The Pharmaceutical Pricing Compendium

www.pharmaceuticalpricing.com
The Pharmaceutical
Pricing Compendium
A PRACTICAL GUIDE TO THE PRICING AND REIMBURSEMENT OF MEDICINES
• Benefit from expert opinion and
case studies
• Wide range of subjects covered
• Designed for desktop reference

The Pharmaceutical Pricing
Compendium
A practical guide to the pricing and reimbursement of medicines
Published and Distributed by
Urch Publishing Ltd
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PHARMACEUTICAL PRICING COMPENDIUM
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 2003 Urch Publishing Ltd
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© 2003 Urch Publishing Ltdii

TABLE OF CONTENTS
Foreword 1
Chapter 1. The art of pricing in the pharmaceutical industry 5
Mario R. Nacinovich Jr, Fission Communications (US)
The business of pricing
Chapter 2. Global pricing strategies for pharmaceutical product launches 13
Peter J. Rankin, Gregory K. Bell and Tim Wilsdon, Charles River Associates (US)
Chapter 3. Integrating pricing and reimbursement needs into drug
development 25
Cecil Nick, PAREXEL International (UK)
Marketing issues
Chapter 4. Assessing the pharmaceutical price modelling tools 33
Gary Johnson, Inpharmation Ltd (UK)
Chapter 5. Managing price throughout the life cycle of a pharmaceutical
product: tools, timing and strategies 39
Judith D. Bentkover, Marc R. Larochelle and Patricia M. Russell, Innovative
Health Solutions (US)
The effect of health economics
Chapter 6. The importance of health economics in successfully achieving a
sustainable price for reimbursement 49
Paul C. Langley, 3M Pharmaceuticals (US)
Chapter 7. Hospital negotiation – the use of health economics as a support
for new product pricing 61
Brian Lovatt, Vision Healthcare (UK)
Ethical versus economic issues
Chapter 8. The global AIDS crisis and drug pricing controversy 69
Faiz Kermani, Chiltern International (UK)
Regional Issues in pricing and reimbursement
Chapter 9. Trends in international pharmaceutical pricing and
reimbursement 77
Jorge Mestre-Ferrandiz, Office of Health Economics (UK)
Chapter 10. The future of parallel trade in pharmaceuticals in Europe 87
Klaus Hilleke, Simon Kucher & Partners (Germany)
Europe
Chapter 11. Pricing considerations for new products in Europe 95
Roland Pfeiffer, Altana Pharma AG (Germany)
Chapter 12. Schering’s policy for pharmaceutical price harmonisation in
Europe 101
Michael Bohn, Schering AG (Germany)
© 2003 Urch Publishing Ltd iii

US
Chapter 13. Bio-pharmaceutical prices and the effects on the US economy 107
Roger A. Edwards, Haleh Armian-Hawley and Louise Firth, TIAX LLC (US)
National and international law and pharma pricing
Chapter 14. Differential pricing in the EU: significance of the decision in the
GlaxoSmithKline case 121
Lorna Brazell, Bird & Bird (UK)
Chapter 15. Additional information about pharmaceutical pricing and
reimbursement 131
Terminology of pharmaceutical pricing 137
List of Figures
Figure 1.1 The art of pharmaceutical pricing 6
Figure 1.2 The drug development process 7
Figure 2.1 Strategic considerations for global product launch 14
Figure 2.2 Determining optimal global price 15
Figure 2.3 Price bands: no variation 22
Figure 2.4 Price bands: increasing price discrimination 23
Figure 5.1 Spending and time requirements for pharmaceutical R&D by phase 42
Figure 5.2 Floor price analysis for example product 44
Figure 7.1 The measurement of economic costs and benefits in healthcare
research 65
Figure 9.1 Reimbursement and pricing decisions 78
Figure 9.2 The effects of reference pricing systems 81
Figure 10.1 The global price corridor 91
Figure 10.2 Factors influencing the future of parallel trade in Europe 92
Figure 11.1 Market share of parallel imports in Germany 98
Figure 11.2 Average time intervals between submission of the P&R dossier and
the awarding of pricing and reimbursement permission 100
Figure 12.1 Different price levels of pharmaceuticals in Europe (ex-
manufacturer prices, 1998, index based on official exchange rates,
104
Figure 13.1 d percentage of US
thcare
112
Figure 13.5
116
Figure 13.8 echnology sectors
116
Figure 15.1 e total reimbursed
133
Figure 15.2 etween application and award of pricing
134
Figure 15.4
11 134
D = 100) 103
Figure 12.2 The optimal launch sequence
Pharmaceutical expenditures worldwide an
health spending on pharmaceuticals, 1960–2001 109
Figure 13.2 Worldwide private and public R&D funding for heal 110
Figure 13.3 Worldwide genomics research investments, 2000 111
Figure 13.4 Worldwide components of the pricing and innovation puzzle
Biotechnology revenues, drugs on the market and drugs in clinical
trials 113
Figure 13.6 Total economic impact by the pharmaceutical sector, 1999 115
Figure 13.7 Total pharmaceutical industry economic contributions by type, 1999
Market capitalisation of pharmaceutical and biot
as percentages of total market value, 1990–2000
Estimated costs paid by the patient in th
pharmacy market value at retail prices, 2000 (%)
Average time intervals b
and reimbursement (days) 133
Figure 15.3 Average retail prescription prices, 1990–2000
Projected drug spending by and for the Medicare population, 2001–
© 2003 Urch Publishing Ltdiv

CONTENTS
Figure 15.5 Manufacturers’ price increases for existing drugs versus retail
prescription price increases reflecting the use of newer drugs,
1991–2000 135
Figure 15.6 Generic drugs as a percentage of total prescriptions dispensed and
percentage of total annual retail prescription sales, in US dollars,
1996–2000 135
84
Table 10.1 el imports in key European markets in
102
Table 12.2 t in pharmaceuticals. Originator
ons, 2000
ries (list prices)
131
Table 15.3 eutical cost-containment methods used in 18
Table 15.4 Estimated discounts for larger/institutional buyers in the US 136
List of Tables
Table 1.1 Factors influencing a product’s price 8
Table 1.2 Estimates of the average cost of developing a new drug 9
Table 1.3 Influences on pharmaceutical prices 10
Table 4.1 Summary of techniques used to determine market response to a
product’s proposed price 37
Table 5.1 Annualised costs of existing urinary incontinence interventions (€) 41
Table 5.2 Possible costs of new urinary incontinence interventions and
comparison with existing interventions (€) 41
Table 5.3 Pricing research stakeholders and key issues to explore 43
Table 5.4 Potential strategies to respond to changes in the competitive
landscape 46
Table 6.1 Relative market potential for pharmaceutical sales 56
Table 7.1 Definitions of health economics methodology 63
Table 7.2 Health economics methodologies used in the pharmaceutical sector 64
Table 8.1 Summary of pharmaceutical companies’ best ARV price offers for
developing countries (prices in US dollars per adult per year) 73
Table 9.1 Which method to use: price per DDD, per gram or per unit? 82
Table 9.2 Effects of using different exchange rates 83
Table 9.3 Effect of using different weights in pharmaceutical price
comparisons
Market share of parall
selected years, by value 88
Table 12.1 World pharmaceutical market, 2001
Results of a free-market environmen
area for the 50 top-selling products 102
Table 13.1 US drugs as a percentage of healthcare costs 109
Table 13.2 Number of US launches of innovative medicines, 1990–2000 112
Table 13.3 US biotechnology industry characteristics by selected regi 115
Table15.1 Price ratios for all pharmaceutical catego 131
Table 15.2 Price ratios for ATC groups (list prices)
Summary of pharmac
European countries 132
© 2003 Urch Publishing Ltd v

Foreword
Achieving the best price for a pharmaceutical product is vital for a pharmaceutical
company’s profitability. A clearly defined pricing function can help a company achieve
and maintain higher prices as well as more favourable reimbursement terms. The
Pharmaceutical Pricing Compendium – a practical guide to the pricing and
reimbursement of medicines provides the essential insight into the business, economic,
legal, political and strategic issues that companies must consider when pricing a
product.
Pharmaceutical pricing and reimbursement is complex, controversial and varied. The
global environment is made up of a set of forces, many of which are out of the direct
control of the manufacturer. Companies must contend with numerous variables when
pricing their medicinal products, including:
• healthcare and drug funding systems that differ radically from market to market
• reimbursement and market access increasingly complicated by health economic or
technology assessments
• international reference pricing, already common in Europe, now expanding globally
• considerable parallel trade of pharmaceuticals in the European Union (EU) (which
is now starting to expand to the Middle East)
• access to essential drugs in the developing world, in particular those for HIV and
AIDS, which is very controversial and has led to calls for differential pricing
• in the US, review of drug purchasing by Medicare (coverage for the elderly) and
Medicaid, with managed care organisations shifting the burden to the patient
• the continuing weakness of intellectual property laws in many countries.
This brief list illustrates the obstacles that companies must navigate, not just in getting
innovative medicines to market, but in making products profitable. The Pharmaceutical
Pricing Compendium will help steer the executive through this maze by providing clear
information on the practical business issues that surround the subject. The
Pharmaceutical Pricing Compendium brings together some of the most qualified and
distinguished commentators on pharmaceutical pricing. Authors are company
executives, consultants, health economists, marketers, economists and academics.
Executives charged with delivering profitable prices and reimbursement for their
companies’ products will draw practical, business-critical advice from these expert
papers.
The Pharmaceutical Pricing Compendium is ordered in themes reflecting the issues
currently affecting the pricing and reimbursement sector. Introducing the 14 authored
articles is Mario Nacinovich’s overview (Chapter 1), which succinctly describes the key
issues that pharmaceutical companies have to consider when making a pricing decision.
© 2003 Urch Publishing Ltd 1

Companies pursuing global product launches have identified a troubling tension
between minimising the time to market and maximising prices that determine global
profits. Charles River Associates’ piece (Chapter 2) discusses the approach companies
must take to pricing globally and the constraints that must be overcome. Cecil Nick
(Chapter 3) discusses the merits of considering price issues in the early stages of drug
development which allows companies to create products that demonstrate good value.
Marketing issues
Customer research based on surveys should lie behind all good price decisions. Gary
Johnson’s article (Chapter 4) reviews the types of customer survey methods to assess
price sensitivity and explains the differences between non-trade-off and trade-off
techniques (also known as compensatory and non-compensatory techniques). Life-cycle
management is discussed in Innovative Health Solutions’ article (Chapter 5), which
provides a guide to the key analytical tools, including therapy economics, that
companies must use to ensure optimum performance from R&D to end-of-patent
exclusivity.
Health economic issues
In the past few decades the aim of drug development has always been to produce
effective, relatively safe medicines, but health economic considerations are now gaining
in importance, and the development of a successful product requires integration of the
needs of the purchaser with the already recognised needs of the prescriber and patient.
Brian Lovatt’s article (Chapter 7) argues that, as cost containment becomes increasingly
important in health systems, demonstrating the value of products is becoming essential
to ensure reimbursement. Paul Langley (Chapter 6) develops this theme by identifying
the steps that companies can take to launch a product at a price that is acceptable to the
authorities, customers and the company.
Ethical issues
The controversy surrounding the supply of AIDS medicines to African countries has
tarred the industry’s reputation. There are enough issues here to fill a number of books.
The pharmaceutical companies’ stance has been watched closely by the authorities that
oversee the pricing and reimbursement of medicines. The article by Faiz Kermani
(Chapter 8) summarises the history of AIDS drug supply and the impact on prices and
the generic competitors.
Regional issues
The varied pricing and reimbursement systems of European countries often cause
companies distress. Jorge Mestre-Ferrandiz (Chapter 9) looks at the use of reference
pricing in Europe, which started in Germany in the 1980s and is now commonplace for
launches. He provides a number of detailed case studies of inter-nation price
comparisons and exchange-rate differences. One major problem rising from the single
European market is parallel trade of pharmaceuticals, which, according to Klaus Hilleke
(Chapter 10), is the fastest growing part of the pharmaceutical market. In his article he
runs through the options that companies have to counter the negatives effects of parallel
imports and discusses the long-term future of this controversial business.
Roland Pfeiffer’s (Chapter 11) and Michael Bohn’s (Chapter 12) articles offer useful
insight into the methodologies that companies employ to set prices in Europe. Whether
© 2003 Urch Publishing Ltd2

FOREWORD
companies should sacrifice sales in one country in order to maximise overall
profitability is debated, and Bohn illustrates how pharmaceutical company Schering has
a pan-European approach to profitability and thus price setting.
TIAX’s article (Chapter 13) looks at the US and the impact of the pharmaceutical
industry on the economy. The authors argue that high prices and a free market are
essential to support a strong research-oriented bio-pharmaceutical industry, as spending
on pharmaceuticals takes only 1.4% of GDP.
Legal issues
GlaxoSmithKline’s now infamous case of two-tiered pricing in Spain has yet again
brought the legality of parallel trade into the limelight. Lorna Brazell’s article (Chapter
14) clearly explains the company’s defence and the European Commission’s opinion.
The Pharmaceutical Pricing Compendium brings together a series of useful tables and
figures (Chapter 15) relating to pharmaceutical prices and reimbursement trends. There
is also a short glossary in which terms and jargon specific to the business of
pharmaceutical pricing are defined.
The Pharmaceutical Pricing Compendium will become an essential reference work for
all involved in the business of pharmaceutical pricing and reimbursement.
Urch Publishing
January 2003

CHAPTER 1
The art of pricing in the pharmaceutical industry
Mario R. Nacinovich Jr, Executive Director, Strategic Planning, Fission
Communications (US)
Article summary
There are many elements that pharmaceutical companies must consider when
pricing their products. Recouping the large investment in research and
development (R&D) is a key driver but others such as product life cycle, patent
protection, innovativeness, competition, government controls and corporate
philosophy all have an influence on the pricing decision, thus making pricing
one of the most complex economic decisions.
Keywords
Commercialisation, GATT, GlaxoSmithKline, Price Adopter, Price Innovator,
Pricing Strategy, Optimal Value Harmonisation, Patent, Products Cycle,
Tagamet, Zantac
PHARMACEUTICAL, MEDICAL DEVICE and biotechnology companies have all
become dedicated to a new discipline in their due diligence of bringing any new product
or device to market – the art of advanced price planning. The industry is currently made
up of organisations that range from very small, research-intensive groups funded by
universities and by venture capitalists, to large, multinational corporations. The
innovators in the industry such as Pfizer, GlaxoSmithKline, Merck & Co., AstraZeneca,
Bristol-Myers Squibb and others face issues including required outcomes research,
governmental regulations and controls, validation, healthcare reform, managed care,
decreased patent protection periods, generic competition and ongoing challenges related
to advertising, education, promotion and industry pricing. Figure 1.1 illustrates the
pressures that have a direct or indirect effect on pricing.
Pricing and price planning
Pricing is a dynamic economic logic with principles and policies that are rooted deeply
in a company’s fiscal philosophy. Pricing strategy includes objectives, broad policy,
strategy, implementation and adjustments.
The goal of this philosophy seeks to maximise or optimise the appreciation of the value of
each individual product as it relates to the overall company portfolio and the diverse
global marketplace. Price planning is essential to achieving and sustaining optimum
pricing. Pharmaceutical and biotechnology companies are continuously faced with pricing
decisions, where eventual prices are developed through the direct interplay of a series of
multivariable functions of internal and external challenges. Decisions for the advance of
new pharmaceutical and biotechnology treatments are made on the basis of the product’s
potential for success, and its capacity to recover its outlay and make an equitable profit.

Figure 1.1 The art of pharmaceutical pricing
Industry
Pricing
Advertising,
Education &
Promotion
Outcomes
Generic
Competition Healthcare
Reform
Managed
Care
Patent
Protection
Validation
Regulations
Controls
Optimum
Pricing
Source: Author
The art of pricing
The art of pricing is an approach rooted in the core concepts of marketing and revenue
management. This requires consideration of background issues and influences and some
understanding that the market will accept the logic for the pricing. According to
economic theory, both demand and production costs play a role in determining the price
of a drug. Price, however, can never be the fundamental driver of the sale in
pharmaceuticals; companies need to sustain optimal value harmonisation (OVH), which
is the consideration of the appropriate price valuation. This is the point at which the cost
of producing another unit of drug, and the profits earned from that sale, affords the
incentives for the competition to question investing in drug development.
When a breakthrough drug is introduced, by definition it has no close substitutes on the
market. Demand for the drug is fairly insensitive to price, since there is no alternative
treatment of equal quality and effectiveness. Companies with such products are forced to
focus their creativity and innovation to enhance the value of the product to the physician,
patient and consumer while maintaining the same level of creativity and innovation in
their pricing. One area most companies look to in order to balance these efforts is with
disease management education, where educational initiatives are made to reinforce a
particular image that has been portrayed. An additional area in which innovator companies
lead physicians and the public is in terms of vision or sense of purpose. Innovative
pharmaceutical companies exist for something far more motivating than making money.
The view and value that the pharmaceutical company encompasses is the company as a
research and life-improvement entity. In 1950, George Merck II said:
We try to remember that medicine is for the patient. We try never to forget
that medicine is for the people. It is not for the profits. The profits follow, and
if we have remembered that, they have never failed to appear. The better we
have remembered it, the larger they have been. (Merck)

THE ART OF PRICING
Figure 1.2 The drug development process
Sales
Returns
R&D
Costs
Discovery Development
I II III IIIb IV
Basic
Research
Pre-
clinical
Clinical Testing
Commercialisation
Product
Launch
Marketing
Market
Introduction
Patent
Expiration
Patent
Filed
5–10 years 5–10 years 5–20 years
Source: Author
Discovery, development and commercialisation
Pharmaceutical and biotechnology companies have made substantial investments in
product development and discovery. Without the protection of patents, which make
possible a return on such investments, discovery and product innovation simply would
not happen. The GATT agreement, which, among other legislation, set international
standards for pharmaceutical patent life, declared that new entities would be protected
for 20 years. In most countries, however, manufacturers cannot sell the entity until it has
gone thorough a rigorous clinical development and approval process. This process is
estimated to take between 8 and 12 years of the 20-year patent life.
Assuming the successful completion of this process, this decreases the exclusivity time
that pharmaceutical manufacturers have to sell the product.
There are universally accepted ‘equivalency’ requirements that affect decision making
on patent life and market entry. When a new product is first introduced, patent
protection is determined by the product’s inherent attributes. These requirements
include products with the same active ingredients, dosage forms and labelling.
Regulatory/government officials place additional emphasis on the degree to which the
companies have communicated the value of these qualities to key opinion leaders,
formulary committees and managed care. Relative to the art of pricing in the
pharmaceutical industry, investment in the discovery and continued development of

these compounds is risky and at an incredibly high cost that the research-driven and
manufacturing companies absorb. Even after patents have been granted and a product is
available, these companies continue to research and support activities to better
understand the performance of the product.
Neil Dorward, in his book on the economics of pricing, states:
Actual pricing decisions taken by businessmen have revealed a very complex
decision process. Much of the complexity results from the multidimensional
nature of pricing decisions. They usually incorporate many variables, of which
the number, composition, and relative importance, together with the form of
their interrelationships, can vary between different pricing situations within
the same company.
There exist general principles that these organisations have established in their
guidebooks and corporate policies that outline their basic pricing philosophy that aims
to sell their products at fair and just prices, reflecting the current environment in which
that product is to be promoted. Once the policies have been reviewed and tested the
company outlines specific strategies by which to take individual products (even in early-
stage development) and integrate them into the broader product strategies incorporating
all marketing, managed care, manufacturing, finance, public relations activities and
considerations balancing the development of global or regional pricing strategies that
may be important.
The goal of the pharmaceutical and biotechnology company is to accelerate the
product cycles and time to market. There is also the hope to potentially contain R&D
costs without compromising the rigours of the ongoing clinical development.
Ultimately, an approved product’s price (once available in a national or global
market) is priced to the market. The approved price aims to cover costs for those
developmental areas that do not bear fruit, for patent life and eventual competition
from generic copies which may compete principally on the basis of quality of the
existence of the product, for their support or contracting, for price, or for a
combination of factors, for the need to fund future developments, for the fixed costs
to make the product widely available and for the overall value of the product in the
market or for any combination of these factors.
Table 1.1 Factors influencing a product’s price
• Developmental areas that do not bear fruit
• Decreased patent life
• Eventual competition from generic copies
• Existence of product
• Support or contracting
• Generic pricing
• Need to fund future developments
• Fixed costs to make widely available
• Overall value in market
• Any combination of the above factors
Source: Author

THE ART OF PRICING
Product commercialisation and Glaxo pricing strategy (case study)
In the commercialisation of a new product, a company assumes a position as either a
price adopter or price innovator. The price adopter sets its price according to the current
and anticipated prices in the market. The price innovator seeks to price to market at the
optimum level for each market. Glaxo successfully pursued this approach when pricing
Zantac (ranitidine) (prior to merging with SmithKline Beecham). This case is the single
best representation where innovation in the art of pricing was ultimately the key not
only to a product’s success, but also a company’s overall success.
The innovative pricing strategy, along with strategic, locally based marketing alliances
and effective product positioning, was the three-part process that ensured Zantac’s
entrance and eventual dominance in the global gastrointestinal tract market. Tagamet
(cimetidine), introduced in 1977, had 6 years on the market before the second entrant to
the market, Zantac, was introduced. Reflecting the company’s commitment to
innovation in commercialisation, Glaxo launched Zantac at a significant price premium.
There was already a perception that Tagamet was priced as high as the market would
bear. Zantac set the new benchmark and was recognised as the market leader in 1986
when Zantac topped Tagamet in global sales. Zantac was seen as a superior compound,
in part because of its premium price. This innovative pricing strategy was one of the
factors that facilitated the global, blockbuster status of Zantac across the globe.
The opportunity for an ample return on investment is the basis of the investment itself.
Companies invest time and money to make these discoveries and sometimes, as seen in the
Zantac case, set a new premium over competition. The reason is simple, as the costs for
development of these innovations continue to escalate. The Tufts Center for the Study of
Drug Development has estimated that the full-capitalised resource cost of new drug
development is $802m (year 2000 dollars) compared with a decade ago when the average
cost was estimated to be $231m (year 1987 dollars). Lehman Brothers Healthcare Group has
estimated that R&D costs are as high as $675m per new drug. Boston Consulting Group has
put current average development costs between $590m and $800m for a new drug.
Related Tufts Center research has found that it takes between 10 and 15 years to develop a
new prescription medicine and win approval to market it in the US. The findings were
based on information obtained directly from research-based drug companies.
Regardless of the actual figure, a distinction exists between price adopters and price
innovators in the pharmaceutical market. Some have characterised this in terms of
monopolistic competition, but a more thorough investigation shows that most, if not all,
of the leaders in industry make pricing decisions on a conscious, fully informed,
product-by-product, country-by-country, case-by-case basis.
Table 1.2 Estimates of the average cost of developing a new drug
Estimator Cost ($m)
Tufts Center for the Study of Drug Development 802
Lehman Brothers Healthcare Group 675
Boston Consulting Group 590–800
Source: Adapted from data (see References)

New product development, commercialisation and pricing authorities
Much like the thorough examination of product candidates in the early phases of clinical
research, pharmaceutical companies have dedicated new product development teams to
tackle one of the core considerations as to the likely price a product can direct in the
global marketplace. Primary and secondary audits are analysed and the compound is put
through a rigorous play of projections and field research to determine target pricing and
point of profitability. Once target pricing is reviewed and set, there is the challenge of
setting the optimum price for the individual pricing environment. That ultimately
requires input on a regional or local basis where there are governmental controls that
influence price either indirectly or directly.
These pricing authorities are key decision makers and sometimes act as the rate-limiting
step for a company to achieve optimal pricing. Much like the thought leaders for the
education and promotion of a product through medical education, these individuals and
agencies require effective strategic planning and thorough relationship-building tactics to
recognise the contribution that the pharmaceutical product can bring to their constituents.
The various directives that govern pharmaceuticals relate to registration, testing, pricing,
manufacturing, distribution, classification, and labelling. There is also significant
divergence in the area of pharmaceutical pricing and with regard to the period granted for
product market authorisation. While some countries have determined the criteria for
pricing and have introduced the principle of uniform pricing for domestic and imported
products, the difference is debated mainly on the existence of price controls for
pharmaceuticals produced in the individual country. The art of pharmaceutical pricing
becomes highly variable due to government interference in pricing and reimbursement.
There are common elements that, once understood, can assist a pharmaceutical company
in preparation for handling directives. These elements and their adoption vary but are
standardised to reference specific controls on generic referencing or substitution,
therapeutic category referencing, profit or margin controls, and international referencing.
Understanding the importance of these elements and the relative adoption in each
country helps ensure that specific local price planning meets the therapeutic and
economic guidelines and that the new product offering represents clear value in these
two areas. It is clear that the same dollar buys considerably more in Mexico or Pakistan
than it does in the US or the EU. These issues will be detailed in greater depth in other
areas of the Compendium but are relative to the understanding of the role of the
environmental and governmental factors in the art of pharmaceutical pricing.
Table 1.3 Influences on pharmaceutical prices
Governing directives Government controls
Registration
Testing
Pricing
Manufacturing
Distribution
Classification
Labelling
Generic referencing or substitution
Therapeutic category referencing
Profit or margin controls
International referencing
Source: Author

THE ART OF PRICING
Summary
The cost of bringing a new product through the various stages of clinical trials and
regulatory approval is enormous. Some pundits have argued that pharmaceutical prices
tend to be high because of these costs, while others have argued that it is the high prices
and potential for return on investment that encourage companies to drive innovation at
their own expense. Actions involving prices should be based on conditions in the
marketplace, the activity of competitors, the competitive position of the innovation, the
prevalence and current financial burden of disease, whether the product is a new entry,
and overall strategic and long-term product or portfolio plans.
Crucial to the art of pharmaceutical pricing is to get close to the ‘perfect market
knowledge’ where supply optimally matches demand. There exists a predisposition
that these innovations are an expense to the patients in need. Only after a thorough
review of the philosophies, principles and policies, strategies and tactics, and the role
of global markets can one truly appreciate the art and the impact of pharmaceutical
pricing for each specific pharmaceutical, medical device, and biotechnology company
with a particular product, at a specific time, in a given country and under current
market conditions. The basic tenet of the neoclassical theory on price is that equating
marginal costs and marginal revenue maximises profits. This presupposes knowledge
about the shape of supply and demand curves, and the elasticity of demand for an
item. These innovative products are priced at the value that they bring to the end user,
which in some cases means keeping patients alive and active in our global community
longer and in less costly care settings. That is where product value outweighs the
acquisition cost. These products are to be recognised as therapeutic advances in the
purest form from relief of sickness, pain, suffering and death, and priced to such
value.
References
Boston Consulting Group (June 2001) A revolution in R&D: the impact of genomics.
Available at http://www.bcg.com/publications/files/genomics.pdf (accessed 1
September 2002).
Dorward, Neil (1987) The Pricing Decision. Economic theory and business practice.
London: Harper & Row.
Lehman Brothers (2000) Drug R&D costs, success rates, and emerging technologies: a
look at three future scenarios. In Mathieu, M.P. (ed.), PAREXEL’s Pharmaceutical
R&D Statistical Sourcebook 2000. Waltham, MA: PAREXEL International
Corporation.
Merck (September 2002) Available at http://www.merck.com/careers/culture.html
Tufts Center for the Study of Drug Development (30 November 2001) Tufts Center for
the Study of Drug Development pegs cost of a new prescription medicine at $802
million. Available at http://csdd.tufts.edu/NewsEvents/RecentNews.asp?newsid=6
(accessed 1 September 2002).

About the author
Mario R. Nacinovich Jr is a senior business executive with broad knowledge of the
pharmaceutical, biotechnological and healthcare educational marketing fields, as well as
expertise in a variety of specific disease categories. As Executive Director, Strategic
Planning, Mr Nacinovich is responsible for strategic and tactical development and plays
a leading role in all business development activities with Fission Communications based
in New York City (www.fissioned.com). Fission Communications benefits from being part
of one of the top 50 healthcare advertising agencies, Regan Campbell Ward, which is an
independently branded and managed part of McCann-Erickson Healthcare Worldwide,
the second largest global healthcare agency.
Mr Nacinovich joined Fission as the second executive in this start-up in October of 2001,
after spending the previous 2 years, most recently as Vice President, Strategic Planning,
with Ventiv Health in Stamford, Connecticut. In the Communications division, he was
also named Vice President of Ophthalmology, under an agency contract with Pharmacia
Corporation. In addition he received appointment as a member of the Clinical Advisory
Council, a medical board of directors founded to serve as clinical advisors to support
Ventiv Health, Inc. Mr Nacinovich also served as the Communications division lead for
many developments with Ventiv Integrated Solutions, a separate business unit within
Ventiv Health that offers product introduction and life-cycle management strategies that
improve on risk and return profiles of traditional commercialisation options such as going
alone or out-licensing. Through his 2-year tenure, he also served as Director of Business
Development and in various client services positions while contributing a great deal of
medical writing and core content development for a host of industry clients. Prior to
joining Ventiv in April 2000, Mr Nacinovich spent over 6 years at Merck & Co., Inc., in
New York City, West Point, Pennsylvania, and in Scottsdale, Arizona, in various sales
and marketing management positions.
Mr Nacinovich received his Bachelor of Science degree in Managerial Science, with
minors in Psychology and Economics, from Manhattan College in Riverdale, New York.
He also received a certificate in Political Journalism from Georgetown University in
Washington, DC, on a Bodman-Achelis Foundation Scholarship.
He is an active member of the American Management Association and the Association
for Research and Vision in Ophthalmology. He lives in Danbury, Connecticut, with his
wife and their two daughters. Mr Nacinovich can be contacted via personal email at
nacinovich@att.net or at Fission Communications, 381 Park Avenue South, New York,
NY 10016, USA. Tel: +1 646 742 2123.

CHAPTER 2
Global pricing strategies for pharmaceutical product
launches
Peter J. Rankin, Senior Associate, Gregory K. Bell, Vice President and Tim
Wilsdon, Principal, Charles River Associates (US)
Article summary
This article provides a brief strategic overview of the types of constraints that
manufacturers must overcome in order to implement a successful global
product launch and determine the optimum price.
Keywords
Demand Analysis, Global Launch, Health Outcomes, Market Research, Optimal
Price, Parallel Trade, Prescribing Patterns, Reference Pricing
ESCALATING HEALTHCARE COSTS, increasing sophistication of insurers and
regulators, and heightened investor expectations continue to compel pharmaceutical
manufacturers to become more effective at pursuing all available sources of revenue.
These pressures are emerging globally, with countries seeking a variety of concessions
from pharmaceutical manufacturers. Effective global launch of a new pharmaceutical
therapy must account for reduced pricing freedom and a tangle of country-specific
regulations. Efforts to rationalise regulatory regimes and promote international trade
further contribute to an environment in which pharmaceutical manufacturers must
manage product launches globally in order to meet revenue and profit expectations.
There are many rewards to reap from effective global launches, but today’s approach
requires strategic considerations that might differ fundamentally from past experiences.
Successful global strategies must negotiate profitable prices in a fragmented and
idiosyncratic environment, predict proper launch timing, mitigate parallel import losses,
minimise the effects of reference-based pricing, and establish consistency in pricing and
reimbursement levels across markets and time. An acknowledged effective approach to
global launches allows the development of potentially valuable global brands, generates
in-licensing opportunities and maximises global profits.
Pharmaceutical companies pursuing global product launches have identified a troubling
tension between minimising the time to market and maximising prices that determine
global profits. Limited intellectual property protection and stockholder expectations
(among other factors) often suggest that the best product launch strategy is one that
provides the fastest commercialisation. This mindset is appropriate in countries where
manufacturers are free to set price; however, in countries that require price negotiations
before launch, such haste to enter the market risks sacrificing significant revenues over
the product life cycle.

Of course, this tension is merely the first of many hurdles faced by manufacturers
pursuing global product launches. Others include price maintenance, unilateral
regulatory price changes, managing price negotiations, and sequential launch timing.
Underlying all of these constraints is the spectre of parallel imports, which can magnify
the scope of price concessions by eroding sales in profitable markets.
Determining the global launch strategy
A successful global launch strategy includes far more than determining price. As shown in
Figure 2.1, the typical launch issues, including product positioning, price determination and
reimbursement negotiations, must include an evaluation of the factors that affect the launch
and life cycle of the new therapy. For example, a profitable global launch strategy must:
• demonstrate the clinical attributes of the therapy against products
• protect against the possibility of a generic or new competitive entry
• incorporate each country’s healthcare system and physician prescribing patterns
• cater to country-specific regulatory environments while successfully negotiating
profitable prices.
Price determination should be the culmination of demand analysis based on market
research, account segmentation, health outcomes analysis and evaluation of regulatory
constraints. The significance of different determinants of launch prices varies by
geography; emphasis on health outcomes analysis and the risks of parallel trade is
pronounced in Western Europe whereas the importance of managed care and account
segmentation analysis is dominant in the US. Figure 2.2 provides a summary of these
pricing factors, each of which is described in detail below.
Figure 2.1 Strategic considerations for global product launch
Approval, Pricing and
Reimbursement
Product Positioning
Segmentation Analysis
Optimal Pricing Strategy
Negotiating Reimbursement
Cost Effectiveness
Parallel Trade Effect
Generics
New Products
and Indications
How will they affect
market?
What will
competitive
landscape look
like?
National Regulatory Environment
and Healthcare SystemProduct’s
Clinical
Attributes
Competitors’
Clinical
Attributes
Physician Prescribing Guidelines
Source: CRA

GLOBAL PRICING STRATEGIES
Figure 2.2 Determining optimal global price
Demand Analysis
• Determine prescribing pref erences
• Determine key decision makers and
price sensitiv ities
• Estimate share, rev enue, prof it
curv es
Parallel Trade
• Estimate parallel trade impact: which
countries with what v olumes are at
stake
• Dev ise parallel trade strategy
• Quantify expected value
Segmentation
• Determine negotiating objectiv es:
national pay ers and US accounts
• Prioritise opportunities
• Identify driv ers of therapy uptake
Health Outcomes
• Identify audience members: patient,
pay er, phy sician
• Identify country -specif ic endpoints of
interest
• Construct audience-specif ic models
• Lev erage cost-eff ectiv e benef its
Source: CRA
Demand analysis
Understanding the dynamics of prescription use is of critical importance to developing
an optimal pricing strategy. Across different countries and physician types, the
propensity to use a particular therapy and, as a result, the willingness to pay for a
therapy, vary greatly. Demand analysis focuses on three critical questions:
• Who are the key decision makers for the use of this therapy?
• How do the price sensitivities of key decision makers affect use?
• How do prescribing preference vary across markets of interest?
Key decision makers
A fundamental truth underlies all prescriptions and provides constancy when
considering global product launch: physicians know which therapeutic options are best
for their patient. Provided a new pharmaceutical offers clinical advantages relative to
current treatment methods, physicians, especially key opinion leaders, will motivate
prescriptions, both through their own prescriptions for the product as well as their
recognition of clinical advantages in public forums. Manufacturers emphasise the
importance of a new therapy by recruiting key opinion leaders for clinical trials and
health outcome analyses to boost the credibility and distribution of information related
to their new therapy.

Payers affect therapeutic choice in a less direct but often more substantial manner: by
limiting the class of options from which a physician can select a therapy. Some payers
may not reimburse certain products, or might reimburse only under certain
circumstances (such as when a course of therapy begins in the hospital). Further, the
reimbursement decision allows differential support across therapies; not only can a
payer exclude some drugs from consideration, but that payer can also demonstrate
preferences among covered drugs by altering the degree or ease of reimbursement, as is
the case with multi-tiered formularies in the US.
Patients can play a significant role in the prescribing decision, especially for certain
types of therapies under certain healthcare systems. Granted, patients often defer to their
physicians when considering therapeutic options, but with the increase in ‘lifestyle’
products, the broader availability of health information and direct-to-patient marketing
initiatives, patients increasingly express a preference for a particular therapy. In certain
markets (e.g. the US), patients also have a direct financial incentive to guide their drug
decisions, as cost-sharing requirements can result in higher costs for certain therapeutic
options.
Price sensitivities
As noted above, key decision makers might be price insensitive, depending on the
regulatory structure of the market. Some countries, such as Japan, have regulatory
systems that provide economic incentives for physicians to use certain therapies. Some
European markets discourage physicians from higher priced therapies by establishing
physician budgets for prescriptions. Similarly, countries vary greatly in the degree to
which patient price sensitivity is encouraged or structured in local regulations. Payer
price sensitivity, of course, is a redundant phrase as payers are universally interested in
methods to reduce prices. Pharmaceutical managers should have a firm understanding of
the local dynamics among these three parties when establishing a launch strategy.
Integrating the results of these analyses would reinforce a tailored approach to maximise
returns.
Prescribing patterns across markets
Prescription patterns vary widely across markets, reflecting local epidemiology,
physician preferences, clinical practices and regulation. Clinical guidelines, guided
largely by these local matters, play a large role in influencing prescribing patterns.
Countries often have clinical groups that establish treatment guidelines for certain
maladies or for certain classes of pharmaceuticals. These guidelines typically
encompass more than a single product, which results in a new product being classified
relative to existing comparable therapies. These guidelines can differ significantly
across markets. German physicians, for example, are much more willing to use beta-
blockers for congestive heart failure than physicians in other European markets. In
nearly all markets, including Germany, usage of beta-blockers lags behind the targeted
rate established in clinical guidelines. Which guidelines are followed, the extent to
which guidelines encourage the use of particular products and the speed with which
guidelines are adopted provide significantly different prescription patterns across
countries.

Market research: identifying the demand for pharmaceuticals
The goal of demand analysis is to craft a research agenda that speaks to all three
research questions, while also providing insight into segmentation and health outcome
strategies. Market research provides the raw information to address these concerns, but
only if designed well and fielded correctly. Effective market research must provide
information on all key decision makers. In general, market research should evaluate the
share response to changes in the status of competing products; the share response to
clinical attributes, indications, efficacy and patient profiles; price responsiveness;
physician response to financial incentives and disincentives for prescribing; and patient
awareness and willingness to pay.
The particular market research design used to provide competitive information for a
new product launch depends greatly on the therapy, existing and expected competitors,
key decision makers and clinical factors. However, there are a number of practical
suggestions that apply to market research in general. First, key decision makers must be
placed in realistic trade-off situations. Not only does this provide the most accurate
forecast of market demand, but it also keeps the respondent engaged in the survey
process. Physicians asked to consider an unfeasible collection of product attributes, or
patients asked about their willingness to pay an exceptionally high cost, are likely not
only to provide poor responses, but their frustration regarding poor scenario
construction will most likely limit or reduce the quality of information collected.
Second, market research should consider multiple factors of demand for a new
therapeutic agent. When key decision makers – whether physician, patient or payer –
are confronted with a shortlist of demand determinants, market research is easily
manipulated to fulfil the preferences of the respondent. For example, if market research
on pricing a new therapy considers only the effect of price, respondents to market
research have an incentive to overstate their price sensitivities in order to encourage low
prices. Instead, pricing scenarios should be coupled with other demand factors,
including reimbursement issues, treatment regimens, patient severity and characteristics
of available alternatives. The particular type of market research employed (e.g.
monadic, discrete choice) can also affect the extent to which respondents can
manipulate market research to bias the results.
Finally, the third characteristic of effective market research is short, focused survey
instruments. The instrument needs to focus on the ‘need-to-know’ issues (identified
earlier in the analysis of strategic options for the launch) and not be hijacked to satisfy a
myriad of ‘nice-to-know’ questions. There is an implicit trade-off when considering the
length of a survey instrument: collecting more data from each individual respondent
risks respondent fatigue against the higher cost of a larger sample size (the ‘no data
versus bad data’ scenario).
Armed with effective market research data, manufacturers can understand the dynamics
of prescription patterns for a new product and its competitors. Market research allows
construction of share, revenue, profit-maximisation and competitor-reaction curves for
each global market and market segment. The results of market research analysis can be
evaluated at the subgroup level to inform segmentation analyses and health outcome
trial designs, and aggregated across groups to the national or pan-European level.

Account segmentation
A fundamental first step in determining an optimal price is to prioritise the opportunities
available from those who might purchase or use the therapy, including patients,
physicians and payers. Not all purchasers will have the same sensitivity to price, and not
all will purchase similar volumes. The goal of an optimal pricing strategy is to
accurately predict the price sensitivity, willingness to pay and expected purchase
volumes of customer groups. Effective segmentation analysis will answer four questions
across the global customer population:
• Which segments of the market are price sensitive?
• How price sensitive are these segments?
• What percentage of the total market do price-sensitive segments represent?
• How will competitor responses vary by segment?
Segments can be defined using a number of criteria, such as cost-sharing liability, disease
status, physician type, acute/chronic disease type, payer size and predisposition to generic
use, among others. There is no single correct method to segment the market, as the
appropriate tactic will depend on market and product characteristics. To be successful,
though, a segmentation method must produce segments that are homogeneous within and
heterogeneous among. Once these categories of purchasers have been defined, pre-launch
efforts and strategic focus should obviously be directed to those segments of the highest
priority, typically those segments that exhibit the greatest profit potential.
Health outcomes and pharmacoeconomics
The value of health outcomes and pharmacoeconomic analysis depends largely on the
structure of the local healthcare system. In countries where governments negotiate
reimbursement levels (e.g. France, Spain and Australia), health outcomes research is
essential to demonstrate the cost effectiveness of a new therapy. In countries where
reimbursement is traditionally negotiated with non-government payers (e.g. the US),
health outcomes analysis has traditionally played a less important role (though health
insurers in the US increasingly recognise the value of health outcomes research).
An effective global launch strategy must incorporate health outcomes research. Not only
can an effective health outcomes strategy help to demonstrate the efficacy of a new
therapy, compelling health outcomes research can speed time to market by anticipating
the clinical or cost-effectiveness concerns of regulators. To achieve this end,
manufacturers must conduct a basic evaluation of health outcomes needs in the principal
countries for commercialisation well in advance of regulatory filing. In fact, clinical
trials data used in health outcomes research should be structured to include endpoints of
interest to countries of interest. Such anticipatory planning requires that manufacturers
identify issues and endpoints of interest sufficiently far in advance to structure the
clinical trials to include these endpoints.
Such foresight is often elusive, but the pay-off is often worthwhile. Anticipatory data
collection can obviate the need for costly follow-up trials. Addressing country-specific
concerns in advance can avoid costly delays in the time to market for new product launch

or restrictive product labelling. Finally, compelling cost-effectiveness data can constitute a
powerful tool in price and reimbursement negotiations with regulators and private payers.
Parallel trade
The risk of parallel trade, not to mention the court of public opinion, requires that a
profitable global launch strategy explicitly consider price differentials across markets.
Parallel trade describes the process in which large price differences among country
markets makes it profitable for an arbitrageur to purchase pharmaceuticals in one
country market and sell them in another. Parallel imports are particularly prominent in
the EU, where trade liberalisation efforts have minimised the costs associated with trade
while disparate regulatory policies have encouraged price differentials across markets.
Expected enlargement of the EU will only exacerbate the range of price variability.
Parallel trade diverts additional product revenues from the manufacturer to those who
move the pharmaceuticals from one market to another. Spain is a standard example.
Low prices have led arbitrageurs to purchase pharmaceuticals in Spain and export them
to countries with higher prices, such as Germany or the UK. In such a transaction, the
manufacturer loses the value of the sale in the importing country, realising only the
lower priced sale in Spain.
In addition, parallel trade imposes other costs on manufacturers, including market
forecasting, liability assessment and mitigation, and volatile manufacturing
requirements. The liability assumed by the manufacturer when a product packaged in
one country and distributed in another (which might have a different national language)
is often unclear, leaving manufacturers to assess and address potential claims.
Manufacturers must also forecast the sales for both exporting and importing countries in
order to minimise the risk of product shortages or unexpected production runs.
Manufacturers can work with local governments to address some of these concerns. For
example, some countries are experimenting with ‘clawback’ policies intended to recoup
some of these profits accruing to parallel traders, but these benefits accrue to payers (or
patients) rather than pharmaceutical manufacturers.
Understanding the potential effects of parallel trade is complicated by several emerging
trends. First, the increasingly extensive price negotiation required in some country
markets generates uncertainty regarding the eventual price band for the new product.
More troubling is that many countries use reference pricing policies, which potentially
increases the number of markets from which parallel trade exports could ensue by
basing reimbursement on countries with the lowest prices/reimbursement levels. Each
of these issues is now explored in detail.
Price negotiations
A stark and immediate consideration for pharmaceutical manufacturers used to launching
pharmaceuticals in the US, UK or Germany is that few other global markets allow free
pricing. Instead, there is often a period of time between regulatory or technical approval
and commercialisation, during which manufacturers negotiate with regulators to establish
the price at which the new product will be marketed, or at least reimbursed.
Price negotiations are often protracted. In France, price negotiations have an average
duration more than twice that for the rest of Europe. In addition to price, these

negotiations might also require other concessions by manufacturers. In the UK, for
example, manufacturers are constrained by a specified level of profitability. Other
countries, such as Spain, require manufacturers to commit to predetermined sales
targets. Manufacturers are held accountable for recouping the cost of sales that exceed
volume commitments, either by reducing prices or by directly paying back profits.
There are well-documented cases of manufacturers rushing negotiations in order to
launch as quickly as possible, only to realise that the gains from a quick
commercialisation did not outweigh the cost of reduced reimbursement levels resulting
from abbreviated negotiations. Clearly, manufacturers must approach these negotiations
with care and careful preparation. Quick commercialisation is not always ruled out,
however. In some countries, such as the UK and France, effective strategies often hasten
negotiations not by acceding to price reductions, but instead by agreeing to labelling and
use limitations on their products. Once a quick launch is achieved, at a favourable
reimbursement rate, subsequent clinical trials can expand product labelling.
Manufacturers anticipating this strategy can even prepare the subsequent clinical trial
framework before negotiations begin.
Reference pricing
The concentration of purchasing power to payers (often government agencies) in global
markets is of little consequence to optimal pricing without other regulatory constraints.
As has become well publicised, though, many regulatory agencies have pursued a host
of methods intended to limit the prices that a pharmaceutical manufacturer can charge.
One example of these policies is reference pricing. Under a reference pricing framework
the price of a pharmaceutical therapy is affected by the price of a reference drug. The
reference product might be another drug in the same therapeutic class; it might be a
drug with the same clinical indications; and it may or may not be available in the
country of interest. Canada, for example, sets drug prices by comparing with prices
charged for that drug in the US and several European countries. Australia exercises firm
reference pricing with reimbursements capped at the reference price.
Reference pricing has two immediate effects on pricing for product launch. First, some
countries are considering a form of retroactive reference pricing, which would constrain
a manufacturer’s ability to use launch timing and life-cycle pricing changes to maximise
profits. Second, the existence of reference pricing policies ‘ups the ante’, or increases
the pressure on pharmaceutical manufacturers to avoid selling at a low price, as that low
price could be used to affect pricing in other countries that use reference pricing. The
strategic implications of both effects are explored below.
Reference pricing effects on timing decisions
Retroactive reference pricing may place further restrictions on pricing strategy, limiting
some of the rationale that used to support a sequential entry strategy for a global launch.
Unless a sequential strategy is mandated by regulatory requirements, intellectual property
concerns, or production or distribution capacity constraints, retroactive reference pricing
can limit the cost of an immediate rollout in every market of interest. For a country that
practises retroactive reference pricing, a subsequent launch in another country at a lower
price may force the manufacturer to reduce the price in the first country and refund the
difference between the price charged initially and the new, lower price.

Reference pricing effects on pricing strategy
In completing regulatory dossiers to seek clinical or technical approval in global markets,
manufacturers often have the opportunity (and perhaps obligation) to report the anticipated
prices, sales volumes, reference products and clinical indications of their therapy. There are
obvious strategic issues inherent in the approach taken in these dossiers, where
manufacturers have the chance to affect regulatory consideration of their therapy. While
these dossiers are usually country specific, they often share a core of information (such as
clinical trials data) that is common across countries. The extent to which clinical trials and
health outcomes analysis anticipates global launches and incorporates this information into
the structure of the studies (e.g. trial location and demographic populations, or health
outcome endpoints of particular interest) will affect the latitude enjoyed by the manufacturer
in addressing idiosyncratic concerns of individual regulators.
Pharmaceutical manufacturers have two strategic choices affected by reference pricing,
assuming that the necessary clinical and regulatory information is available. First,
manufacturers can choose a limited number of countries in which they would like to
commercialise their product. Because of reference pricing, it might be a (global) profit-
maximising strategy to avoid launching a product in certain countries. For example,
several manufacturers have avoided commercialising a product in France, both in
recognition of the protracted length of negotiations and the possibility of a low
reimbursement price triggering lower prices in other markets that use reference pricing.
The second strategic option available to manufacturers is to craft a globally consistent
price negotiation strategy. The most commonly cited example of such a strategy involves
the use of price bands.
Price bands
Price bands define the allowable difference in prices across global markets. As depicted
by the hypothetical situation in Figure 2.3, the narrowest price band is a single price
charged in all markets. Such a price eliminates the concern of reference pricing, but also
restricts a manufacturer from realising the highest global profit levels. For instance, in
Figure 2.3, the single price is too high to maximise profits in Spain and too low to
maximise profits in Germany (the profit-maximising price corresponds to the highest
point on the profit curves of Figure 2.3 for each country). Alternatively, wide price
bands allow some differences in prices across countries. Such price differences might
allow for some negative effects due to parallel trade or reference pricing, but they also
provide additional latitude to reach the profit-maximising price in more markets. Figure
2.4 demonstrates that a 15% price band would allow a manufacturer in these
circumstances to charge a different profit-maximising price specific to each of the five
country markets.
While they provide a useful heuristic tool for the evaluation of pricing strategy, price
bands face limitations. The degree of success attainable from a price band strategy
depends on the willingness of a manufacturer to walk away from reimbursement
discussions that do not comply with the global strategy. In a manufacturer’s favour, a
demonstrable price band strategy might provide support for requested prices in
reimbursement discussions. Just as likely, however, a price band strategy increases the
relevance of each negotiation, effectively increasing the bargaining power of regulators,
many of whom already enjoy significant advantages as near-monopoly purchasers.

Figure 2.3 Price bands: no variation
€ 5
€ 15
€ 25
€ 35
€ 45
€ 10 € 12 € 14 € 16 € 18
Parallel trade risk lowest with single price and no price discrimination
Price at €11.55 across
EU yields €162.77 profit
France
Spain
Italy
UK
Germany
Source: CRA
Certainly, parallel trade is not only an issue under a price band strategy; after all,
parallel trade will develop whenever there is a sufficient price differential among
markets, whether the result of a price band strategy or not. In fact, it is the price
differential between markets encouraging parallel trade that places an upper bound on
the potential success of a price band strategy. Of course, reference pricing will magnify
the consequences of any sub-optimal result of pricing negotiations by increasing the
number of markets from which parallel trade exports could ensue.
Conclusion
Manufacturers that have grown accustomed to the pricing freedom afforded by certain
markets such as the US are likely to encounter severe strategic challenges when
attempting a global product launch. Price restrictions, including reference pricing, profit
limits, price reductions and other measures combine to create a global market with price
constraints growing increasingly numerous. Launching in any country may have
immediate ramifications in other countries, and unfortunate pricing decisions can spread
to several markets despite the best efforts of the manufacturer. In this increasingly
complex global marketplace, manufacturers must use segmentation analysis, health
outcomes research, parallel trade evaluation and demand analysis to craft a coherent
global pricing strategy that anticipates regulatory entanglements. While difficult, the
profits of an effective comprehensive global launch strategy more than justify a
concerted strategic effort.

Figure 2.4 Price bands: increasing price discrimination
€ 5
€ 15
€ 25
€ 35
€ 45
€ 10 € 12 € 14 € 16 € 18
Profit
Parallel trade likely but with potentially higher profit
15% price band increases
profit to €166.54
Germany
France
UK
Italy
Spain
Source: CRA
About the authors
Peter J. Rankin, PhD, is a Senior Associate in the Pharmaceuticals Practice
(Washington, DC). Tel: +1 202 662 3935; email: prankin@crai.com
Gregory K. Bell, PhD, MBA, is a Vice President and the Pharmaceuticals Practice
Leader (Boston). Tel: +1 617 425 3357; email: gbell@crai.com
Tim Wilsdon, MSc, is a Principal specialising in Finance (London). Tel: +44 20 7664
3707; email: twilsdon@crai.com
About Charles River Associates (www.crai.com)
The Pharmaceuticals Practice at Charles River Associates provides consulting services
to leading firms in the pharmaceutical, biotechnology and medial device industries
across North America, Western Europe, Japan and Australia. Its emphasis is new
product launch strategy, product pricing and contracting, and strategic responses to new
market entrants. It specialises in the economics of business strategy, and its
recommendations are based on quantitative analyses using game theory, marketing
science, finance and econometrics.

CHAPTER 3
Integrating pricing and reimbursement needs into drug
development
Cecil Nick, Senior Consultant Worldwide Regulatory Affairs, PAREXEL
International (UK)
Article summary
There is increasing need for drug development teams to take into account the
cost effectiveness of new products. Pricing and reimbursement needs can be
integrated into the development programme, thereby allowing companies to
demonstrate to purchasers that products represent good value.
Keywords
Comparator, Cost Effectiveness, Dose Ranging, Efficacy, Drug Development,
Indications, Target Population, Safety
DRUG DEVELOPMENT HAS delivered dramatic victories in the treatment of human
disease, but these victories have come at a price. For a start, there is the ever-present
risk of adverse effects, which has to be balanced against any potential benefit. These
risks can be exacerbated if quality and safety are compromised during drug
development, as has been exemplified by a number of past problems such as the
thalidomide incident in 1962. Such incidents fuelled the demand to control the sale and
supply of medicinal products and led to the global mushrooming of regulations, with the
need to demonstrate quality, safety and efficacy prior to medicines being granted access
to the market.
These increases in regulatory demands, however, also come at price, a price that
inevitably has to be borne by the consumer. New and expensive health technology is
further fuelling the demand on the healthcare providers’ purse so that the need to control
costs has become a high priority amongst healthcare providers.
The problem is that medicines are a unique commodity, where the person placing the
order (the prescriber) neither pays for nor uses the product. When the drug works, the
prescriber and the patient are happy, regardless of costs; but not so the purchaser, who
seeks not only effectiveness but also value for money. These purchasers are becoming
more vociferous, demanding data to demonstrate that they are receiving such value. As
a result, pharmaceutical companies are being confronted by a new hurdle, the so-called
fourth hurdle – the need to demonstrate not only quality, safety and efficacy but also
value for money; inevitably, this can be achieved only if the product is value for money.
Health economists may be able to build a case for cost effectiveness, but healthcare
providers frequently employ their own health economist to unravel any misconceptions
built into the arguments provided by the pharmaceutical manufacturers.

Thus, in addition to safety and efficacy, there is an increasing need for drug
development teams to consider issues such as:
• the cost and cost savings associated with the use of the product
• in which populations use of the product will prove cost effective
and, the most critical question of all:
• how the cost benefit of the new product compares with current practices.
So demonstrating that the candidate drug promises a positive risk benefit needs to be the
beginning of the development selection process. There is also the need to assess whether
the product will provide a positive cost benefit. This depends on numerous factors but a
key factor is the cost of drug development. Development costs represent an enormous
outlay that needs to be recouped, and so inevitably impacts on price. These costs need to
be further balanced against the risk of failure, which in the development of
pharmaceuticals is high. It has to be appreciated that the revenue from a successful
product needs to cover not only the cost of its own development but also that for the
many products discarded in its wake. These costs will need to be recouped over the
patent life of the drug and thus an extended development programme that erodes the
patent life of the product will also impact on pricing. Manufacturing costs, too, are a
consideration but are usually of little significance for novel products except for complex
biotechnology products.
The need to demonstrate cost effectiveness needs to permeate the entire drug
development programme. There are a number of areas where pricing and reimbursement
needs can be integrated into the development programme. These include: choice of
indications, choice of target population, study design, choice of comparator, dose
ranging, efficacy studies and safety studies.
Choice of indications
The choice of indication will impact on the willingness to pay for the treatment. For
example, treatment of a mild illness will not significantly impact on healthcare costs or
the patient’s quality of life and, therefore, is unlikely to command a high price. In fact,
even those treatments for severe disease that offer the potential for significant health
gain may not justify a high cost if effective cheaper treatments are available.
The prevalence of the illness is clearly another critical factor. Yet treatments for rare
diseases, although representing a small market, may nevertheless justify a high price
because the low prevalence will have little overall effect on healthcare budgets. Thus,
such treatments can generate sufficient revenue to cover the cost of development,
particularly if the product qualifies for orphan drug status, so entitling government
incentives that may contribute to reducing the development cost to the sponsor.
Patient population
The population to be treated can profoundly affect pricing considerations in a number of
ways. Clearly, the benefit will be maximised if the proportion of patients responding to
treatment is enriched by careful selection utilising techniques such a genotyping,

PRICING AND REIMBURSEMENT NEEDS IN DRUG DEVELOPMENT
phenotyping, novel diagnostic techniques, or a brief trial treatment. However, these can
prove costly and may be of value only where the drug is expensive to manufacture since
the ‘shotgun’ use of a proportionally lower priced medicine in a larger patient
population will have the same impact on overall costs and revenue. Nevertheless, such a
shotgun strategy does present risks in that if in the future it becomes easier to identify
responsive patients, this will significantly impact on future return on investment.
Additionally, if the sponsor subsequently decides to develop the product for new
indications in more easily identifiable but smaller patient populations, it may not be
possible to recoup the development costs based on the low prices already established.
Another factor is the geographic and social distribution of the disease to be treated, for
the value of the treatment is intricately linked to the ability to pay for it. Thus,
treatments developed against diseases of the rich are likely to generate more revenue
than those intended for use in the developing world, a stark but real problem that has
been graphically highlighted by the African HIV epidemic.
The age and health of the target population are other critical factors to consider. For
example, saving a young life will most likely generate many more productive years
compared with those gained for an elderly and possibly disabled person. The value that
health providers place on a life will, of course, vary, and published figures are not easy
to come by since they are based on complex and emotive decisions and are difficult to
defend on a case-by-case basis. However, in the Western world in general, values of
£20,000–50,000 per full-quality life year saved are usually considered acceptable. On
this basis, a treatment course that on average provides 60 years of good quality life
might justify an expenditure of £1,000,000 to £3,000,000, although one would normally
discount this by 5% per annum (cumulative average), which would more than halve
these figures. On the other hand, a treatment that provides an 80-year-old patient with
say 5 more productive years will justify an expenditure of £100,000–250,000 (and less
if discounted at 5%). But often the extended life is not of full quality. To deal with this
problem, health economists have introduced the concept of the quality-adjusted life
year, or QALY. This adjusts the numerical value of a life year by the quality of that life.
Numerous quality-of-life assessment systems have been introduced, all of which can
provide good estimates.
The value of life is important, but is just one aspect that health providers have to
consider. Equally important are the costs associated with caring for the ill and the
impact a new treatment might have on delivering cost savings. For example, the H2
antagonists and newer proton pump inhibitors have considerably reduced expenditure
on surgery for gastric ulceration. Such benefits need to be evaluated and quantified
during drug development in order to enable justification of pricing to the healthcare
purchaser.
Dosage and route of administration
The way in which medicines are used will also impact on cost. For example, parenteral
administration will increase costs by requiring the use of sterile syringes, although these
may be insignificant when compared with the cost of the medication. Nevertheless,
more novel routes of administration might contribute more significantly – for example,
the pulmonary delivery of proteins may demand the need for complex administration

devices, and the need to administer drugs as intravenous infusions may necessitate an
extended hospital stay, thereby contributing significantly to expenditure.
Dosage, too, may impact on price in numerous ways, the most obvious – but usually the
least important – being that high doses require utilisation of higher quantities of drug
substance. However, unless manufacturing costs are relatively high, this will have a
marginal impact. In fact, perhaps of more importance is the potential need this might
generate for increased shelf space in pharmacies.
Of much greater importance is the need to get the dosage right, because prices have to
be set against predicted usage in order to deliver the target revenue. Should it be
discovered subsequently that a lower dose gives equivalent efficacy, generally it would
not be possible to raise prices to cover any consequential shortfall in revenue.
Another issue that might be faced is where dosage requirements vary considerably from
one patient to another. As much of the cost of a new medicine arises from its
development rather than its production, it seems unfair that a patient who requires twice
the average dose is saddled with twice the cost. To accommodate this, suppliers may
often set their price per dosage unit rather than per milligram of drug substance. This
approach is acceptable provided one is not dealing with a multi-dose presentation such
as insulin. But even then if these costs are borne by state or other large healthcare
systems, this will average out. There is clearly a problem, however, where patients have
to pay for their own treatment and for rare diseases requiring costly therapy, whereby a
healthcare provider can find that one patient requiring high doses of a drug can
adversely impact annual budgets, a notable example being the treatment of a
haemophiliac inhibitor patient suffering a major bleed. Complex arrangements such as
price capping agreements can be used to circumvent these problems but these can prove
difficulty to administer.
From a different perspective, the frequency of dosing may also impact on cost (albeit
indirectly) by reducing compliance, for example, which in turn will reduce clinical
effectiveness and consequently cost effectiveness.
Choice of comparator
Regulators require incontrovertible proof of efficacy; this usually requires placebo-
controlled studies. However, it is unusual for a new drug to represent the sole treatment
for a particular indication, and the purchaser will be interested to know how the new
treatment compares against current treatments. In fact, this is not at odds with the
requirements of EU regulators who are also interested in the relative safety and efficacy
of the new product compared with the ‘gold standards’ currently in use. But choosing
the ‘gold standard’ is often not as easy as it sounds. Firstly, the comparator that might
interest the purchaser may not yet have been launched. Secondly, the regulators and
purchasers may have different views of the ideal comparator. For example, a less
effective but commonly used less costly comparator may be preferred by the purchaser,
although this will present a huge hurdle when it comes to pricing discussions. On the
other hand, the regulators might consider such a comparator to be outdated. Clearly, the
sponsor will need to navigate these differences whilst bearing in mind the need to
convince both parties.

Other issues that might confound the choice of comparator are:
• different practices in different regions
• difficulties in blinding (e.g. different dosage form, dosage schedule, adverse events)
• those circumstances in which the gold standard comparator represents first-line
treatment and the new drug does not.
Furthermore, it is clearly important that any comparisons are fair, and thus it is
extremely important to ensure appropriate comparison of dose and frequency of dosing
when performing any comparative study.
Clinical effectiveness
Whereas the regulator’s interest is efficacy, the health economist focuses on clinical
effectiveness; that is, the impact on the patient’s overall well-being when the medicine is
used in a natural setting rather than a clinical trial. Clinical effectiveness measures include
quality of life, morbidity and/or mortality. Regulators tend to be less comfortable with
quality-of-life assessments because of their perceived arbitrary nature, although this
science has progressed considerably over recent years and is becoming more widely
accepted. Certainly, regulators will have no difficulty with patient survival. The key
difference, however, is that regulators are a little more amenable to accepting surrogate
endpoints, if validated. However, this is built on pragmatism rather than preference, as
survival studies may sometimes need to run for decades. Health economists therefore also
have to accept surrogate endpoints, albeit reluctantly, and deal with this by mathematical
modelling. Thus, there is a strong, although not perfect, overlap between the needs of the
health economist and the regulator when designing efficacy studies.
But what about the trial setting? It is true that early regulatory studies are conducted under
strictly constrained conditions. However, later in the trial programme it becomes
important to simulate the intended usage conditions in order to assess safety in the broader
population. Some constraints in phase III trials are unavoidable as it is important that the
interests of the patient are protected and the potential for a successful trial is maximised.
But this is a compromise that health economists have to live with if they want data at the
time of regulatory approval. Thus, providing protocol constraints has a sound basis and, if
kept to a minimum, should not devalue the outcome data to any significant degree.
Safety
For a new chemical entity, regulators will normally require that at least 1,500 patients
are exposed to the new drug in order to detect adverse events with a frequency of 0.1%.
Furthermore, if long-term use is intended, 300–600 patients should be treated for at least
6 months. Health economists will be extremely interested in these safety results, as
adverse effects will detract from any benefit and could contribute to the costs of patient
management. However, the health economist will have a keener interest than the
regulator in segregating drug-related adverse events from those unrelated to the
treatment so as to enable calculation of the impact of treatment over the background
effect. When ethical, this can be achieved by including a placebo control group to
provide a baseline for adverse events. Statistical advice will need to be sought, but often
several hundred patients treated with placebo may suffice.

Cost effectiveness
Clearly, the health economist’s prime interest is the cost effectiveness of a new
medicine and in order to calculate this there is a need for cost data. These data are not
normally generated in clinical trials and in any case vary from one region to another.
However, cost drivers can be researched during the clinical trial programme. Such
drivers include:
• days in hospital
• number of laboratory tests required
• consumption of test compound
• total consumption of medicines
• number of additional diagnostic procedures required
• hours of nursing care.
These cost drivers can then be converted to costs using local data accrued in separate
research.
There are difficulties, however, associated with determining cost drivers in registration
studies. One of the key problems is that regulatory trials require numerous assessments
that can mask the need for the actual numbers of consultations and tests that may be
required in a more natural setting. There are ways of dealing with this, however (see Nick,
2001). In any case, such costs are frequently insignificant compared with overall costs.
Conclusion
The focus on the escalating costs of medicinal products is unlikely to disappear.
Willingness to pay represents a critical factor contributing to these ever-rising costs.
However, the role of product R&D costs is certainly considerable and not fully
appreciated. More targeted and focused research could, therefore, have a favourable
impact on cost in the long run. In the past few decades the aim of drug development has
always been to produce effective, relatively safe medicines, but health economic
consideration are now gaining in importance, and the development of a successful
product requires integration of the needs of the purchaser with the already recognised
needs of the prescriber and patient.
Reference
Nick, C. (2001) In pursuit of clinical excellence. The Regulatory Affairs Journal 12(2),
100–104.
About the author
Cecil Nick, BSc (Hons), FBIRA, has over 20 years’ experience in pharmaceutical
regulatory affairs. He has extensive experience in the development and EU registration of

products of biotechnology, other biological medicines and new chemical entities. He is a
Fellow of the British Institute of Regulatory Affairs and has published many articles on
clinical regulation. Cecil can be contacted at PAREXEL International Ltd, River Court, 50
Oxford Road, Denham, Uxbridge, Middlesex UB9 4DL, UK. Tel: +44 (0)1895 614589;
email: cecil.nick@parexel.com

CHAPTER 4
Assessing the pharmaceutical price modelling tools
Gary Johnson, Managing Director, Inpharmation Ltd (UK)
Article summary
Most pharmaceutical companies rely on surveys to set prices but such survey
techniques have unavoidable biases. Also, some key customers – particularly
payers – are difficult or impossible to survey. This article explains why simple
econometric techniques should be considered in order to provide powerful
guidance and how these techniques can boost the accuracy of price predictions
even when it is possible to undertake surveys. Lastly, the author explains why
health economics are best reserved for price advocacy rather than price setting.
Keywords
Conjoint Analysis, Compensatory, Non-trade-off Techniques, Price Forecasting,
Surveys, Trade-off Techniques
MANY PHARMACEUTICAL COMPANIES use market surveys to support their
pricing decisions. The reasons cited for this are that it is a good idea to be customer
focused (true) and that therefore it is possible to determine what customers are prepared
to pay simply by asking them (not true). The problem is that survey techniques tend to
produce biased results.
There are many survey techniques that can be used to assess price sensitivity, but
broadly these can be split into two types: non-trade-off techniques and trade-off
techniques (technically known as compensatory and non-compensatory techniques).
Non-trade-off techniques
With this type of technique the customer is asked for a response to the price. For
example, one might say: ‘Here is the profile of a new product; at what price do you
think you would not prescribe this product because you think it is too expensive?’ By
aggregating the responses of many customers to such a question, one can create a price–
demand curve. So, for example, at a price of $1 none of the customers surveyed said
that their ‘stop prescribing price’ was this low, thus relative demand at this price is
100%. But at a price of $2, 50% of respondents said that their ‘stop prescribing price’
was below $2. Thus relative demand at this point is $2. In this manner it is possible to
build up the implied price–demand curve from the survey.
This is a simplified account of how these techniques are applied in practice and there
are many elaborations and variations on this theme. This brings us to the first point
about these techniques: there seems to be no evidence that more complex variations on
this theme are any more effective than the simpler versions. In fact, a review of the

forecasting literature shows that whenever investigators have compared the performance
of simple and complex methodologies, the simple versions are always at least as good
as the complex alternatives.
The second point to appreciate is that non-trade-off techniques seem to be
systematically biased. Not only do they have an error but, specifically, these techniques
tend to overestimate sensitivity to price or, put another way, they tend to underestimate
the price that a company can charge for a product.
The reason why these non-trade-off techniques tend to overestimate sensitivity to price
is that they focus the respondent’s attention much more on price than on the other
product features.
Because of this bias, non-trade-off techniques fell out of favour somewhat in the 1970s
and 1980s and were replaced by trade-off techniques.
Trade-off survey techniques
The central idea behind the techniques is to encourage customers to consider all key
product attributes and to weigh one against the other. Trade-off techniques consider
products to be ‘bundles of attributes’. They assume that it is possible to isolate the effect
that each attribute has on a customer’s decision regarding which product to choose.
Consider this very simple example of a product that has only two attributes: efficacy
and price. Let us pretend that each attribute can have one of two levels. Efficacy can be
high or low and price can be either $1 or $2.
Now it is obvious that respondents would prefer to have a combination of high efficacy
and low price. It is equally obvious that they would least favour a combination of low
efficacy and high price. But it is not obvious whether they will prefer high efficacy and
high price or low efficacy and low price. It is not obvious because this choice requires
the respondent to trade-off the value of high efficacy against the value of low price. If
we ask respondents to make this choice and they favour high efficacy and high price to
low efficacy and low price, we can say that (for the levels considered) efficacy is more
important than price.
The actual techniques used are more elaborate than this. The most popular elaboration is
a technique called conjoint analysis. Conjoint analysis was introduced into market
research in the late 1970s. It takes its name from the fact that it asks respondents to
consider attributes jointly (conjoint = considered jointly). Respondents choose between
product profiles (or partial product profiles). It is then possible to recombine the
different attributes into a vast number of hypothetical combinations and predict to what
extent respondents will like these.
Key aspects of trade-off techniques
The two key points to appreciate about trade-off techniques are exactly the same two
factors that were stressed for non-trade-off techniques. Firstly, the more elaborate
techniques have delivered no improvements in the accuracy of their predictions.
Conjoint analysis, because of its popularity and high cost, deserves special mention. A
recent systematic review of studies published in leading peer-review journals concluded

ASSESSING THE PHARMACEUTICAL PRICE MODELLING TOOLS
that conjoint studies are no better at predicting than much simpler techniques known by
the unfortunately technical term ‘self-explicated techniques’. These techniques are
simpler because, rather than asking for responses to bundles of attributes and then using
statistics to infer the importance of individual attributes, respondents are simply asked
directly for this information. Proponents of conjoint analysis provide many plausible
reasons why their more sophisticated techniques ought to make better predictions.
However, when the experiments have been done, the predictions prove to be no better.
The second point to appreciate is that these trade-off techniques – just like the non-
trade-off techniques – seem to have systematic bias. There are two key reasons for this
bias:
1. People respond to a written product profile and they assume that it is not a full
description. In the absence of a full description, they assume that price is a proxy
for a product’s performance on missing attributes. So, they are less sensitive to
price than they would be with a real product.
2. When people are given a bundle of product attributes, they tend to focus on the key
ones. This happens particularly when the task is hurried or trivial. Both of which are
the case in market research. (Market research decisions are faster and less important
than real clinical decisions.)
Of course, we can attempt to overcome these biases. Unfortunately, efforts to alleviate
one of the above biases tend to make the other source of bias worse. For example, we
can use partial product profiles – sometimes consisting of just two attributes – so that
price does not get ignored, but such massively incomplete product profiles will serve to
aggravate price being used as a proxy for quality.
So, where does this leave us? The older non-trade-off techniques were abandoned
largely because of a bias to overestimating price sensitivity. The solution of trade-off
techniques seems to have the opposite bias of underestimating price sensitivity.
The solution: combining price forecasts
The solution seems obvious: the results of the non-trade-off and the trade-off techniques
should be combined. This, it turns out, is not just a pragmatic solution to this particular
problem. Four decades of academic pricing research have shown one thing beyond
doubt: a combination of different forecasting techniques – and the more varied the
better – almost invariably provides a more accurate prediction than any one technique
alone. And how should these different results be combined? Again, forecasting research
suggests that it is difficult to beat the simplest and most obvious solution – just take a
simple average.
Going beyond surveys with econometrics
Combining the two main types of survey-based pricing techniques is a good idea. But
why stop there? Are there other techniques that can be brought to the forecasting
process? Happily, the answer is yes. This is a good thing not only because combining
more techniques will give us greater accuracy, but also because there are some key
pricing questions that are difficult to answer with surveys.

Take, for example, the issue of payers. This catch-all term is used to describe the people
or bodies who pay for pharmaceuticals and decide whether particular products are made
available for doctors to prescribe. Payers could include pricing and reimbursement
authorities, managed care organisations or hospital formulary committees.
It is usually difficult to survey payers effectively – especially regarding how they will
respond to a specific drug. Past behaviour is generally a better guide to how people will
act in the future anyway, and there is a long record of past behaviour that we can
analyse to help us make predictions. Statistical analysis of past market behaviour is
known as econometrics. This sounds daunting, but actually the most useful econometric
analyses in pharmaceutical pricing are very simple. So, how might we go about
conducting an econometric analysis to predict payer behaviour? Usually, this means
taking obvious aspects of payer behaviour and analysing them statistically. In other
words, we look at factors that are obvious and that almost certainly form a part of any
judgement that would be taken on what price payers would support.
For example, we all know that payers tend to grant higher prices to products that treat a
smaller number of patients, and this can be taken into account when estimating a
reasonable price. And, indeed, when we analyse a large number of payer decisions
mathematically we find that there is an impressive link between patient numbers and the
decision to reimburse. So, why analyse the relationship between payer support and the
number of patients that a product can treat statistically when we already know that this
factor is important and take it into account? The answer is that a huge number of studies
show that this leads to more accurate forecasts – statistical models are usually better
than expert judgement.
Obviously there are other factors, apart from the number of patients treated, that have to
be included in a statistical analysis and it is not only payer decisions (but also doctor
decisions etc.) that are amenable to this sort of econometric analysis. The point to note
is that these techniques can reasonably be expected to further enhance the accuracy of
price predictions and can give insights into areas that are difficult to probe with surveys.
Again, it is worth noting that, in studies, complex econometric methods perform no
better than simple ones – so one should maintain a healthy suspicion of ‘sophisticated’
techniques that one does not fully understand.
Health economics and pricing
It will be apparent that so far there has been no comment on the use of health economics
in pharmaceutical pricing. This may seem strange, particularly as many pharmaceutical
companies combine their pricing and health economics functions.
The reason why health economics is left until last is that is has a minor role in
pharmaceutical price setting. This is not to say that it has no role, nor is it to say that it
does not have a major role in price advocacy.
However, for pharmaceutical price setting, the role is minor for the following reason.
Health economics analyses are ‘normative’. This is economics jargon meaning that they
try to prescribe what people should do. In fact, what payers do correlates poorly with
health economics analyses. In order to predict what payers will do we need descriptive

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