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Drug Product Pricing 101: A Fundamental Issue Revisited

 

Eighteen months ago, FDA Matters wrote about the firestorm created by KV Pharmaceuticals’ decision to “charge $1500 per dose for Makena, a drug that reduces the risk of pre-term delivery in pregnant women. The same therapy has been compounded in pharmacies for years at a cost of $10 to $30 per dose.”

 

Three months ago, K-V Pharmaceuticals filed for bankruptcy protection. This week, a federal judge rejected the company’s last-ditch effort to save itself by ruling that FDA had discretion to permit continued compounding of the drug.  

 

No one knows the “right price” for this or any other drug, but there are ways to rationally evaluate and guide product pricing decisions. Apparently, not everyone in industry knows this.

 

Value/pricing analysis helps companies determine an appropriate and defensible price. Some large pharmaceutical and biotech companies have the in-house capacity. Generally, small and medium-sized companies will use external consultants or consulting firms to assure a professional, unbiased process. However, it seems clear that some companies don’t bother to undertake a sophisticated analysis prior to setting prices.

 

In recommending a particular price or a range of prices, the consultant or consulting firm will look at three or more approaches…and then work with the company to make judgments about “best fit” or achieving consensus among a range of possible prices. Here are three examples of the approaches a consulting firm might use:

 

·         “Value-added” pricing. This values the company’s product (and supports a price) based on replacement or enhancement of current treatments in the same clinical category. In the case of an asthma drug, a value-added pricing approach would look at “savings” achieved by the reduction in hospital days, emergency room visits, and disability. Other system savings might be considered, such as the benefit of added compliance, the reduction in concomitant drugs, fewer side effects, etc. Any system “costs” (e.g. loss of productivity, treatment of adverse events) are also included in the model.

 

·         “Cost plus” pricing. This values the company’s product based on the development costs and achieving a reasonable return on investment (ROI).  This may include real, imputed and opportunity costs. Thus, the “cost” component is likely to be greater than the company’s actual expenditures. Pricing in this approach is highly dependent on the ROI variable and the likely timeframe before newer products or generics cut deeply into sales.   

 

·         “Comparable value” pricing. This looks at the pricing of products that have comparable characteristics or benefits, but may be in different clinical categories than the company’s product. For example, a new recombinant vaccine might be compared to the pricing increment when another vaccine was “upgraded” to a recombinant version. In the case of a unique therapy or breakthrough (e.g. a new drug for Huntington’s disease), an analogy is drawn to the most relevant situations in other treatment areas.

 

The analytic models are adjusted for a host of variables, such as the size of the potential market, the degree and rate of market penetration, and the likely product lifecycle. As noted, there is usually a consensus-building process where the consultant works with the company to determine a price that factors in the results of the different analyses.

 

Each consulting firm has its own approach, a proprietary model to distinguish their services from competing firms. These models add value and reach far beyond the basics I have described above.

 

Now you have an idea of how it’s done….or should be done. This analytic process should reduce objections to the pricing of a product and also prepare a company to defend its pricing decision. Controversy cannot always be avoided, but shareholders, patients, and payers are always going to respond better to companies who have backed their pricing with sound reasoning.

 

Steven

 

Disclosure: I am not affiliated with any consulting firm that does pricing analysis, nor is this a service I provide. However, if you are interested in the names of a few firms that are in this business, please contact me by e-mail at sgrossman@fdamatters.com.

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