The high cost of pricing myopia

When launching a pharmaceutical product, it’s not enough to negotiate the best reimbursable price for each local market. Overall financial performance will depend on successfully managing go-to-market strategies at the global level. That means determining the optimal price and launch sequence for all the countries in which you intend to commercialize a new product.

It’s a complex equation. External market forces, governmental pricing pressures, parallel trade and global reference price modifications have not only reduced launch revenue but caused in-market selling prices to erode by 3-6 percent a year. Even a slight price change in one country can mean a big hit to prices, revenues and margins around the globe.

A key influence in this trend is international reference pricing (IRP), also known as external reference pricing (ERP), a cost-control approach that is widespread. It’s the practice of regulators using the pricing of a medicinal product in one or more countries (a reference basket) to derive a benchmark for setting or negotiating the reimbursable price of the same (or similar) product in that country. For example, a commonly used rule stipulates that when a product is launched in a given country, its price must be no higher than the average price for that country’s reference basket.

Why it matters

Traditionally, products were often launched as soon as regulatory approval was received – or larger markets were launched first. Now that pricing across international borders is based on a complex web of interdependencies, it’s no longer enough to use broad-brush rules of thumb and a local focus. The challenge for pharmaceutical companies is to negotiate the best possible launch prices across all countries and carefully time the launch to minimize the influence of reference pricing as long as possible – all while balancing global revenue targets.

Challenges

The benefits of optimizing the launch sequence strategy are self-evident, but there are challenges to the ideal.

Complexity of the question

The reference pricing matrix around the globe is daunting and ever changing. Most countries use their own formulas, and the rules that govern IRP are complex. Several of the largest, most influential and most referenced countries are evolving their reimbursement and referencing rules. Even a slight price change in a referenced country can have a significant impact on prices, revenues and margins around the globe. Navigating this matrix to limit price erosion becomes a serious optimization exercise.

For example, a product launch across 75 countries in 60 months represents trillions x trillions x trillions of possible price/launch date sequence combinations. Not all of those combinations will be viable, but you still get the idea. Finding the optimal combination is an enormous needle-in-the-haystack calculation.

Lack of global vision and governance

Organizational capabilities for price optimization are often cobbled together and do not adequately support today’s business requirements. Few pricing teams have a corporate mandate to manage launch strategies across geographies. As a result, pricing and launch sequencing decisions are often made at the country level without awareness of the big-picture ramifications. Companies that don’t have a centralized framework for managing launch strategies tend to make reactive pricing decisions and forego tens to hundreds of millions in revenue.

Absence of advanced analytics

According to an Accenture study on the pharmaceutical industry, 80 percent of executives surveyed said that pricing optimization is one of the top three strategic priorities for their companies, two-thirds of pharmaceutical companies do not have sophisticated pricing capabilities. In fact, about 70 percent of the industry is still using spreadsheets to figure out this problem. A few are using basic analytics in homegrown systems.

Slow time to results

Global pricing teams are tasked to run many analyses to simulate different market pricing situations. One client reported that each scenario required 12 hours of computer time to run, only to restart the next day with new assumptions. This iterative approach slows the pace of decision making, limits the number of scenarios that can be considered, consumes valuable resources and leads to organizational bottlenecks.

What is needed

Some life sciences companies have taken steps to formalize the launch process, but most still need to gain the abilities to:

• Quickly simulate new product launches to see the effect of different pricing and sequence strategies.
• Optimize the launch price and country launch sequence, including launch date as a variable.
• Monitor in-market prices while considering the impact of mandated price changes and market events.
• Centralize business structure and processes around global pricing

Launch revenue optimization is one of the most complex areas of analytics to solve, but the returns for the business are significant. Join our experts Patrick Homer and Ivan Oliveira at Analytics 2015 to discover more.