Pharmaceutical executives devote significant resources to strategic decision making when launching key products—and rightfully
so. Many facets of a product's optimal marketing strategy—from clinical programs, product pricing, competitive positioning
and differentiation, to stakeholder value and messaging, DTC, and sales force deployment—require careful attention and investment
both at launch and throughout the product lifecycle to maximize access.
In our experience, the power of pricing as a tool to maximize a brand's financial performance is often overlooked after a
product is launched. While contracting strategies are typically adapted over time to differentiate net pricing for specific
payer channels or customers, opportunities to improve financial performance through better list price management over the
full course of the product's lifecycle often go unrealized. Decision makers may lose sight of the fact that on-market pricing
is almost costless relative to other marketing investments, thereby resulting in a high ROI, if implemented effectively.
In this article, we first highlight traditional price-increase strategies for on-market products and patterns over time. Next,
we describe how research and analysis can be used to identify situations in which list pricing strategies should diverge from
these traditional approaches without "hitting the cliff"—that is, actions by payers that could risk a downgrade in price or
restricted access to patients. We conclude with some practical observations based on our experience with pricing decision
making for many on-market products.
How it's done: on-market list pricing strategies for top brands
To review the most common approaches to list price management, we examined the wholesale acquisition cost (WAC) price actions
of the top 100 pharma brands over the past 10 years. We observed three distinct phases to the product lifecycle with respect
to list price strategy. During the first two to three years following launch, manufacturers tend to be conservative with price
increases. Over the "mid lifecycle" phase of the product, which might extend for 10 or more years, the list price strategy
is most often based on annual price increases in the range of 4 to 6 percent per year, with 5 percent being the most common.
The last phase, the three years prior to loss of exclusivity, is characterized by sharp increases in price in anticipation
of generic competition (Figure 1).
Figure 1: Average annual WAC price increase over brand lifecycle of the top 100 brands, 2002 to 2011.
When brands are in the mid lifecycle period, we see evidence of varied price-increase strategies: some manufacturers take
multiple price increases per year, make moderate changes in price increase strategy year-over-year, or vary price increases
based on market conditions. Table 1 presents the annual price increases of the Top 100 brands for the period 2002 to 2011
(cumulative percent of price increases in each year in increments up to 10 percent, and percent of price increases that exceeded
10 percent). An annual price increase in the 4 to 6 percent range is the most common approach in most years, with average
annual price increases ranging from 3.4 percent in 2009 to 7.7 percent in 2010. Moreover, the majority of price increases,
63 percent over the entire period, were below 6 percent, with 85 percent of price increases below 10 percent. Recently, higher
annual price increases have become more prevalent. During 2011, the most recent year we examined, the highest annual price
increases among the top 100 brands were for Strattera, Zyvox, Namenda, and Copaxone, with 18.2 percent, 16.6 percent, 16.1
percent, and 14.9 percent annual increases, respectively.
Table 1: Mid-lifecycle WAC price-increase strategy of the top 100 brands.
One-time price increases within a calendar year have been most common, and are often taken in January or September. Recently,
taking two smaller price increases during the year instead of one large price increase has become more the norm, possibly
to avoid payer scrutiny and response to larger one-time price increases. For example, the 16.1 percent Namenda price increase
for 2011 was spread across two price increases (8 percent and 7.5 percent). Whereas previously only 19 percent of price increases
were "two per year," this practice has doubled to nearly 40 percent in the most recent three years.
The mightiest of the four Ps
The on-market list price strategies that have been used for top pharmaceuticals brands, as described in the preceding section,
have generally been less than optimal. This is because insufficient research and analyses are applied to support these decisions,
likely leaving money on the table. Price is clearly a marketing tool with high leverage—therefore, even small increases in
list price can result in significant increases in profit margin, provided there is limited impact on volume. Pricing expert
Raffi Mohammed has noted, for example, that a 1 percent price increase would result in anywhere from a 16 to 155 percent increase
in operating profit, in companies across many industries with a wide range of underlying cost structures. For pharmaceuticals
manufacturers, the key to realizing this leverage is to know where "the cliff" is; that is, at which point a price increase
will result in a downgrade in access by key payers, and a corresponding decrease in volume utilization.