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Is the Price Right?

“There are no solutions.  There are only trade-offs.” Thomas Sowell, Economist and Senior Fellow at the Hoover Institution, Stanford University

The pharma industry is increasingly focusing on complex specialty medicines to treat challenging diseases, but there have been several “flash points” when it comes to the cost of these new therapies. A selection of examples can be seen in the sidebar on page 47 and it is fair to say that drug pricing is a hot-button issue. In Europe, the topic of what drugs should be paid for (1) and how much could be taken up by the European parliament (2) has also triggered a reaction from the European Federation of Pharmaceutical Industries and Association (EFPIA), which has been discussing an outcomes-based reward system (3).

In the US, pharma companies have come under significant pressure at both a state and federal level for the pricing of specific drugs (4). A recent review of pharmaceutical corporate filings and conference call transcripts found that pharmaceutical sales were mainly driven by price increases, which raised political concerns in Congress as well as the threat of price controls, which I discussed in the November issue of The Medicine Maker (5). There are also ramifications for shareholders because this practice is not economically sustainable in the longer run (6). How has the industry reached this critical point?

The trade off

Academic research has chronicled the industry’s efforts to address long-standing R&D productivity concerns and how this has influenced a shift in focus to specialty medicines (7)(8). Specialty medicines – many of which are biopharmaceuticals or based on genomic approaches – can help address unmet medical needs and also offer greater price freedom, since there tends to be less competition. Even after patent expirations, the entry and impact of biosimilars is generally seen as more limited given the development costs, as well as the hurdles involved in gaining acceptance from the medical community (9)(10)(11). Although branded biologics generate a longer period of revenue after patent expiration compared with small-molecule drugs, there is (as suggested in the opening quote by Thomas Sowell) a trade-off. Specialty medicines cater to smaller patient populations than primary-care driven drugs – about 60 percent of drugs in the specialty medicine category have orphan drug designation (12) or cater to much smaller personalized medicine segments (13) – so the cost per patient treatment needs to be high for companies to amortize a return on increasing R&D risks and costs (14).

Specialty medicines now account for a significant proportion of US drug spending; more than half of the country’s drug spending growth in 2015 could be attributed to drugs that had been available for less than two years (15). Similar spending growth can be attributed to specialty medicines in other developed markets too (16). The upshot is that government healthcare budgets are feeling the pressure, which is impacting patient access.

We now have a rapidly growing gap between pharma’s efforts to bring new drugs to market, and societal willingness and ability to pay for them. The issue is especially acute with anti-cancer drugs, and has generated much analysis on cost and pricing trends (17)(18). In particular, it can be difficult to decide how to finance drug use for a disease such as metastatic cancer, where life is extended by a limited time. To this end, both American and European oncology societies have developed frameworks to assess the benefits of new cancer treatments relative to their costs; the aim is to help clinicians and patients to make decisions regarding the value of these treatments (19)(20).

Countering the conundrum

How can pharma companies address the pricing challenge? Unfortunately, current academic literature on biopharma marketing offers little insight. Published works tend to emphasize a tactical, non-strategic economic model framework myopically focused on maximizing return on investment across various promotion channels, with the aim of increasing physician prescriptions (21). I believe that the growth in specialty medicines means that we require a completely different commercial model design and accompanying analytics. Consideration for – and demonstration of – value must be infused into pricing analyses, firstly in support of the final decision before launch, but more importantly throughout the entire project/product lifecycle. I’ve given a non-exhaustive list of suggested company actions for the pricing of specialty medicines pre-launch in "How to price medicines – pre-launch". To support these actions, however, pharma companies will need to think very differently about their commercial model design. In addition, traditional pharma sales/promotion response analytics need to give way to new marketing models, which must be informative in nature and deliver scientific evidence using metrics ultimately tied to improvements in health outcomes, total treatment costs, and cost effectiveness (22)(23).

Pricing pressures – recent examples in the US and UK

A drug for the treatment of cystic fibrosis costs more than $300,000 per patient per year (24).

Combination therapy drugs for the treatment of advanced melanoma costs more than $250,000 per patient for the first full year (25). The UK’s cost watchdog, the National Institute for Health and Care Excellence (NICE), rejected one of these drugs for the treatment of non-small cell lung cancer (NSCLC), even after a cost-sharing arrangement proposal, because of a cost of £91,100 per quality-adjusted life year (QALY) (26).

A drug for the treatment of hepatitis C costs $84,000 per patient for a 12-week course of treatment (27). NICE has approved the drug as cost-effective, but global healthcare budgets will be exhausted if the millions of patients who would benefit from the drug went through treatment.

A drug for the treatment of lung cancer costs £51,000 per patient per course of treatment. This price was agreed after two rounds of price cuts and negotiations with the UK’s NHS (28).

Another drug for the treatment of NSCLC and pleural mesothelioma was originally priced above £82,000 per QALY, according to NICE (28).

Lastly, another drug for the treatment of cancer was originally priced at £43,000 per QALY, rising to £65,000 and £89,000 for advanced stages, according to NICE (28).

Commercial activities to support company pricing decisions in a specialty medicine environment can be divided into seven interdependent buckets:

  1. Commercial model design. The go-to-market approach and model design necessary to achieve all company strategic goals. This approach is dependent on the drug technology of the project/product portfolio that can be successfully developed and tactically executed, while mitigating external threats and positioning the company to take advantage of opportunities (for example, define metrics to determine success and how company resources will be positioned/organized/coordinated to ensure the achievement of stated company goals).
  2. Payer analytics. Focusing on the parties responsible for reimbursement, whether they be private-managed markets and/or government-based reimbursement plans, as well as analyzing effects from changes in plan design, and their relationship to sales, marketing, and patient outcomes.
  3. Patient analytics. Analyses generated from real-world evidence and patient-level data on outcomes (for example, drug compliance and adherence, drug costs, treatment costs, health outcomes, cost-effectiveness) resulting from drug utilization.
  4. Sales analytics. Processes and outcomes related to ensuring optimal sales force investment efficiency and result effectiveness (for example, sales force strategy outcomes, territory alignment, call planning, objective setting, incentive compensation, sales performance metrics, sales reporting).
  5. Marketing analytics. Processes and outcomes related to ensuring optimal brand performance throughout the entire lifecycle.
  6. Commercial analytics innovation. Basic research activities designed to generate new management/marketing science methods that can address future commercial problems faced across the entire project/product lifecycle, including experimentation, collaborations with academic researchers, and other activities to encourage innovation.
  7. Cloud information management. The focus must be on speed, agility, and scale in association with managing new data sources, elastic infrastructure, data quality & accuracy, and actionable insight in support of activities in all of the preceding commercial analytics buckets.

In a small-molecule drug world, these commercial analytics “buckets” were traditionally seen and conducted as distinct, separate activities. Today – and increasingly in a future likely to be driven by specialty medicines – these analytics are rapidly becoming interdependent activities. Moreover, outcomes from payer and patient analytics will become the principal emphasis and drivers of all commercial decisions. For example, construction of the right commercial model design and the analytics in other areas will all support payer and patient outcomes. Therefore, future applications of commercial analytics will require greater coordinating and linking among all preceding seven buckets. In addition, insights from health economic and outcomes research (HEOR) and real world evidence (RWE) modeling needs to be built into commercial analytics for practical execution to 
pharmaceutical customers.

How to price medicines – pre-launch

  • Start thinking about pricing and market access early in a product’s lifecycle. Pricing should not be an after-thought once clinical work has been completed – it should be infused throughout the entire project.
  • Market access and cost considerations should be a deciding factor when choosing which projects to take into further development and clinical trials.
  • Clinical trials should be structured so that the demonstration of value can migrate into commercial strategy and operations, which means greater coordination and information sharing between clinical and commercial teams.
  • Phase III clinical trials of drug candidates should be measured not only against placebo, but also leading generic and branded drug therapy treatment options (where appropriate). Research-based branded drugs cannot compete against generics on the basis of cost. The only way for a patented, specialty medicine to succeed over a competing older drug is to demonstrate value over cost.
  • Payer and individual patient affordability should play a major role in determining economic viability when deciding whether to move forward to phase III. 
  • The construction of forecast simulations should be done no later than the phase III decision point (and after that it should be continually updated as new information becomes available). Variations in product attributes (relative to the competition), product risk profile, regulatory decision risk, market dynamics (for example, order-of-entry and time delay in the marketplace), managed market formulary acceptance, and individual willingness and ability-to-pay must be accounted for. Sales and marketing activities should be seen primarily as channels to disseminate medical information about product net value attributes to payers, physicians, and patients – not as the principal mechanisms that determine brand success.
  • Performance-based pricing will become the norm from payers, which means the HEOR and RWE teams will play a major role in determining a specialty drug price. Managed care plans today are making decisions on formularies that are based on evidence of value. They are also looking to guidelines and the treatment pathways being adopted by providers – which are also driven by evidence of outcomes and value. Effective sales and marketing activities are only possible if the established price point ensures optimal payer formulary acceptance, physician adoption, and patient compliance and adherence.
  • Performance-based pricing contracts will require companies to leverage mobile technologies (where appropriate) that protect individual patient information, and allow for self-diagnosing and self-monitoring of patient behaviors to demonstrate product success. As an added benefit, such technologies show patients the continuing progress and value of their drug therapy, which should boost drug adherence, improve health outcomes, and lower cost of care.
  • Given the high cost of specialty medicines to patients, companies need to develop cost elasticity analyses on patient out-of-pocket expenses to support the development of patient assistance programs, which will have an impact on the drug net price.
Consideration for and demonstration of value must be infused into pricing analyses.

In conclusion, specialty medicines represent a wealth of opportunities for pharma companies – rapid developments in science are addressing unmet medical needs and improving care. The challenges of pricing and market access, however, should not be underestimated given that there is increasing resistance to high drug prices. To be successful, pharma companies must think differently about how to prepare these drugs for market launch and beyond – and be prepared to use analytics in new ways to support pricing decisions.

George A. Chressanthis is Principal Scientist at Axtria.

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About the Author
George A. Chressanthis

George A. Chressanthis is Principal Scientist at Axtria.

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