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How to weather the pricing competiton

In this article, global expert in life sciences pricing and all aspects of market access, Raf De Wilde, debunks this perceived contradiction and discusses specific strategies to avoid, delay or accommodate price competition to achieve long-term sustainability.

Over the years, the threat of pricing competition has increasingly become a concern. In a Valid Insight webinar on ‘Sustainable price competition – contradiction in terms?’, we discussed how price competition occurs, its potential impacts, as well as some tips for how companies can alleviate price competition.

How pricing competition occurs

If prices escalate, payers can promote pricing competition. First, they declare that certain products are therapeutic equivalents and that they prefer the cheapest version. They then request price proposals from companies and award most or all of the sales to the one with the cheapest offer. Often, payers pit two companies against each other. This tendering process has become a formalised procurement approach for several major payers.

The award criteria for tenders vary – some are based solely on cheap pricing, while others consider additional criteria such as payment terms, flexibility of supply, and value-added services. Tenders also vary in terms of customer size (nationwide, regional, group/single client). Subsequently, tendering can also impact the bottom line – the greater the payer’s buying power and the more focussed they are on cheap pricing, the greater the risk for price erosion. A country tendering all-or-nothing on the lowest price can make a company win or lose an entire market at once. It is also risky for the customer; once they award one company, competitors – who are back-up suppliers – may exit the market completely.

Avoiding or delaying pricing competition

A well-substantiated argument for product differentiation will deter payers from claiming that all available products are equal. If a product has a clearly demonstrated higher therapeutic value, there will be pressure on payers to prefer that product because there can be ethical repercussions to prescribing lower value treatments that produce fewer positive health outcomes just because they are cheaper.

A significantly higher therapeutic value can be typical for breakthrough products, which are rare to come by. Hence, it is highly recommended for companies to also differentiate through other features that are not easy to replicate.

Pharma companies can develop products that offer advanced administration. For instance, Merck Serono’s EasypodTM is a device for injecting the growth hormone Saizen (somatropin).[2] The tool’s development took 10 years and involved several observational studies that highlighted improved adherence. Therefore, there are two hurdles for competitors: to develop a similar technology and then substantiate that their version of the product offers even more value. For the drug Saizen, Merck Serono was able to move out of tenders and into contracts.

Differentiation can also be achieved through innovative patient access schemes and value-adding services (e.g. diet/lifestyle programmes and patient counselling).

If avoiding pricing competition is not possible, delay it instead. Companies can argue against the illegality of prioritising commercial impact over medical impact, rely on physician lobbying, or raise the public’s awareness of the risks of preferring cheaper yet potentially lower quality medications.

Handling unavoidable pricing competition

Ultimately, however, discussion about tendering always seems to make its way back onto the negotiation table. So, what can companies do when price competition can neither be avoided nor delayed?

Companies can be given pricing/tendering training in the form of a special pricing simulation computer game. Two companies (or teams) play the game, which involves 6 hypothetical client hospitals (programmed with buying behaviours and perceptions) that at the start of the game demand an all-or-nothing deal. The simulated market becomes highly competitive with the entrance of a better value product and then later a biosimilar/generic competitor. The two companies must come up with the best offer to secure a year’s worth of sales. As the companies place their bids (annually for 6 years), the computer chooses the most logical and attractive offer.

Based on results from more than 60 different games conducted in the last 15 years, it has been observed that the average price quickly descends over the simulated 6 years. Less experienced people tend to be more aggressive in driving down price. The lesson here is that although payers can encourage price competition, the severity of the price competition is something that the industry itself can still influence. There is the need for companies to carefully react to price changes so that the amplitude of price erosion is minimised.

To read the rest of this blog, please visit: https://www.validinsight.com/how-to-weather-pricing-competition/


27th April 2020

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