Pharma & Biotech: Pricing Strategies In A Changing Market

By Aaron Davis, Founder, Metabolic Markets

“So what do you think we can charge?” 

A simple question posed every day by pharma/biotech executives and investors around the globe about products at the earliest stages of development.  The answer boils down millions upon millions of research dollars and thousands of man-hours to a single number. 

This number will be controversial internally and potentially politically explosive externally.  How is a manufacturer able to assess pricing potential for an early stage asset and continue to build value in the asset throughout the development process in an evolving and increasingly complex healthcare payment system? 

Answering the question of “what can we charge?” requires answering two crucial questions: “who is paying?” and “what do they perceive as value?” 

A very important first step is to assess your payer market to learn the multiple sales channels and the various payers within each channel, identifying “who is paying.”

Who is paying?

Long gone are the days of “our market is commercial insurance, Medicaid and cash.”  In recent years, we have seen a myriad of benefit designs and increasing patient out-of-pocket in commercial insurance, the evolution of Medicare Part D, increasing managed Medicaid enrollment, and now this year, the unique health insurance benefit designs created by the Affordable Care Act. 

Other institutional sales channels cannot be ignored, depending on the product, such as long-term care, hospitals, and federal channels like the VA and Defense Health Agency.  Each disease state has unique exposure to the multiple sales channels and variation can be seen within products in the disease category. 

Understanding the payer mix is a fundamental component of identifying who your customer is, how they are covering current treatments, and their needs.  This is the first step to recognizing the payer-customer and their goals. 

Investing in market data at an early stage is important to accurately detail the payer landscape.  The disease state may have a higher exposure to government-sponsored health plans and may be more price sensitive.  Some disease states may be dominated by commercial insurance but heavily controlled. 

Within the individual channels, the data will uncover how individual payers are managing products through the various payer utilization management tools, such as patient cost sharing, step edits or prior authorizations. 

What do the payers value?

Knowing “who” is paying for products in the disease state allows the developer to engage the payer early in development.  There are multiple mechanisms for working with the payer community. 

A manufacturer should have open dialogues discussing what data generated is important to the payer customer and identifying what data will enhance the product’s value. Products are typically developed with only a regulatory strategy in mind, which is not to be discounted, but with increasing payer options in many disease states, understanding what additional data is needed will separate the product from the masses and increase value.

The payer community has been asking for comparative effectiveness and head-to-head trials for some time, which is very challenging to provide at launch.  Setting aside risky and expensive trials, involving payers early in the development process will identity other important data points which will support the product’s value, such as disease state economic burden or other quantifiable metrics that can be captured in trials.  Simply having the payer conversations early in the development process will help a manufacturer understand the market from the payer-customer’s perspective, even if the data the payer would like to see is not possible to develop. 

Answering these two fundamental questions are the crucial pieces to maximizing the pricing opportunity.  If these two questions are answered well, price setting should not be a painful organizational exercise. 

In most situations, however,pricing is controversial and emotional.  Even in situations where payers were involved early in the process, challenges will arise.  If the product’s value is established, pricing may be scrutinized, but the value will outweigh the cost.  The product’s value story must be told ahead of the price conversation both in public- and private-payer discussions.

In recent weeks, much has been made of the price for Solvaldi (sofosbuvir), a groundbreaking Hepatitis C treatment.  While large national payers have loudly complained about Solvaldi pricing, the product is off to one of the fastest launches in history.  That’s because the market perceives that Solvaldi’s benefits outweigh its cost.  Payer challenges will continue to arise as total spend grows, but it is difficult for payers to stand in the way of strong demand of a very effective product. 

The pharma landscape is littered with high-priced products that the market has relegated to niche populations.  In most cases, it is not the price that has marginalized the product, but the the fact that the product’s value was not reflective of the price.  If the manufacturer understands who is paying for their product and what those payers value, the likelihood of a successful product with payer value well understood is dramatically increased.

As an example, we can apply the key questions framework to a fictional product in development for diabetes.  Diabetes is a large and fiercely competitive disease state.

Early in development, the manufacturer invests in data to understand the payer landscape and dynamics among current treatments.  As all marketed products offer some measure of glycemic control, the manufacturer must find additional benefits that payers value, e.g. safety profile, patient adherence, additional CV benefit, or impact on quality metrics important to payers. 

Symphony Health (http://symphonyhealth.com) has provided real data for the case study example.  Below is the sales channel mix for branded non-insulin products.  Differences can be seen between the product classes, important for a manufacturer to understand what the sales channel and payer mix will be for their specific product.  Further data analysis would provide the manufacturer additional granularity to the specific payers within the channel and the utilization management the payers impose, all important inputs into knowing what the payers value and their pricing sensitivity.

The manufacturer engages the payer community as described by the market data, to discuss which of the product benefits beyond glycemic control are most valued from a payer perspective.  The manufacturer produces publications on the unmet need in these important areas while developing product data on the identified additional benefits. 

As the product approaches approval, payers are once again engaged to assess the product value.  Shortly before launch, the manufacturer incorporates payer input, assesses product value and sets a reflective price. 

The example outlined describes a straightforward, common-sense approach, but in the real world, pricing is complicated and a non-linear process.  If a manufacturer understands the payer market and the payer-customer, the question “So what do you think we can charge?” is remarkably simple to answer and defend.