How Do Pharmaceutical Companies Price Drugs? PDIG Summer Symposium Coventry, June 5th, 2008 Donald...

How Do Pharmaceutical Companies Price Drugs?

PDIG Summer Symposium

Coventry, June 5th, 2008

Donald Macarthur

Global Pharmaceutical Business Analyst

Donald Macarthur

• UK in an international context

• P&R strategy development for new drug

• Examples with orphan drugs

Agenda

Donald Macarthur

Changing Paradigm

Registration approval “the race is finished”

Old paradigm

New Hurdles:• Safety, Quality, Efficacy

…..and……• Cost-effectiveness• Affordability

New Paradigm

Donald Macarthur

Marketing Approval vs P&R Approval

Key Feature Registration P&R

Basis Science Economics/politics

Transparency Good Poor

Speed Accelerating Slowing down

National differences Lessening Little change

Pre-submission dialogue

Good Rare

Guideline documents Good Poor

Appeal mechanism Well-defined Poor

Attitude to NCE Advance in treatment Budget buster

Donald Macarthur

What is so special about price?

UK offers free pricing to all new molecular entities and automatic reimbursement from launch, but also…..

Profit control (PPRS) Periodic across-the-board price cuts Slow uptake of new drugs/’postcode prescribing’ Cost-effectiveness demands (NICE/SMC/AWMSG) Cash limited PCT budgets/indicative GP budgets Very high generic penetration High parallel import penetration Impact of devolution Powerful, vertically-integrated chains PbR in England Wholesale margin under review Pharmacy clawback Volatility with generic reimbursement Inequitable and illogical prescription charge system Encouragement given to POM-to-P switches

Donald Macarthur

UK price in important for pharma industry

UK represents less than 4% of world demand for prescription medicines, but…

…other countries that set prices with reference to those in the UK (including Japan, France, Italy, Canada, Belgium, Switzerland, Poland, Netherlands, Finland, Hungary, Norway and Ireland) together account for 25%

…but it is not all-important

Donald Macarthur

Aims of European P&R strategy

• Access to reimbursement– full or maximum reimbursement– reasonable co-payment

• At an optimal price– revenue optimising price– trade-off price and volume

• Without undue delays– minimise administrative delays in getting P&R approval– reasonable uptake

• Or excessive restrictions– patients/indications according to MA– avoid step therapy– funding made available

Donald Macarthur

Success is based on contribution of P&R strategy to revenue optimisation

• Revenue = price x volume

• Focus on EU-5 (Germany, France, UK, Italy & Spain) as account for >70% of total European sales

• Optimum approach for each country may require different trade-offs, and different stakeholders are key to success

Donald Macarthur

Dual Perspective on Price

• The market perspective is generally the starting point for developing pricing strategy…

• A viable price range will balance both the market and company needs and perspectives

VIABLE PRICE RANGE

Market Market PerspectivePerspective

• Perceived value to customer in context of alternatives

• Places downward pressure on price “what the market will bear”

Sets upper limit price achievable

Company Company PerspectivePerspective

• Reasonable gross margin and ROI

• Places upward pressure on price “what the company needs”

Sets lower limit price required

Donald Macarthur

One big advantage of UK – No delays to market

(P&R timelines [days], Feb 2007 data)Czech Republic 517

Belgium 447

Italy 431

France 390

Hungary 338

Greece 281

Spain 271

Portugal 235

Netherlands 210

Sweden 156

Switzerland 148

Ireland 104

Germany 0

UK 0

US 0

Donald Macarthur




Agenda

Donald Macarthur

Three core analytical constructs form the basis of P&R strategy development

Value Based Pricing

Purchase Decision Analysis

Global Optimisation

Understanding the “buying system”

Understanding the relationship between

the offering and perceived value

Understanding the tradeoffs within and across

products and markets

Donald Macarthur

Core analytical process

1. Product 1. Product profile and profile and positioning positioning optionsoptions

3. Differential 3. Differential Value Value AnalysisAnalysis

2. Reference 2. Reference AnalysisAnalysis

4. Value based 4. Value based price price target/rangetarget/range

5.Assess Role 5.Assess Role of purchase of purchase decision decision makers in makers in enabling enabling market market access (MA)access (MA)

6.Assess MA 6.Assess MA barriers & barriers & strategies to strategies to overcomeovercome

7.Identify and 7.Identify and assess assess cross cross market market impactsimpacts

8.Price 8.Price targets/ targets/ policy, policy, rationale rationale and support and support strategy strategy needsneeds

Value Based Pricing EstimationPurchase Decision

Analysis

Pressure tests likely “system reaction” to

price

LOOP BACK AND REVISE IF NECESSARY

Proactively determines a rational, value based price target or range

Global Optimisation

Optimizes P&R strategy across markets

Donald Macarthur

Value based pricing

Value Based Pricing


Global Optimisation

Understanding the relationship between

the offering and perceived value

Donald Macarthur

Value based pricing

Reference Value

Differential Value

Perceived Value

V

R

D

(Price of the Best Alternative)

(Value of the differentiation)

The perceived value of a product to a customer is based on….

V = R +/- D

Donald Macarthur

Value based pricing and pharma challenges

Reference Price

Positive Differentiation

Value

Negative Differentiation

Value

Perceived Value

VR

D

Pharma challenges..…• What is your product?

• “V” differs depending on indication, positioning, target patients

• What is “R”?

•What if you have a breakthrough product?

•What about generics?

• What drives “D”?

•How do you measure it?

•How do you prove it?

• Value to whom? Who is the customer?

•Payer? Prescriber? Pharmacist? Patient? Who really counts?

V = R +/- D

Donald Macarthur

Value across segments

Smaller patient segments may yield higher economic value and higher revenues/profits

ILLUSTRATION

Donald Macarthur

Understanding and framing the reference “R” is critical

Reference Price


Value


Value

R

D

• is usually the current “standard of care”…

• may not be a drug

• may be old and generic, or go generic before we get to market

• may be indirect – an analogue

• may vary across countries

• may still be in development in a competitor’s pipeline

• is dynamic and changes with competitive or environmental developments

The Reference:

There always is a reference!

Donald Macarthur

• Value of differentiating attributes must be:• Relevant to the customer – especially the payer

• Payer perspective should be incorporated prior to finalizing Phase 3 endpoints

• Robustly supported by data – both clinical and, increasingly, outcomes and economic

• Adopting the “4th hurdle” requirement is the payers’ way of formalizing and quantifying their computation of differential value

• Effectively communicated to customers timely preparation of the “payer market” is increasingly important

• Particularly important where large drug budget impact anticipated

Differential value - “D”

Reference Price


Value


Value

R

D

Donald Macarthur


Value Based Pricing


Global Optimisation

Understanding the “buying system”

Donald Macarthur


• Understanding the system/identifying the stakeholders

• What are their decision criteria?

• How do they influence each other?

• How does this product proposition and target price map against those criteria? what will be the system reaction to our product?

• What hurdles might need to be overcome?

• What leverage points in the system do we have?

Payer

Prescriber Patient

Donald Macarthur

Affordability/budget impact is increasingly a payer barrier

2. Can we afford it? (budget impact)

Available Budget

Potential BudgetImpact

1. Is it worth it? (value for money)

The 2 main payer concerns are:

Requires early assessment and build into development & commercial strategy

Requires careful consideration of options and trade-offs:

Price vs patient access (consideration of subpopulations)

Strategies to facilitate increase in budget headroom

Donald Macarthur

Global Optimization

Value Based Pricing


Global Optimization

Understanding the tradeoffs within and across

products and markets

Donald Macarthur

Global optimization

• Global optimization across different “entities” a key part of pharma pricing strategy development:

• Geographic price optimization – across countries, managing

• Price referencing

• Parallel trade

• Indication price optimization – same molecule, >1 indication

• Dose price optimization – same formulation, different doses

• Formulation price optimization – new formulations, line extensions

Donald Macarthur

Australia

Canada

Japan

New Zealand

South Africa

Western Europe

Hong Kong

KenyaThailand

Key to Reference Types

Periodic Formal

Periodic Informal

Launch only formal

Launch only Informal

Source Country

Pakistan

Bangladesh

UAE

Sri Lanka

India

Informal reimb/mkt access

Taiwan

Brazil

Singapore

Turkey

China

Korea

Egypt

Saudi Arabia

Philippines

USA

Mexico

Many countries refer to prices for same product in other market

Donald Macarthur

Loss of revenue from PIs

• Price fluctuations and favourable incentives have enabled PIs to flourish in 2007

• Value at MSP €4.7 bn (+12.7% vs +3.6% for total market)

• 9.2% share of main importing markets

• 3.3% share of EU-27 (including Norway, Finland, Belgium, Ireland, Austria, Poland, France, etc.)

Source: IMS Health

country PI market share %

Growth (%)

UK 16 (€1.3 bn)

3

Germany 8 (€1.8 bn) 28

Netherlands

15 10

Sweden 12 9

Denmark 12 4

Donald Macarthur

Response: Price management

12

16

20

24

European ex manufacturer price

corridor:

France Germany Italy Spain UK

€ 16.0

€ 14.4

ILLUSTRATION:Ex Manufacturer Price Corridor for Product X in €:

• Launch sequence (high priced countries first)

• Price corridor or more usually target price with ‘hard’ floor and ‘soft’ ceiling (differentiate prices as much as possible, harmonise prices as much as necessary)

Donald Macarthur




Agenda

Donald Macarthur

Orphan drugs: Concerns by payers

• Little negotiating power– high unmet medical need– no suitable references– medical benefit still under investigation– pressure from rare disease KOLs and patient groups

• Surge in orphan drug R&D– by established pharma & biotech companies and new entrants – 23% of MA applications to EMEA in 2006 were for orphan drugs

• Limited data, small trials, short in comparison to natural history of disease. no comparative or dose-finding studies, surrogate end points.

• Prevalence of orphan condition expands when treatment available• Genomics may disaggregate current common diseases into many

genetically defined distinct conditions• Need for life-long treatment. Need for new medical education• Non-orphan indications found for orphan drugs• Issues of equity

….orphan drug costs might reach 6-8% of pharmaceutical budgets in EU by 2010 (Alcimed, Study on Orphan Drugs for European Commission, 2004)

Donald Macarthur

Orphan drug pricing: Views of the Italian

authority

‘In national negotiation, orphan drugs are always handled separately. The most critical point is that while standard drug pricing procedures are not applicable to orphan drugs, other methods are unavailable; as a result, the decision on the price seems to be based on no rules at all.’

Andrea Messori, AIFA

Donald Macarthur

Approx. MSP Glivec 100mg x 60, March 2008

0

200

400

600

800

1,000

1,200

1,400

1,600

€

Donald Macarthur

UK has lowest prices for orphan drugs among major EU countries

• Total of 44 EU-designated orphan drugs had received marketing authorisation from EMEA by end-2007

• 34 identified on UK market in March 2008 using publicly-available data sources

• 28 of these 34 had the lowest MSP among EU-5 countries

• Not entirely due to £’s weakness against €

Donald Macarthur

Conclusions: Factors critical to a pharmaceutical

company’s future performance

• ‘Price’ is just one aspect:

Speed of market access (time from MA to launch)

Speed of market penetration (market share growth in major markets over first five years)

Premium pricing (price realised versus therapeutic class comparator)

Price consistency (narrow official price band across Europe and other relevant markets)

Donald Macarthur

Thanks for you attention, any questions please?

[email protected]

phone +44 (0)1444 811888

P&R strategy development slides reproduced with permission from PriceSpective Ltd (www.pricespective.com)

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