Wednesday, July 29, 2015

Pharmaceutical Pricing: Real Value vs. Revenue Forecasting

Stanton R. Mehr, President, SM Health Communications LLC

The pharmaceutical industry sometimes forgets how payers calculate the value of their products. Payers do not view value solely through the lenses of clinical efficacy, safety, and utility.

In the prelaunch phase, before drug pricing is set, payers are often given a wide range of figures, either by company reps or in market research studies, as an FYI, instead of asking the payers what approximate price would make financial sense based on the product’s apparent value. It seems an obvious question, but it does happen, and too often. This leaves payers (and most other stakeholders) with the impression that the price is an actuarial business decision: let’s pick a price point that maximizes revenue. This doesn’t mean the price is indefensible, but it does imply there is no transparency or clinically based logic to the pricing.

This was clearly the impression Gilead left with the launch of Sovaldi, generating tremendous animosity in the face of drug launch that should have been triumphant. This public relations debacle was a nightmare on several levels: the ink was not only aimed at the public and providers, but the payers as well. Everyone, including corporate employers, felt blindsided by the initial $84,000 price tag of treatment. Few doctors, health plans, or hepatitis C patients would give Gilead the opportunity to make its case that this represented real value versus the price of a liver transplant.

As it turned out, Gilead’s concept of real value was reconsidered under threats from major PBMs to exclude coverage, in favor of AbbVie’s competitor product.

Also a little more than a year ago, doctors from Memorial Sloan Kettering Cancer Center in New York decried the high cost of oncology drugs, and called on the industry for price transparency. The same question is being raised over many oncology drugs, including the $150,000 cost of Revlimid, which produce much more incremental benefits.

This week, another article appeared in the New York Times addressing the high price of other oncology medications. Also this week, the first of a new class of hypercholesterolemia drugs, the PCSK9 inhibitors, will be approved by the Food and Drug Administration, for use in patient populations that could theoretically bust the pharmaceutical bank. It’s announced pricing was above the estimates payers had been anticipating. I would not be surprised if we heard a renewed, vigorous call for Medicare to be given the power to negotiate drug prices.

For the pharmaceutical company like Gilead, if the price of a liver transplant is $300,000, isn’t a Sovaldi price tag of $84,000 a bargain in comparison? Well, no, said the payers, in unison. Interestingly, Gilead did achieve one goal though: Even with heavy discounting demanded by payers, Sovaldi is challenging for the number 1 spot in terms of pharmaceutical sales revenue.

Too many specialty drugs today and in the pipeline tomorrow carry price tags that do not align with their claimed value. Biopharmaceutical companies should expend considerably more time and effort incorporating payers’ assumptions and opinions on the value of new medications before setting price, or at least really gauge their reaction to proposed pricing well before launch. This will result in at least some degree of price acceptance at launch or at least the impression that the company cares about the payer perspective.

In a value-based health system, this will matter a great deal. 

(1) Does your prelaunch market research allow for payer consideration of potential price points? 
(2) Is the goal of the market research to validate the company's concept of drug value or to gather data on what coverage decision makers think?

SM Health Communications provides writing, consulting, and innovative market research services for the payer markets. Its proprietary P&T Insight™ virtual P&T Committee program is the leading mock P&T Committee product in the field. We’ve participated in many market research projects involving biosimilar development and launch, from the point of view of the biosimilar and the innovator drug manufacturer. For more information, please visit or contact Stanton R. Mehr, President, at