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Pricing Strategy in the US Pharmaceutical Market

Pricing Strategy in the US Pharmaceutical Market

Pricing Strategy in the US Pharmaceutical Market

 

Last month, Turing Pharmaceuticals paid $55m for the US rights to HIV drug, Daraprim. Last week, Turing’s CEO, Martin Shkreli (a former Hedge Fund Manager) made headlines around the globe by announcing that they would be increasing the price of Daraprim by around 5,000 per cent. The result was widespread social outrage and a $40bn dent in US Pharmaceutical and Biotech stocks, bringing the whole industry under scrutiny.

 

Controversy over drug pricing is hardly new; Pharmaceutical CEOs have long defended their right to make a return on R&D investments. And rightly so, otherwise how would they be able to fund further innovation? Of course we want to incentivise that. What’s disappointing about the Turing case though, is that Daraprim is an in-licensed generic drug – they don’t have billions of dollars’ of R&D costs to recover, the product was already on the market. The company’s monopoly is a result of zero competition rather than IP protection and Shkreli is applying his Hedge Fund principles to take advantage of an undervalued asset. The move caused a US Presidential candidate to hint at possible measures to cap pharmaceutical “profiteering”, which poses the wider question; what level of return is sufficient and reasonable, and who decides it?

 

Let’s take a look at Gilead Science’s pricing of blockbuster HCV product, Sovaldi. Although the foundations of Sovaldi were effectively acquired as part of the $11bn Pharmasset deal in 2011, Gilead still invested heavily to further develop and commercialise those assets into a marketed product with a 90% cure rate. Today, Sovaldi treats a disease that has affected millions and was incurable prior to its launch – this is ground-breaking innovation that needs to be rewarded and replicated. However, it’s safe to say that Sovaldi’s price tag raised a few eyebrows. At $84,000 per treatment, the drug enabled Gilead to hit a profit margin of almost 50% in 2014 (up from around 25% in 2013). Sure that’s a sufficient return, but is it reasonable?

 

Whilst both cases demonstrate the pricing power held by Pharmaceutical companies, particularly in the US market, there is a difference between jacking the price of a marketed drug and launching an expensive innovative drug to treat an unmet need. Of course both hit the payer pocket, but there is far greater value to the patient in the latter. Novartis CEO, Joe Jimenez often talks about the need for companies to adapt to a value-based (or outcomes-based) approach, pricing its products by asking questions like; “what value will this drug bring to the marketplace?” and “is society willing to pay for this drug?” A strategy like this may well serve to keep policy makers at bay and allow for innovative pharmaceutical companies to enjoy sustainable sales growth.

 

It will be interesting to see how pharmaceutical companies adapt to the changing landscape and potential threat of government-led price curbing. How will companies like Turing, Gilead and Novartis shift their commercial strategies to demonstrate value to the market? How will future M&A / Licensing deals fare in light of the Turing scandal? And how will launch pricing and market access strategies develop as more of these high-value specialty drugs come to market?

 

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