Pharmaceuticals

Pricing in an Approval-predominant Situation

Steps in price setting

In many countries nowadays it is not so much a question of whether a physician wants to prescribe a new drug as whether he is allowed to do so and/or whether the drug will be reimbursed.

Price setting in these countries means establishing the maximum prices that authorities will reimburse or a managed care organization will accept. In most markets with these high initial hurdles the physicians are less price sensitive.

The basis for setting prices in these countries is the health economic profile of the new drug. The calculation of direct and indirect cost savings of a new drug is quite straightforward. The central question is about the value of intangible benefits such as increased quality of life, prolongation of life and reduced mortality rates.

In these cases the cost-benefit ratio of a drug cannot be calculated but only subjectively measured.

Computer-aided techniques such as Conjoint Measurement in combination with in-depth personal interviews with decision makers from managed care organizations or formulary committees provide the information necessary to establish the optimal price.

Example: pricing a new drug in the USA

An optimal price was to be defined for a new drug in the US market. Currently available products in this indication were unsatisfactory but rather inexpensive. Therefore, price was not the most important factor but was still decisive.

The following steps led to the final price strategy:

• Internal workshop with the client
• Analysis of all available health economic data to derive cost estimates
• Interviews with independent physicians and medical opinion leaders to measure competitive performance
• Interviews with officials of health maintenance organizations to measure perceived benefits
• Analysis of all data and recommendations for an optimal price as well as a sophisticated discount system

Result

The optimal price was set at more than three times the competitors' average price. It was clear that the product would not be on all formulary lists, but profit was still maximized.