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Novel approach of Product Launches for Pharmaceutical Companies

A vital trend concerning product launches in the Pharmaceutical Industry related to the interaction they have with the payers of their products. Most payers in Europe and the US have switched their decision making on reimbursement schemes based on outcome-based models. The Big Pharmaceutical companies have the opportunity to capitalize on such a trend by shifting from a largely unit-sales based product launches to more appealing outcome-based product launches. These outcome-based product launches basically offer a guarantee to the payer that the reimbursement price they pay for a product X is directly tied to a predefined health outcome of the end user – the patient. Simply put, the reimbursements are offered in proportion to the extent of positive effect in patient health. Parameters such as recovery rates, re-hospitalizations, average health spending to treat a particular medical condition etc. could be considered in order to negotiate the reimbursement policy based on health outcomes. So, in order to increase product diffusion into the market via payer acceptance, the pharmaceutical companies have an opportunity to create a risk sharing mechanism by guaranteeing fixed % returns of money or rebates on additional purchases in case of failure to meet patient health outcomes. To further strengthen their commercialization process, some companies have also started giving away their payers an independent authority to determine whether the pre-determined health outcome has been achieved or not. Such a shift of power from the pharmaceutical company to the payers was virtually non-existent during the times when the blockbuster was the norm. This creation of a mutually beneficial risk sharing mechanism stems from the fact that a select few payers have now started to calculate effective long-term financial savings in case a disease/medical condition for an average patient is effectively treated versus when a condition relapses and calls for further reimbursement from the payer side. Also, with this arrangement, pharmaceutical companies with radically better products compared to their generic counterparts face relatively lesser threats of being replaced since it would mean lesser co-pays for patient groups (especially in the US) and pharmaceutical companies would also be able to plan future expansion operations with more certainty since they can closely approximate average sales volumes after a few months of performance observation once these contracts are activated.

While, the benefits create an impression of a flawless plan waiting to be executed by big pharma companies, there are certain limitations which hampers these arrangements. In order to constantly monitor change in health outcomes, most pharmaceutical companies as well as payers across the EU and the US would require unrestricted access to the Electronic health records of the patients, associated diagnostic laboratory tests etc. Further, they would need to identify exactly how these results could be translated into a from that can be easily analysed and made sense of. Furthermore, certain products bring about a change in clinical outcomes over many months and not immediately. So, these arrangements can’t be universally applied to all products since neither payers nor pharmaceutical companies might not be always willing to wait and watch in the hopes of securing a probable long-term financial gain. Yet another restrictive factor to such arrangements for drug commercialization is the fact that the discounts or rebates offered by pharmaceutical companies sometimes do not cover the costs of retrieving and processing the data that determines the change in health outcomes. Since most pharmaceutical companies currently delegate this authority to payer organizations, the associated costs also fall on the payer’s behalf and thus might prove to be a detriment for effectively commercializing a newly developed drug.

References:

  • Licking, E., Garfield, S., Yeo, A., Van Wingerden, M., And, A. A., De Backer, R., … Mancini, A. (2016). A Roadmap To Strategic Drug Pricing The current unit-based pricing model for drugs is too one-dimensional for the market’s present needs. Pharma firms must identify
    products that will benefit from innovative pricing models. ANGLE Targets A Rich CTC Niche. 34(3). Retrieved from http://www.ey.com/Publication/vwLUAssets/ey-in-vivo-a-road-map-to-strategic-drug-prices-subheader/$FILE/ey-in-vivo-a-road-map-to-strategic-drug-prices-subheader.pdf
  • Seeley, E., & Kesselheim, A. S. (2017). Outcomes-Based Pharmaceutical Contracts: An
    Answer to High U.S. Drug Spending? Issue Brief (Commonw Fund), 2017(September), 1–8.
    Retrieved from https://www.ncbi.nlm.nih.gov/pubmed/28953345
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Pharmaceutical Industry & the Blockbuster: Rise and Fall

Every day, novel technologies to treat various diseases, medical conditions and improve human health are being developed. The expected rate of growth for the pharmaceutical industry globally is poised to have a rate of growth of about 4.9% from $ 1 trillion in 2015 to about $ 1.3 trillion in 2020. However, the pharmaceutical industry of today faces a considerable amount of risk. While the global revenues are expected to rise steadily, the innovativeness in terms of successful new product launches by the pharmaceutical industry is way below par. It has been observed that the Pharmaceutical Industry roughly follows Eroom’s law. Eroom’s law in this context is that the number of New Molecular Entities per billion dollars spent on research and development has halved every 9 years since 1950.
The Blockbuster Business Model was conceptualized to develop select innovative therapeutics that provided an incrementally improvised functionality than its predecessors. However, a fully integrated pharmaceutical company (which handles R&D, manufacturing and sales all by itself) is exposed to risk at multiple points across its value chain. This can be proven by the observation that on an average in the pharmaceutical industry, out of every 10,000 compounds that are investigated, 250 compounds enter the pre-clinical testing stage. 5 compounds subsequently are chosen to enter the Phase I, II and III trials, out of which only one is approved by the authorities(FDA). Hence the rationale behind creating the blockbuster was always to find that one product offering that would cover for other failed prospective drugs and in addition to it still yield a high rate of return (10-20 times the net investment). Blockbuster drugs are often the results of a wide scale collaboration between companies excelling at different levels of the value chain. According to a survey carried out by Hannigan, Mudambi, & Sfekas in 2013, about 87.6% of all blockbusters were finally marketed by the major pharmaceutical industries major companies in their research are the top 12 pharmaceutical companies of the Fortune 500 list.
In the recent years, there has been an increasing pressure on the pharmaceutical companies to lower drug prices due to government initiatives for affordable healthcare. At the same time, the cost and difficulty to commercialize new drugs has also been rising. According to a study conducted by the Tufts Center for the Study of Drug Development, the life cycle costs incurred from developing a new prescription drug to gaining post-market approval is $2.87 billion in 2013 which is 145% higher than in 2003.
The major reason attributed to this rise in the cost of drug development is the increase of ‘’out of pocket clinical costs”. This means that due to stricter regulatory protocols, expensive medical consultations to study drug effects, a higher number of test subjects (in thousands) for clinical trials etc. need to be paid for. Further, on an average only one out of five thousand compounds clear medical trials and reach the drug shelf with the process taking about 15 years.

 

References:

  • Osakwe, O. (2.016). Trends in Innovation and the Business of Drug Discovery. In Social Aspects of Drug Discovery, Development and Commercialization https://doi.org/10.1016/b978-0-12-802220-7.00002-8
  • Hannigan, T., Mudambi, R., & Sfekas, A. (2013). A longitudinal analysis of blockbuster pharmaceutical drugs. DRUID Academy 2013, (1942).
  • U.S. Department of Commerce, & International Trade Administration. (2018). Overview and key findings. https://doi.org/10.1787/weo-2018-4-en
  • DiMasi, J. A., Grabowski, H. G., & Hansen, R. W. (2016). Innovation in the pharmaceutical industry: New estimates of R&D costs. Journal of Health Economics, 47, 20–33.
    https://doi.org/10.1016/j.jhealeco.2016.01.012
  • Spatz, I. (2010). Health Reform Accelerates Changes in The Pharmaceutical Industry. Health Affairs, 29(7). https://doi.org/https://doi.org/10.1377/hlthaff.2010.0432
  • Gilbert, J., Henske, P., & Singh, A. (2003). Rebuilding Big Pharma’s Business Model. In Vivo, 21(10), 1–10. Retrieved from
    http://www.fredreichheld.com/bainweb/PDFs/cms/Public/rebuilding_big_pharma.pdf
  • Schilling, M. A. (2013). Strategic Management of Technological Innovation (Vol. 53).
    https://doi.org/10.1017/CBO9781107415324.004