every month and often complain to the prescribing physician about the cost of medications. 17 5- Disease characteristics ▪ A patient paying $1.00 each day to treat a disease he or she does not feel, such as hypertension, should be expected to complain of the cost more than a patient whose NSAID is relieving the pain of arthritis and allowing him or her to lead a more normal life. 18 6- Company needs ▪ Although the cost of goods and company-established minimum selling margins play a role in the establishment of a price floor, other company specific issues must also be addressed. ▪ New research investment or activities that are expected to require significant amounts of funding might well necessitate the charging of a higher price for agents about to be launched, providing the higher price would not negatively affect the sales of the product. ▪ Conversely, a new agent may be seen as simply providing the company with experience in a therapeutic category prior to the introduction, some years later, of an agent that is believed to be superior. In this case, a low-price strategy on an agent without significant advantages could allow the company to develop this experience and important relationships with prescribers and key thought leaders in this market. 19