By Ben Locwin
Many of the pharmaceutical companies that drive the bulk of the revenue in the market spend more on sales and marketing than on R&D. They do this in an attempt to directly recoup the development costs of their pipeline of new drug products. It’s so expensive to research and develop new therapeutic molecules (over $1 billion for each treatment that reaches the market), and the attrition rate of clinical candidates is a statistic you’ve no doubt read a dozen times (more than 19 in 20 candidates that fail). Especially if those companies that conduct early stage trials lower the statistical power of the trials to look for larger effect sizes, the ability to detect ”true positive” results is decreased as well. This results in some false positive results, which are later weeded out upon further trial testing—at a steep financial cost from deciding based on erroneous trial designs.
So the strategic pricing of pharmaceuticals is a complex endeavor based on the cost of not only the candidate treatment, which is having a price determined, but also on other proximal pipeline attritions which are co-located in time. Additionally, it needs to take into account market price, volume, cost containment structures and reimbursement plans, parallel imports, competitors, patent lifespans, and planned pricing effects of future generic offerings. In cases where several drugs are available to treat the same condition(s), any direct drug comparators offer small epicycles of within-drug-class free market competition and will at some level contain inordinately-high price settings.
The negotiation of pricing using evidence occurs within a complicated framework. But when pricing is set properly, value is offered to the market and fair revenue is returned to the firm. And as mentioned above, when this money is reinvested properly, future products can continue to push the boundaries of the industry forward and offer cutting-edge treatments to the public on an ongoing basis.
Tim Worstall came up with an interesting opinion of drug pricing in the market…that drugs are too inexpensive:
And we have a reliable economic sign that drugs are simply too cheap presently in the United States. Actually, it’s not in fact just a reliable sign; it’s a complete slam dunk…despite having probably the most expensive pharmaceuticals in the world, America also seems to have shortages, meaning that the prices are too low…Please note again that this is a simple and easy economic test. If we’ve got rationing, then prices are too low–full stop (for the English), period (for Americans), this is simply so. And since we have rationing then prices must be too low.
Now, to be fair, Worstall’s piece was to focus on many of the overly- and unnecessarily-complex regulatory features in the pharmaceutical market, but it’s an interesting classical economics view of the current pricing paradigm.
The argument I hear most often from audiences boils down to the intended nature of the products produced by the pharmaceutical industry: They are perceived to be altruistic products, demonstrated clinically to improve how a patient feels, functions, or survives. And because of the social norms imbued into altruistic products, consumers largely don’t feel like they should be held to the same pricing structure as other consumables or goods that they buy.
What do you think about the current pricing of pharmaceutical drugs? How would we influence or improve the industry?
Want to learn more? Check out these resources:
- “Why Too Many Clinical Trials Fail—And a Simple Solution that Could Increase Returns on Pharma R&D,” by David Grainger, Forbes
- “Clinical Development Success Rates for Investigational Drugs,” by Michael Hay, David W Thomas, John L Craighead, Celia Economides, and Jesse Rosenthal, Nature Biotechnology
- “Failure Rates in Drug Discovery and Development: Will We Ever Get Any Better?” by William Bains, Drug Discovery World
- “Quantifying the Value of Time,” by Ben Locwin, Contract Pharma
- “Pharmaceutical Drugs Are Too Cheap in America, Not Too Expensive,” by Tim Worstall, Forbes
- “Predictably Irrational,” by Dan Ariely