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Drug Pricing: Why Justify On R&D Cost Rather Than Precise ‘Customer Value’?

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While looking around, it won’t be difficult to spot many types of steep-priced highly innovative products, where high costs aren’t justified by high R&D expenditure, but for unique ‘customer value’ offerings. Many consumers evaluate those and decide to settle for one, instead of opting for cheaper variants – delivering the basic customer requirements in that product class or category. Although, both pharma and electronic goods belong to high tech-based knowledge industries, similar examples are in plenty of the latter, but hardly any in pharma.

Agreed that pharma is a highly regulated industry, unlike electronic goods. But so are banks, financial services, airlines, telecommunication, among many others. Interestingly, all these industries are building great brands without talking about their investment costs in R&D, while doing so.

In this article, I shall focus on – despite facing a formidable headwind, mostly for the same, pharma industry, in general, continue to lack in two critical areas of brand building. But, before doing that let me quote from some recent research papers wondering, how is this situation continuing unchanged, despite all concerned being aware of it.

Two opposing views:

Just to recap, let me put below, two diametrically opposing views that continue to clash with each one, since long:

  • New and innovative drug costs being excessive, globally, lowering their prices will not harm the progress of innovation.
  • Drug industry argues, any restriction of free pricing of innovative drugs, will seriously jeopardize innovation of newer medicines and treatments.

So much of divergence in the views of two key partners within the industry, can’t just continue any longer, without a serious intervention of governments across the world, including the United States.

Pharma does want to talk about ‘Cost & Value of Medicines’. But…

It’s not that pharma doesn’t want to talk about ‘Value of Medicines,’ but not, apparently, to create an ‘emotional connect’ with its stakeholders, including the patients. It appears, more as a general justification for the high cost of new drugs. For example, a pharma trade association’s communication, after acknowledging ‘that many are struggling to access the medicine they need,’ says upfront: ‘Discussions about costs are important.’ It follows a series of much-repeated common justifications, which are no- brainer, such as:

  • Medicines Help Patients Avoid Expensive Hospital Services,
  • Developing New Treatments and Cures is a Complex and Risky Undertaking,
  • Medicines are Transforming the Treatment of Devastating Diseases.

But, the reality is, these justifications are not working on the ground, as these are not quite in sync with ‘customers’ value’ expectations, both from the company as well from the brand. Moreover, instead of establishing an ‘emotional connect’, this approach probably is further alienating many stakeholders, as several governments are now broaching the issue of price control, or some other mechanism to set drug prices.

Pharma marketers need to be eclectic:

Instead of keep following the age-old marketing and communication models, young pharma marketers need to be empowered to be eclectic. They should look around and try to fathom how is ‘marketing,’ as a business domain, changing in other fast-growing industries, and act accordingly. As pharma is a high-tech knowledge industry, let me draw examples from other similar industries, such one that innovates and manufactures electronic products.

Unlike any high-priced, high-tech electronic product companies, such as Google, Apple or Microsoft – pharma marketing communications are more like ‘justification’ centric, for charging high prices for medicines. This approach, apparently, is not just a bit defensive, but virtually negative. Whereas, unlike drug manufacturers, the above tech companies are constantly focusing on the following two areas, for creating a robust ‘corporate brand’ that infuses consumer-trust in each of their products:

  • Establishing ‘emotional connects’ with customers
  • Focusing on the total value of unique value offerings, rather than the high cost of innovation to justify high prices

Let me deliberate briefly on each of the above two.

The importance of establishing ‘emotional connects’ with customers:

With the penetration of technology, almost in every household, with a varying degree, though, access to a gamut of information becomes increasingly easy, so are the options available to customers. This is impacting almost every industry, including pharma and healthcare.

Thus, for corporate performance excellence, customers are now creating a space for themselves at the core of the pharma business strategy. Consequently, a need arises for the pharma marketers to enhance end-to-end customer experience. Besides, brand value offerings, this includes both short and long-term customer service offerings to ensure an ongoing emotional connect with customers, for more intense and longer-lasting engagement with trust, both on the ‘corporate brand’ and also on individual products.

Therefore, creating effective ‘emotional connects’ with customers are assuming a cutting-edge strategic importance – in multiple facets of pharma business. More ‘emotionally connected’ customers also act as a force-multiplier to enhance corporate reputation. Although, it mostly happens through word of mouth, in recent days, value added omnichannel communication by respective companies, is playing a crucial role for success in this area.

In the good old days, reaching patients or patient groups directly, would have been a challenging proposition. Most communications on products, diseases and treatments, used to be through healthcare providers. But, this is no longer so, especially in the digital world, that opened a new spectacle of opportunities for crafting patient-centric strategies – as patients become more digital-savvy, too.

Focus on brand value offerings, not on cost of innovation to justify high prices:

To dwell in this area, a series of questions that one may possibly encounter, such as: ‘How do you define value? can you measure it? What are your products and services actually worth to customers?’ Way back, these points were deliberated in the article – ‘Business Marketing: Understand What Customers Value,’ published in the November-December 1998 issue of the Harvard Business Review (HBR). It said: ‘Value in business markets is the worth in monetary terms of the technical, economic, service, and social benefits a customer company receives in exchange for the price it pays for a market offering.’ From this paper let me pick up just two critical components of value, as follows, for better understanding:

  • Value in monetary terms: Such as, dollars per unit
  • Value for a customer: What the person gets in exchange for the price it pays

Nevertheless, the important point to note: As ‘market offering has two elemental characteristics: its value and its price, raising or lowering the price of a market offering does not change the value that such an offering provides to a customer. Rather, it changes the customer’s incentive to purchase that market offering.’

When applied in the pharma perspective:

When the above concept of value is applied in the pharma industry perspective, it vindicates an important. Which is, tangible value offerings of an exclusive, high-priced patented products, and the same in its off-patent low-priced avatar remains unchanged, regardless of significant change in its monetary value per unit. However, unlike a patent protected drug, options for generic equivalents will be many, with differing prices.

This brings out another important facet of ‘value’. As the above HBR paper states, considerations of value take place within some context. Even when no comparable market offerings exist, there is always a competitive alternative. For example, in the pharma business, one possible competitive alternative for patented products could well be – when the Government decides to issue a Compulsory License (CL) for make the product available at a cheaper price to patients.

The name of the new game:

Thus, for an exclusive new drug, instead of focusing on cost of innovation to justify high prices, a sharp focus on ‘total value offering’ of the brand would possibly be the name of the new game. It will entail persuading the ‘connected customers’ to realize the total value of both the tangible and intangible cost of each benefit that the product offers, rather than simply the cost of a pill. In doing so, a pharma marketer and his entire team, must have an accurate understanding of what its customers value, and also, would value. This calls for a painstaking research, and a mammoth real time data analysis.

Developing a unique ‘Customer Value’ model:

As the above HBR article reiterates, ‘customer value’ models are not easy to develop. Unfortunately, pharma’s ‘value delivery system’ is still tuned to a self-serving mode and not ‘customer value’ centric.Thus, marketers may wish to note some key points in this regard, as below:

  • Many customers understand their own requirements, but do not necessarily know what fulfilling those requirements is worth to them.
  • This leaves an opportunity to demonstrate persuasively, the total ‘customer value’ that the new brand provides, and how it fulfills their requirements.
  • The strategy makers would have to necessarily generate a comprehensive list of ‘customer value’ elements, based on robust data, on an ongoing basis.
  • The acquired insight on – what customers value, and would value, to gain marketplace advantages over competitors, would form the core of the business strategy.

The next stage would be a pilot study to validate the model and understand the variations, if any, in the estimates. It is also vital to note that an improvement in some functionality may appear important, but may not necessarily mean that customers are willing to pay for it. The aim should always be delivering superior value, and get an equitable return for it. Thus, enhancing end-to-end customer experience in this effort, becomes a critical ingredient to brand success.

Conclusion:

After the article – ‘Business Marketing: Understand What Customers Value,’ published in the November-December 1998 issue of the Harvard Business Review (HBR), in June 2000, a similar article was published in the ‘McKinsey Quarterly.’ The paper titled, ‘A business is a value delivery system,’ also emphasized the importance of a clear, well-articulated “value proposition” for each targeted market segment.

This means a simple statement of benefits that the company intends to provide to each segment, along with the approximate price the company will charge for each of those. The paper also underlined, the strength of the buying proposition for any customer is a function of the product value minus the price. In other words, the ‘surplus value’ that the customer will enjoy, once that product is paid for.

Over a period of time, high prices of new and innovative drugs are attracting negative headlines, like - ‘High cost of hepatitis drug reflects a broken pricing system.’ This continues, despite high decibel justification of the ‘exorbitant’ cost of innovation. Undaunted, Big Pharma and its large trade associations remain reluctant to jettison their old advocacy toolkit.

They seem to be still on a – ‘Listen and believe what we are saying’ mode. This is vindicated by the December 14, 2019 report that revealed: ‘The Pharmaceutical Research and Manufacturers of America, the drug industry’s top lobbying group, filed a lawsuit this week against the state of Oregon, claiming two laws it passed requiring greater transparency of drug prices are unconstitutional.’

Continuation of such approaches, on the contrary, is further alienating many stakeholders, especially the patients and the governments. Thus, time appears more than ripe today to focus more on delivering measurable ‘surplus value’ of new products, to well engaged and connected patients, both globally and locally.

By: Tapan J. Ray   

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

 

Continues ‘The Cat And Mouse Game’ In Pharma Business?

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Many are already aware of the critical factors that make generic drugs so important for patients – virtually for all. These don’t just facilitate greater access to health care – offering affordable alternatives to high-priced off-patent innovative drugs. This is as relevant in the largest pharma market in the world – the United States (US), just as in India. Let me illustrate this point with two examples – one from the US and the other from India.

According to US-FDA, ‘9 out of 10 prescriptions filled, are for generic drugs’ in the United states, as off-patent branded generic drugs cost more than their generic equivalents. The US drug regulator explains, ‘Increasing the availability of generic drugs helps to create competition in the marketplace, which then helps to make treatment more affordable and increases access to healthcare for more patients.’

However, unlike the US, there prevails a unique perception difference even within generic drugs – between branded and unbranded generics. The Indian Survey, undertaken to review and analyze various facts on branded and equivalent unbranded generic medicines, found a huge difference in prices between them in the country. Interestingly, as the researchers also noted, although, more consumers want an economical alternative to high priced branded generics, most physicians do not prefer unbranded generic medicines.

There is another important point worth noting regarding India made generic drugs. Although, Indian pharma sector caters to around 40 percent of generic demand in the US, as IBEF reports, many Americans nurture serious apprehensions on the quality of generic drugs manufactured even by India’s top drug companies. 

This is quite similar to apprehension that exists in India between the quality branded and unbranded generic medicines in India. The only difference is – the above perception in India is not based on impartial and credible scientific studies, whereas it is not so in America. The New York Times report, published on May 11, 2019 vindicates this point. It questioned: “Americans Need Generic Drugs. But Can They Trust Them? The fake quality-control data, bird infestations and toxic impurities at the overseas plants that could be making your medication.” Incidentally, there aren’t any such large-scale accusations regarding dubious quality of drugs manufactured by Big Pharma. 

On the other hand, big pharma players have long been accused of drug price gouging or price-fixing of life-saving drugs, primarily to maximize earnings by ‘extending’ product patent-life. Curiously, in recent times, even the generic drug players are being accused of following a similar practice. Thus, in this article, I shall explore how generic drug players are also trying to hoodwink measures to bring down the drug price, either through price control or through the encouragement of intense competition – playing a ‘cat and mouse game’, as it were, whenever an opportunity comes. If it continues and probably it will, what is the way ahead? Let me begin by recapitulating a historic pace-setting move in the global generic market by an Indian drug player.

A historic pace-setting move by an Indian generic drug player:

Being a major exporter of generic drugs in many developed, developing and even poor countries around the world, India is often termed as ‘the pharmacy of the world.’ That apart, a historical move in this space, by a top domestic player – Cipla, earned global accolades, at the turn of this new millennium. In 2001, Cipla slashed the price of its triple-therapy drug ”cocktails” for HIV-AIDS – being sold by MNCs, ranging from USD 10,000/ USD 15,000 a year to USD 350 a year per patient to a doctors’ group working in Africa.With the generic industry’s focus on a deeper bottom line, the scenario has changed now. Finding ways and means for the price increase, evading both competitive pressure and also drug price control, as in India, has turned into a ‘cat and mouse game’, as it were.

Generic drug pricing – ‘a cat and mouse game?’

Pricing pressure, especially for generic drugs, from patients, payers, politicians and governments, is gradually becoming more intense. More the pressure greater is the effort of affected players to come out of it, in any way –akin to a ‘cat and mouse game’, as it were. Although, it has recently started in the USA, the same exists in India, since 1970, when the first drug price control was introduced in the country. Intriguingly, in the midst of this toughest ever drug price control, phenomenal rise of almost all top Indian companies, including the top ranked company in the Indian pharma market commenced – from scratch. Nonetheless, to get a feel of how is this game being played out, let me start with the Indian scenario.

How this game is played in India to evade price control:

Instead of taking a deep dive into the history of drug price control in India, let me give a bird’s eye view of a few mechanisms, out of many, used to evade price control, since it commenced. The idea is to give just a feel of how this ‘cat and mouse game’ game pans out, with a few of such examples in a sequential order, since 1970, as much as possible, by:

  • Including price decontrolled molecule in the FDC formulations.
  • Replacing a price-controlled molecule by a similar decontrolled one, keeping the brand name unchanged, when the number of controlled molecules came down.
  • Making a major shift towards selling more of higher-priced decontrolled molecules, jettisoning low priced controlled molecules.
  • Resorting to vigorous campaigns, when the government started encouraging prescription of low-priced generic molecules, to ensure further shift to branded FDC prescriptions, alongside image enhancement of branded generics over equivalent unbranded ones. Its outcome is visible in the above Indian Survey on the image of branded and unbranded generics.

Has Indian pharma industry succeeded in this game?

It appears so and gets reflected in the CAGR of the industry. According to IBEF, “The country’s pharmaceutical industry is expected to expand at a CAGR of 22.4 per cent over 2015–20 to reach US$ 55 billion.” I underscore, this is value growth.

Thus, the point, I reckon, that the government should ponder: How both can happen, at the same time – price control is bringing down drug prices, extending real benefits to patients on the ground, and at the same time the industry is recording an impressive growth rate in value terms?  Whatever it means, let’s now try to explore, how such ‘cat and mouse game’ is being played to increase generic drug prices in the United States.

How similar game is played in the US to increase generic drug price:

On May 10, 2019, international media reported that ‘44 US states announced a lawsuit alleging an anti-competitive conspiracy to artificially inflate prices for more than 100 drugs, some by more than 1,000 percent.’ This lawsuit is based on an investigation involving a number of generic drug companies. The process, which took five-years to complete, accused twenty generic drug players. Teva Pharmaceuticals USA, whose parent company is based in Israel was, reportedly, named as the ringleader of the price-fixing. The company raised prices of around 112 generic formulations.

Other companies, reportedly, named in the complaint, include Pfizer, Novartis subsidiary Sandoz, Mylan, and seven Indian drug companies, including Lupin, Aurobindo, Dr. Reddy’s, Wockhardt, Taro Pharmaceutical Industries (a subsidiary of Sun Pharma) and Glenmark. Some of the 15 senior company executives who were individually named in the lawsuit for their involvementin this alleged “multibillion-dollar fraud ”belong to Teva, Sandoz and Mylan.

The ‘cat and mouse game’ in this case is slightly different. Instead of government price control, the US drug regulator encouraged intense generic competition to bring down the price. When the priced did not come down as expected, the State of Connecticut, reportedly, began investigating select generic drug price increases in July 2014. Subsequently, other states also joined the investigation, and uncovered the reason for prices not coming down.

According to the complaint, between July 2013 and January 2015, Teva significantly raised prices on approximately 112 different generic drugs. Of those 112 different drugs, Teva had colluded with its competitors on at least 86 of them. The complaint noted: “Teva had understandings with its highest quality competitors to lead and follow each other’s price increases, and did so with great frequency and success, resulting in many billions of dollars of harm to the national economy over a period of several years.” In this way, the impact of intense competition on drug prices, was made ineffective.

Not the first time, it was detected:

The 2019 anti-trust lawsuit against the generic drug makers may be ‘the biggest price-fixing scheme in the US history’, but not the first lawsuit of this kind in America. A similar lawsuit for illegal price-fixing against six generic companies, was filed by the states in 2016, as well, which is still being litigated. The 2019 case is a sweeping version of the same and is the result of a much wider investigation. It indicates, instead of taking corrective measures, the ‘cat and mouse game’ still continues. However, almost all the companies have vehemently denied this allegation.

Is this game existential in nature of the business?

One may well argue that such ‘cat and mouse game’ with the government is existential in nature, for the generic drug business. When price control or intense market competition brings down the price to such a level, it becomes a matter of survival of most businesses. There doesn’t seem to remain enough financial interest for them to remain in the market. If and when it happens, causing shortage of cheaper generic drugs, patients’ health interest gets very adversely affected. It also prompts the manufacturers to find a way out for the survival of the business. This is understandable. But it needs to be established, supported by scientific studies.

An off the cuff solution:

A general and off the cuff solution to the above issue would naturally be, there should be a right balance between affordability of most consumers and the business interest of the drug makers. This broad pointer is also right and understandable. But again, no one knows the expected upper limit of the generic drug profit margin for their manufacturers – where hardly any breakthrough and cost-intensive R&D is involved. Equally challenging is to know – below what margin, generic players, by and large, loose interest in this business?

What do some available facts indicate?

According to the year-end report of the Pharmaceutical Export Promotion Council (Pharmexcil) the total pharma exports from India has been pegged at USD 19.14 billion for 2018-19. This represents a growth of 10.72 per cent over USD 17.28 billion in thelast year. It further reported, “The top 25 export destinations contribute 76.52 per cent of the formulation exports amounting to USD 10.38 billion. Among these, the US continues to be the largest export destination with over 38.62 per cent of the total generic exports to that country at USD 5.24 billion.” Does it mean business as usual, despite ‘price-fixing’ law suits in the US, since 2016?

Similar impression one would probably get from the Indian scenario, as well. Notably, despite price control, which is continuing since last five decades, the growth rate of the Indian pharma market, which is dominated by branded generics, remains very impressive.According to the January 2019 report of IBEF: “The country’s pharmaceutical industry is expected to expand at a CAGR of 22.4 per cent over 2015–20 to reach USD 55 billion.” So also the same game, probably!

Conclusion:

It appears, there is certainly a huge reputation or image crisis for the generic drug industry, as such, due to such alleged delinquencies. However, from the business perspective, the manufacturers are still having enough leeway to move on with similar measures, supported by fresh thinking. At the same time, it seems unlikely to have any form of drug price control in the United States, at least, in the foreseeable future. Nevertheless, price pressure due to cut-throat competition could even be more intensive, as it gets reflected even in the US-FDA statements.

Nearer home, the Indian generic drug business has been hit with a double whammy – allegations for dubious drug quality standards, on the one hand, and price manipulation on the other, besides dented reputation and image – widening trust gap with patients and governments.

Moreover, unlike the best export market even for generic drugs – the United States, India has been following some patchy policy measures for health care, as a whole. The drug price control system is one such. Till a holistic policy on health care is put in place for all, backed by an effective monitoring system, The Indian price control system may remain like a ‘maze’, as it were, with several ways to hoodwink it.

Hence, the ‘cat and mouse game’, albeit in a different format, is likely to continue, until one gets caught, or till all concerned puts their act together – putting patients at the center of the core business strategy.

By: Tapan J. Ray    

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.