This is the volatile environment that pharma is operating in—and smart companies need to wake up to the new reality, says Tom Nagle, founder of consulting firm Strategic Pricing Group (now a member of Monitor Group) and co-author of The Strategy and Tactics of Pricing. Nagle believes the US goverment will soon follow Europe's lead in taking a greater hand in price negotiations, and pharma will need to be able to communicate the value that products offer. Here he discusses how pharma can meet that challenge.
How have pricing issues changed since you published the first edition of your book?Until the 1990s in Europe and until only recently in America, the pharmaceutical industry lived in a world of its own. It did not operate in a normal market; it was a market where the person making the purchasing decision was neither the person consuming the product nor the person paying for it. It was a crazy world.
It also wasn't a normal market that was driven by value. And that's what's changed. It has definitely changed in Europe, and it's changing in America. Good pricing was all about setting an optimal price level given what customers were willing to pay. And that willingness to pay was almost unrelated to the drug. It was very much related to things like how frequently companies could detail prescribers.
Ten years ago, companies were in a situation where better anti-infectives were curing patients who otherwise might have died, new gastrointestinals were reducing the number of ulcer operations, and the first statins were preventing countless heart attacks. The value of these drugs was so great that worrying about what companies were paid just wasn't that important. People were more concerned about the benefits they were getting.
But we're now at the point where we're making more incremental improvements and looking at smaller and smaller patient populations. And these drugs cost immensely more than those early statins and those gastrointestinals and those anti-infectives.
So we're in a situation where companies have to justify value, and that creates a normal market for the pharmaceutical industry. You know, I hear people all the time saying, "We're going into this crazy world." Well, no, you're not going into a crazy world. You were in a crazy world. You're going into a normal world. Good pricing used to be about setting the optimal price, given what people were willing to pay. Now pricing has become a lot more complicated because good pricing is about getting paid for the value you create.
Europe is fascinating to watch. Could what's happening there—reference pricing in Germany, for example—happen in the United States?