From Pharma 1.0 to Pharma 2.0 – from vertical to horizontal pricing

The PRICE of a pharmaceutical product is probably one of the most heated and controversial aspects we face today in the discourse on pharmaceuticals. So tenuous the discussion has become that it supersedes the good old heated debates about the relationship between HCPs and marketing reps, the conduct of or clinical trials (the Secret Gardener type of accusations) or any other conspiracy theories about infecting people in order to cure them (Mission Impossible 2 then, anti-immunization crowd today), etc.

Zooming out, however, the entire discourse about price is based on the fact that pharmaceutical pricing is essentially VERTICAL – meaning that a given price (at any given time) is established and linked to one product. Put differently, any corporate strategy towards the price setting of a certain product is based on that product alone. Indeed, over the years, pharma companies have tried to provide some additional services in their “value offering”, or to create some kind of a package, like a cross-product negotiations. But truth be told, the DNA of pharma companies of the V1 generation, is based on the pricing of each product individually. From that point onwards, negotiations take place aimed at finding that “golden number” for the relevant market. In this case, it doesn’t really matter if the golden number is part of a pricing and reimbursement negotiations with payers, or to the listing “free market” directly vis-à-vis consumers. It is still a vertical process.

The problem however, as we know all too well, is the growing dissonance and disagreement about that golden number. From one end, Pharma companies and their supporters use all their means to defend and explain the rationale behind their pricing decisions. On the other hand, critiques of “excessive pricing” are equally vocal in arguing against the price offered by pharma V1. From the “regular patient” to the highest authorities in the land, the battle of the vertical price is raging.

There are two scenarios to this debate. And although we don’t know yet which scenario will take its course, I suspect most of us have a strong sense of understanding where things are heading.

Nevertheless, let me briefly annotate these two scenarios. The first scenario is based on “more of the same”, meaning that the discussions and debates over price will continue but the golden number will be preserved. Under this scenario Pharma 1.0 will continue to base its strategies on the concept of “steady as she goes”. Yes, plans and calls for internal change, transformation and innovation will take place. Talks about market transformation, digital foot print, spatial thinking, and any other cutting-edge concepts dominate industry conferences and company workshops. But as long as the quarterly targets are satisfied, nothing will really require change – real change.

Under the second scenario, the golden number (of the product’s price) could not be defended for too long. Pressures from top-down – mostly governments and payers refusing to pay and exercising their huge power to curve down prices, at times brutally – and bottom up – growing public voices against high prices – will increase towards a breaking point. Under this scenario Industry will face the calamity of impossible choices – reduce your price dramatically or look for another model to generate revenues.

But that is exactly where Phrarma 2.0 and horizontal pricing kicks in.

Horizontal pricing means a reality in which any given pharmaceutical product is part of a much broader package of products and services, which, combined together, provides a different price offering. Under horizontal pricing, the price is not determined by that given pharmaceutical product, but rather by the total package. Consequently, the entire negotiations and discussions over the price of that package are conducted across the horizontal spectrum of its different components – hence horizontal pricing.

101 economics tells us that it is usually far better to negotiate and agree on a Pareto price with several components involved (which is also the basic good old for multilateral trade negotiations as well, at least when the WTO was a living entity). Under these negotiations, it is possible to insist on price of product A but be more lenient on the price of product B. It would be possible to price Service C at certain premium, as it is provided on a short-term basis, but reduce the price of service D as it will provided on a longer time spam. Thus, a package will be created, suited and tailored to the different needs to customers – from the individual to the organizations, from the private to the public.

To a great extent, I am stating the obvious. Horizontal pricing is already here. Tesla, Microsoft, Google, Oracle, Amazon, IBM, to name a few, are able to devise their pricing strategies horizontally – just because they are able to offer a bundle of products and services combined into a package.

But not in Pharma. Pharma 1.0 cannot really offer a package, as its price is based on vertical structure. But Pharma 2.0 can and will. Which brings up the question of what is Pharma 2.0.

Pharma 2.0 represents the not so far reality, in which pricing is based on a PACKAGE of a much broader mixture of products and services. One cannot emphasize enough the different between that package and that of vertical pricing of Pharma1.0. Horizontal pricing of pharma 2.0 is NOT about different risk sharing agreements, or any other value offerings that tries to defend the price by providing some additional benefits (from fencing the number of patients, to Apps that support the use of the product, to nurses that will assist the patient on site, etc – one may compare it to the leather seats the dealer will provide you with when you buy a new car). Horizontal price is about the package, which will be greater than the sum of its components and which will include, among other things, the drug.

The obvious questions stem: which pharma company can graduate from version 1.0 to 2.0; under which structure and setting its package will take place; what are the actual components of a prospective package; how will the organizational and corporate structure of a pharma 2.0 company look like, and these are but a few questions to begin with. 

As this is just a short think piece, I’ll expand about such possible realities in future posts. Yet the cardinal principle is as follows: Pharma 2.0 is a company that does not base its revenue stream on its individual products, which in turn represent autonomic profits centers. Rather, a Pharma 2.0 company either controls or is part of a broader corporate organizational setting (quite likely today representing the triangle of Big date, AI and pharma) that focuses on a wider package offering. This offering, in turn, will provide for different and more flexible platforms of price negotiations of the total package. They will neutralize or even nullify the heated debates of horizontal pricing under Pharma 1.0.

How will it look in practice, well in some of the next posts I will provide more concrete insights and practical examples into the “day in a life” of pharma 2.0