How Do Pharmaceutical Companies Price Drugs?

1. How Do Pharmaceutical Companies Price Drugs? PDIG Summer Symposium Coventry, June 5th, 2008 Donald Macarthur Global Pharmaceutical Business Analyst

2. Agenda • UK in an international context • P&R strategy development for new drug • Examples with orphan drugs Donald Macarthur

3. Changing Paradigm Old paradigm New Paradigm New Hurdles: • Safety, Quality, Efficacy …..and…… • Cost-effectiveness • Affordability Registration approval “the race is finished” Donald Macarthur

4. Marketing Approval vs P&R Approval Donald Macarthur

5. UK offers free pricing to all new molecular entities and automatic reimbursement from launch, but also….. Profit control (PPRS) Periodic across-the-board price cuts Slow uptake of new drugs/’postcode prescribing’ Cost-effectiveness demands (NICE/SMC/AWMSG) Cash limited PCT budgets/indicative GP budgets Very high generic penetration High parallel import penetration Impact of devolution Powerful, vertically-integrated chains PbR in England Wholesale margin under review Pharmacy clawback Volatility with generic reimbursement Inequitable and illogical prescription charge system Encouragement given to POM-to-P switches What is so special about price? Donald Macarthur

6. UK represents less than 4% of world demand for prescription medicines, but… …other countries that set prices with reference to those in the UK (including Japan, France, Italy, Canada, Belgium, Switzerland, Poland, Netherlands, Finland, Hungary, Norway and Ireland) together account for 25% …but it is not all-important UK price in important for pharma industry Donald Macarthur

7. Access to reimbursement full or maximum reimbursement reasonable co-payment At an optimal price revenue optimising price trade-off price and volume Without undue delays minimise administrative delays in getting P&R approval reasonable uptake Or excessive restrictions patients/indications according to MA avoid step therapy funding made available Aims of European P&R strategy Donald Macarthur

8. Revenue = price x volume Focus on EU-5 (Germany, France, UK, Italy & Spain) as account for >70% of total European sales Optimum approach for each country may require different trade-offs, and different stakeholders are key to success Success is based on contribution of P&R strategy to revenue optimisation Donald Macarthur

9. VIABLE PRICE RANGE Dual Perspective on Price Market Perspective • Perceived value to customer in context of alternatives • Places downward pressure on price “what the market will bear” Sets upper limit price achievable Sets lower limit price required Company Perspective • Reasonable gross margin and ROI • Places upward pressure on price “what the company needs” • A viable price range will balance both the market and company needs and perspectives • The market perspective is generally the starting point for developing pricing strategy… Donald Macarthur

10. One big advantage of UK – No delays to market (P&R timelines [days], Feb 2007 data) Donald Macarthur

11. Agenda • UK in an international context • P&R strategy development for new drug • Examples with orphan drugs Donald Macarthur

12. Three core analytical constructs form the basis of P&R strategy development Understanding the relationship between the offering and perceived value Understanding the “buying system” Value Based Pricing Purchase Decision Analysis Global Optimisation Understanding the tradeoffs within and across products and markets Donald Macarthur

13. Core analytical process LOOP BACK AND REVISE IF NECESSARY 2. Reference Analysis 8.Price targets/ policy, rationale and support strategy needs 5.Assess Role of purchase decision makers in enabling market access (MA) 6.Assess MA barriers & strategies to overcome 7.Identify and assess cross market impacts 4. Value based price target/range 1. Product profile and positioning options 3. Differential Value Analysis Global Optimisation Purchase Decision Analysis Value Based Pricing Estimation Proactively determines a rational, value based price target or range Optimizes P&R strategy across markets Pressure tests likely “system reaction” to price Donald Macarthur

14. Value based pricing Understanding the relationship between the offering and perceived value Value Based Pricing Purchase Decision Analysis Global Optimisation Donald Macarthur

15. Value based pricing The perceived value of a product to a customeris based on…. Differential Value D (Value of the differentiation) V V = R +/- D Reference Value Perceived Value R (Price of the Best Alternative) Donald Macarthur

16. Value based pricing and pharma challenges • Pharma challenges..… • What is your product? • “V” differs depending on indication, positioning, target patients • What is “R”? • What if you have a breakthrough product? • What about generics? • What drives “D”? • How do you measure it? • How do you prove it? • Value to whom? Who is the customer? • Payer? Prescriber? Pharmacist? Patient? Who really counts? V = R +/- D Negative Differentiation Value Positive Differentiation Value D V Reference Price R Perceived Value Donald Macarthur

17. Value across segments ILLUSTRATION Smaller patient segments may yield higher economic value and higher revenues/profits Donald Macarthur

18. Understanding and framing the reference “R” is critical The Reference: Negative Differentiation Value • is usually the current “standard of care”… • may not be a drug • may be old and generic, or go generic before we get to market • may be indirect – an analogue • may vary across countries • may still be in development in a competitor’s pipeline • is dynamic and changes with competitive or environmental developments Positive Differentiation Value D Reference Price R There always is a reference! Donald Macarthur

19. Differential value - “D” • Value of differentiating attributes must be: • Relevant to the customer – especially the payer • Payer perspective should be incorporated prior to finalizing Phase 3 endpoints • Robustly supported by data – both clinical and, increasingly, outcomes and economic • Adopting the “4th hurdle” requirement is the payers’ way of formalizing and quantifying their computation of differential value • Effectively communicated to customers  timely preparation of the “payer market” is increasingly important • Particularly important where large drug budget impact anticipated Negative Differentiation Value Positive Differentiation Value D Reference Price R Donald Macarthur

20. Purchase Decision Analysis Understanding the “buying system” Value Based Pricing Purchase Decision Analysis Global Optimisation Donald Macarthur

21. Purchase Decision Analysis Payer Prescriber Patient • Understanding the system/identifying the stakeholders • What are their decision criteria? • How do they influence each other? • How does this product proposition and target price map against those criteria?  what will be the system reaction to our product? • What hurdles might need to be overcome? • What leverage points in the system do we have? Donald Macarthur

22. Affordability/budget impact is increasingly a payer barrier The 2 main payer concerns are: 1. Is it worth it? (value for money) 2. Can we afford it? (budget impact) • Requires careful consideration of options and trade-offs: • Price vs patient access (consideration of subpopulations) Potential Budget Impact Available Budget • Strategies to facilitate increase in budget headroom • Requires early assessment and build into development & commercial strategy Donald Macarthur

23. Global Optimization Value Based Pricing Purchase Decision Analysis Global Optimization Understanding the tradeoffs within and across products and markets Donald Macarthur

24. Global optimization • Global optimization across different “entities”  a key part of pharma pricing strategy development: • Geographic price optimization – across countries, managing • Price referencing • Parallel trade • Indication price optimization – same molecule, >1 indication • Dose price optimization – same formulation, different doses • Formulation price optimization – new formulations, line extensions Donald Macarthur

25. Many countries refer to prices for same product in other market UAE Canada Western Europe USA Turkey Korea Japan Egypt China Pakistan Mexico Taiwan Saudi Arabia India Hong Kong Philippines Key to Reference Types Periodic Formal Kenya Thailand Brazil Sri Lanka Periodic Informal Bangladesh Australia Launch only formal South Africa Launch only Informal Singapore New Zealand Informal reimb/mkt access Source Country Donald Macarthur

26. Loss of revenue from PIs • Price fluctuations and favourable incentives have enabled PIs to flourish in 2007 • Value at MSP €4.7 bn (+12.7% vs +3.6% for total market) • 9.2% share of main importing markets • 3.3% share of EU-27 (including Norway, Finland, Belgium, Ireland, Austria, Poland, France, etc.) Source: IMS Health Donald Macarthur

27. Response: Price management • Launch sequence (high priced countries first) • Price corridor or more usually target price with ‘hard’ floor and ‘soft’ ceiling (differentiate prices as much as possible, harmonise prices as much as necessary) ILLUSTRATION: Ex Manufacturer Price Corridor for Product X in €: European ex manufacturer price corridor: € 16.0 € 14.4 France Germany Italy Spain UK Donald Macarthur

28. Agenda • UK in an international context • P&R strategy development for new drug • Examples with orphan drugs Donald Macarthur

29. Little negotiating power high unmet medical need no suitable references medical benefit still under investigation pressure from rare disease KOLs and patient groups Surge in orphan drug R&D by established pharma & biotech companies and new entrants 23% of MA applications to EMEA in 2006 were for orphan drugs Limited data, small trials, short in comparison to natural history of disease. no comparative or dose-finding studies, surrogate end points. Prevalence of orphan condition expands when treatment available Genomics may disaggregate current common diseases into many genetically defined distinct conditions Need for life-long treatment. Need for new medical education Non-orphan indications found for orphan drugs Issues of equity ….orphan drug costs might reach 6-8% of pharmaceutical budgets in EU by 2010 (Alcimed, Study on Orphan Drugs for European Commission, 2004) Orphan drugs: Concerns by payers Donald Macarthur

30. ‘In national negotiation, orphan drugs are always handled separately. The most critical point is that while standard drug pricing procedures are not applicable to orphan drugs, other methods are unavailable; as a result, the decision on the price seems to be based on no rules at all.’ Andrea Messori, AIFA Orphan drug pricing: Views of the Italian authority Donald Macarthur

31. Approx. MSP Glivec 100mgx 60, March 2008 Donald Macarthur

32. Total of 44 EU-designated orphan drugs had received marketing authorisation from EMEA by end-2007 34 identified on UK market in March 2008 using publicly-available data sources 28 of these 34 had the lowest MSP among EU-5 countries Not entirely due to £’s weakness against € UK has lowest prices for orphan drugs among major EU countries Donald Macarthur

33. ‘Price’ is just one aspect: Speed of market access (time from MA to launch) Speed of market penetration (market share growth in major markets over first five years) Premium pricing (price realised versus therapeutic class comparator) Price consistency (narrow official price band across Europe and other relevant markets) Conclusions: Factors critical to a pharmaceutical company’s future performance Donald Macarthur

34. don.macarthur@btinternet.com www.justpharmareports.com phone +44 (0)1444 811888 P&R strategy development slides reproduced with permission from PriceSpective Ltd (www.pricespective.com) Thanks for you attention, any questions please? Donald Macarthur