Above All Else, Price is a Negotiation
The success of innovative drugs will depend increasingly on how well the companies that make them can structure prices to
cover different applications and abilities to pay, can align pricing with performance to overcome uncertainty, and can negotiate
win-win deals with powerful buyers. Above all else, pharma executives must realize that pricing today is not about setting
an optimal number for price takers. It is about creating a strategy for successful negotiations with payers and institutions
that are pursuing strategies to reduce their costs. There is no right price in a negotiation—only a range of possible outcomes
between what the seller is willing to accept and the buyer is willing to pay. Success in negotiation depends largely on having
good information and using it to make viable offers that are attractive to both parties.
One necessary piece of insight for structuring offers is an estimate of how payer restrictions and disincentives impact sales.
Knowing that two payers each could put your drug into the highest co-pay category does not mean that each should be offered
the same deal. The highest co-pay category for one may involve much more restriction of volume than for another because the
actual co-pay levels or the economic circumstances of the patients are different. In addition, the increasing transparency
of discounts requires sellers to consider the impact of a deal on the demands that will be made by similar buyers.
Equally important to a successful negotiation is understanding the drivers of and barriers to brand choice within each payment
system. Who is the economic decision maker: the payer, the physician, or the patient? Is the decision maker concerned entirely
about keeping the cost of care within a budget, or is she willing to expand the budget if the incremental clinical benefits
represent "good value" relative to the incremental cost? What are the criteria used to determine the economic value of clinical
benefits? Beyond value, what are the decision maker's expectations about fairness in the negotiation?
Structuring offers that payers will accept is not about winning the highest prices per unit, but about maximizing the return
on the IP. Pricing models must encourage broad use of the drug, while still capturing differences in value across applications.
To win acceptance, pharma will need to educate stakeholders regarding the social value in replacing product-based with value-based
pricing models. The industry's success in implementing this will affect not only its well-being, but also the well-being of
the healthcare systems and patients it serves.
Thomas Nagle is a partner in The Monitor Group who specializes in strategic pricing. He can be reached at email@example.com