In order to develop pricing strategy, it is imperative to understand the demand-supply drivers combined with drivers that positively and negatively affect pricing decisions. Equally important is the understanding of the key elements of Value-Based Pricing (VBP) along with what it takes to develop and refine the VBP using stakeholder (payers, providers, patients, and policy makers) input. Finally, the optimal pricing derived through this process needs to be applied in the marketplace to ensure product success.
Several key factors, inclusive of but not limited to aging population, increased affordability through regulated health care, aggressive treatment, and increased awareness of drugs, are contributory to the ever increasing demand for biopharmaceuticals. Like in any other economy module, the balance between supply and demand drivers should be the ultimate cornerstone for appropriate pricing decisions.
Innovative drug designing and commercialization is getting a continuous boost from the persistent and significant demand for prescription drugs in treating a plethora of health conditions. The potential of life-saving and life-enhancing prescription drugs as better futuristic investment stems from their ability in providing enhanced protection and effectiveness. Most recent studies showed that the Medicare Part D drug costs have gone down even though there is a significant increase in utilization of prescription drugs. The increased access to these prescription drugs not only improves quality of care experienced by Medicare beneficiaries but also the overall costs associated with the program have been significantly lower compared to what was forecasted just a few years ago when the program was instituted. This can be attributed to the market based competitive pricing forces in play.
Additionally, investment and opportunity costs that go into the successful development of innovative drugs and ‘me too’ drugs (drugs that show minimal differential advantage compared to their predecessors) are considerably higher compared to generics. Of note, setting high prices for the ’me too’ drugs is difficult given their many apparent revenue-generating limitations. In fact, ‘me too’ products face an uphill task in breaking even and command parity pricing and access. It should be noted that demand creation in the industry is more complex compared to other industries due to intricate stakeholder base and their resulting expectations and requirements.
Approval of innovative drugs is regulated by federal regulations under the currently existing regulated healthcare system. Thus, there is not much leeway to manipulate the supply drivers in order to maximize profits. However, in a few rare cases where demand exceeds supply, like for plasma products, manufacturers have the handle to increase profits by increasing price. But taking advantage of such situations will entail having the proper infrastructure of matching up to the increased demand as well as being sensitive to patient access and affordability issues as higher prices can potentially face public backlash.
Since manufacturing and inventory costs contribute to a high percentage of overall cost, the companies must effectively regulate the supply side through optimal inventories. It is fair to say that demand drivers are more promiscuous than supply drivers in regulating product pricing. Albeit in rare situations, where there is a paucity of resources or manufacturing malfunctions or quality control issues or unexpected environmental challenges, supply drivers can occasionally crop up as a vital issue. In any such eventualities proper administrative regulation of the demand-supply balance is a prerequisite for maintaining long-term outlook for the product and prevent any negative impact on the patients using the product.