The Value Manifesto 2018. Section E: Get Pricing Right
For those who have not downloaded the full version of The Value Manifesto 2018, each of the five sections will be posted to enable people to read each section in full. This is the fifth and final section.
18 Price Must Be Based On Value
It seems such an obvious thing to say; that prices should reflect value. However, this is something the Pharma and Biotech industries struggle to get right. We have already seen in point 1 of The Value Manifesto that ‘value’ is not well defined, and that it can mean different things in different situations. We also know that ‘value’ can be calculated in different ways, through the many ‘frameworks’.
What is absolutely critical is the need to have a clear rationale for the price you are proposing, and the value this equates to. In the absence of a clear link between price and value, we are left with the histrionics of politicians and the media claiming excessive or ‘gouging’ behaviour by the industry; which unfortunately, is sometimes demonstrated by ‘bad actors’ implementing huge price hikes on older medicines31.
This can only be addressed through a clear process which defines the value your brand is delivering, versus the clinical and economic consequences of relevant comparators, in the specific patient population with a specific disease state, and the specific health outcomes being delivered to that patient population. This is not simple, and governments have struggled with, and abandoned attempts to develop ‘value based pricing’32.
One of the most important implications of setting price based on value, is that value is different in different indications. When evaluating Afinitor (everolimus) for advanced renal cell carcinoma after previous treatment, a NICE ERG estimated the probabilistic ICER to be ￡51,700 per QALY33, compared with the ERG’s estimate of ￡68,000 per QALY for everolimus with exemestane for treating advanced breast cancer after endocrine therapy34; a difference of over ￡16,000 per QALY for the same product.
Trying to set one price at first launch for a brand with multiple indications, with differing outcomes and ‘value’ in each setting, is clearly nonsense. While many stakeholders cry ‘too difficult’ when it comes to pricing by indication (which means, inherently, by value), it can’t be harder than Elon Musk inventing a way to land rockets after they’ve been used! After all it’s not exactly rocket science. Linking price to value can, and should, be done.
19 The Price at First Launch Is Not the Price for Life – or Even for Launch!
The price everyone reacts to is the first launch list price. It is always this which is reported, and usually causes the ‘sticker shock’ reaction if the price is perceived as high – irrespective of whether or not it represents ‘value’. As we saw in point 4 of The Value Manifesto, the cause of over-reaction is often poor Value Communication. However, what most people do not appreciate is that the price announced at launch will not be the price for long, if at all.
In the US, rebates are negotiated at launch with Insurers and PBMs. Research has shown that Pharma companies retain 50-60% of the list price, with the rest being shared among Insurers, PBMs and distributors35. In addition we have seen that, even when prices of medicines fall, insurers in the US continue to charge individual patients high co-pays, higher sometimes than the original cost of the medicine36, thus distorting views about the real cost of medicines.
Following launch, outside the USA, price rises are unheard of. Over time, the price decreases in real terms due to inflation. In many countries, with the approval of each new indication this is often accompanied by negotiated price reductions. There is also an annual price re-negotiation (always downwards) decreasing the price further in many countries.
In Europe, each country has a method of extracting discounts at launch, whether through legal frameworks such as AMNOG in Germany, Patient Access Schemes in England through NICE, or Pay-For -Performance schemes in Italy with AIFA. Each of these yield up to 40% discount on the list price.
The only cash a Pharma or Biotech company can put in the bank is the net price it receives, after all discounts and rebates have been realised. Therefore, in the discussion about prices for innovative medicines, it is important to understand which ‘price’ is under debate, and how this net price, over time, relates to the value being delivered.
Therefore, the launch list price is never, ever the price a company receives for its new medicine.
20 Develop Innovative Pricing Methods by Learning from Other Industries
The reason why we continue to price by amount of chemical content (e.g. milligram, milligram per kilogram or international unit) is because industry has been doing it the same way for over 100 years. Pricing per milligram of chemical has no basis in fact or logic, and causes the misperception that marginal manufacturing costs have anything to do with pricing (they don’t). It’s made even worse by today’s Pricing and Reimbursement processes which aim to fix the lifetime price of innovative medicines across all future indications at the time of launch of the first indication which makes no sense, and encourages Pharma to maximize launch price.
Thinking about how other industries have evolved their pricing models, we could learn much from the software industry and the music business. We no longer own a ‘physical thing’ when we purchase software or music – we pay a monthly licence fee or monthly subscription to have access to the service with streaming service like Spotify and Apple Music. We could price innovative therapies in a similar way; a monthly licence fee for the duration benefit is delivered (for example per month of progression-free survival or overall survival in oncology) irrespective of amount of chemical required. This means we no longer discriminate against larger patients who require bigger doses. It also means that affordability is addressed, as payment is linked to the duration of benefit, rather than all up-front with high short-term budget impact. It also means much greater predictability of budget impact (as the fee is fixed and known) – something Payers crave.
By making the licence fee patient-specific, it would mean that indication-based pricing, based on value delivered, would be possible, as well as the collection of prospective outcomes data to ensure the value promised is actually delivered.
The most important thing to get your head around is that nobody ‘buys’ a medicine anymore, they do not ‘buy’ a physical thing like a pack or a vial. This remains the property of the Pharma company. The licence fee is for access to use the medicine for a specific patient – not to procure chemical.
Adapting the licence fee model could also be developed for antibiotics used for severe life-threatening infections. This model works well for antibiotics, where volume use will be tiny (which is desirable – in line with antibiotic stewardship policies). By basing the price on a licence-to-have-access, rather than volume used, we no longer have the perverse negative incentives currently in the system which have shut down some antibiotic R&D.
No one single company can take the responsibility for doing this alone – there needs to be a consolidated effort among companies and academics to develop this pricing method. It will be a brave move for the first company that does this, and it’s more likely to be an entrepreneurial biotech – now’s the time to be bold and challenging!
21 Be Realistic About the Value of Your Asset
Finally, not every asset in the R&D pipeline is a blockbuster. As one wise and experienced head of R&D once told me, “if you have lemons, make lemonade”. Don’t pretend your asset is something it’s not.
Having understood what the asset is truly capable of by uncovering the value (see point 2 of The Value Manifesto), make the most of the virtues it has, or what may have in the future, and price it accordingly. Trying to overprice a mediocre-performing asset reduces the headroom for the real breakthroughs, and reinforces all the negative views people have about the Pharma and Biotech industry.
Pricing an asset on it’s true value means it is more likely to reach patients, and that’s the only thing that really matters.
Please feel free to download, read and share the full version of The Value Manifesto 2018, which I hope you find useful in your own plans. I welcome your comments & feedback. The link to the full version is here:
https://galbraithwight.com/wp-content/uploads/galbraithwight-the-value-manifesto-2018.pdf
I would like to express my sincere thanks to Mark Boyden, Gillian Cannon, Maria Hall and Mary Skeels for their contributions to and feedback on The Value Manifesto 2018.
References
31 CEO Martin Shkreli: 4,000 percent drug price hike is ‘altruistic,’ not greedy. Cha, A., Washington Post. September 22nd 2015. https://www.washingtonpost.com/news/to-your-health/
wp/2015/09/22/turing-ceo-martin-shkreli-explains-that-4000-percent-drug-price-hike-is-altruistic-not-greedy/?utm_term=.0637fec36955
32 UK backs away from ‘value-based pricing’ for drugs. Nature. Newsblog 06 Nov 2013. https://blogs.nature.com/news/2013/11/uk-backs-away-from-value-based-pricing-for-drugs.html
33 Everolimus for advanced renal cell carcinoma after previous treatment. Technology appraisal guidance [TA432] Published date: 22 February 2017. https://www.nice.org.uk/guidance/ta432/chapter/4-Committee-discussion
34 Everolimus with exemestane for treating advanced breast cancer after endocrine therapy. Technology appraisal guidance [TA421] Published date: 21 December 2016. https://www.nice.org.uk/guidance/ta421
35 The Flow of Money Through the Pharmaceutical Distribution System. Sood, N., Shih, T., Van Nuys, K., Goldman, D. USCSchaeffer. June 2017. https://healthpolicy.usc.edu/documents/USC%20Schaeffer_Flow%20of%20Money_2017.pdf
36 Frequency and Magnitude of Co-payments Exceeding Prescription Drug Costs. Van Nuys, K., Joyce, G., Ribero, R., et al. JAMA. 2018;319(10):1045-1047. doi:10.1001/jama.2018.0102. https://jamanetwork.com/journals/jama/article-abstract/2674655?redirect=true