Where Drug Firms Go Wrong in International Drug Pricing
Mispricing in Europe--pricing the new therapy too high compared to perceived incremental value than the older therapy--has been a key reason that new classes of drugs haven't achieved their volume objectives. Successful follow-on classes like statins and proton pump inhibitors have kept their European prices relatively close to the costs of the previous therapies; less successful ones, like the glitazones, have not.
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Competitors and payors will force drug companies to justify their drug prices based on value delivered. With oncology as an example, we show a way to rate multiple factors to arrive at an overall clinical value--and then how to translate this value into an appropriate price for the new product. But the pricing assumptions will also change how products are launched.
By keeping pharmaceutical prices and utilization artificially low, Europe is losing more economically than it gains. Lower drug prices and utilization for Europeans entail other costs , which are difficult to quantify but real, in terms of local industry competitiveness and health outcomes. Indeed, pharmaceutical industry investment and associated innovation has followed the money as the profit pool has shifted to the US, which now represents 62% of the industry's global returns compared with 18% for Europe. If current trends hold, Americans will spend four times as much on drugs per capita as Europeans by 2012. This will drive US R&D investments to double the size of those in Europe, compared with parity today, and will increase the focus on the US for initial drug launches. Pharmaceutical companies need to collaborate on solutions, as they have done in the US, focusing on working with a range of constituents to push governments to improve R&D and other investment incentives in Europe.
Before its launch, GSK's Advair, which combines the active ingredients of what were its own two most popular asthma drugs, faced a skeptical managed care audience which believed the company wanted to simply charge more for what appeared to them a mere increase in patient convenience. The pre-merger Glaxo thus created a two-pronged positioning strategy. To create unrestricted access on managed care formularies, Glaxo launched a risky outcomes-based study to prove the value of dual therapy based on experience with the precursor products, not with the still-unapproved Advair. Then, to position the new dual therapy for the broadest asthma market, rather than restricting it for moderate and severe disease, Glaxo crafted a pricing strategy which discounted Advair to the combination of precursor products but priced at a premium, reflecting its advantages, to its main single-agent competition, Merck's Singulair. The two key lessons for the industry: first, the value of effective and timely life-cycle management as the basis for the creation of a new product; and second, the combination of preclinical and clinical data on the new product, plus "directional" data from the older one, can create arguments that managed care groups will find almost impossible to ignore.