Drug Pricing: Asking the Right Questions
With both 2016 and another JPM behind us, several key issues/events/trends will affect our industry in the coming weeks and months. Few have drawn as much attention from such array of constituents as drug pricing. We have been hearing the criticism for some time now—whether it was on the campaign trail during the US election, Congress, or on Twitter: something must be done to curb the rise of Rx prices.
Little has been done to date. Despite the heated rhetoric, we don’t expect a government crackdown on drug prices in the near term, but it is an issue that warrants further discussion and debate—with solutions not through PR campaigns and tweets from politicians, but from the leading voices among the leaders and innovators in our industry.
We have already seen the beginning of such a movement with companies such as Abbvie, Allergan, Novo, and J&J already pledging to curb annual price hikes. Grouped in the pricing discussion is the reaction to the perceived “high” prices for newly approved therapies.
While it is easy to negatively react to a price, the argument has to be grounded in a patient-centric approach around the strength of clinical data and its impact on overall patient outcomes. The questions become":
What unmet need does the therapy address?
Does it change the treatment paradigm?
What is the benefit to patients?
Does it demonstrate an improvement in patient outcomes?
What are the health economics associated with treating patients with this therapy?
Impact of pricing on patient access?
As large pharma continues to externally source pipeline assets through deal-making, we anticipate an active L&A market in the coming year. Given the need to project return on investment, the pricing question will certainly have an impact; and the focus of consolidators will be on value-creating innovative approaches across development stages that have the potential to significantly improve patient care (eg, novel mechanisms, compelling proof-of-concept data).
Beyond valuation, deals will also incorporate back-end revenue-based “earnout” considerations, incorporating pricing risk into an overall deal structure.
We encounter the pricing argument frequently when building financial models for our assignments particularly in our deal initiatives for both the buy and sell-side. For assets that are, at minimum, “Phase 3 ready” with substantial safety and efficacy data, the patient and health-economic benefit argument justifying pricing can be grounded in some element of fact (understanding the need for the confirmatory Phase 3).
That can be difficult for early-stage programs. It is why in our M&A assignments for these types of assets, the pricing risk is typically mitigated through a deal structure (eg, commercial milestones, tiered royalties based on revenue).
In either case, our approach to year over year pricing growth is always conservative (ie, 2%) unless there is justification for larger increases with new and significant data. In practice, we advise our “sell-side” clients to take a rational approach to pricing in the financial models. This will not only provide the foundation for valuation expectations (particularly for internal purposes), but also allow for a credible argument during negotiations to participate in the upside should clinical results and, thereby, pricing exceed expectations. Pricing is going to continue to be a hot topic in 2017, and we are sure there will be the follow-up to this piece as the year progresses. Whatever the solution, our healthcare system must reward innovation that leads to significant improvement in patient care while ensuring that the days of demonstrating incremental benefit to justify premium pricing and/or substantial annual price increases are long gone.