Pharma's missing ingredient in its outcomes focus: Value based pricing

James Wright, Associate Director at Valid Insight delves into the common misconceptions surrounding value based pricing and value based payment in pharma.

The drive for payers and patients to get what they have paid for measured by real world outcomes is driving a huge industry shift toward the collection of real world data. A manufacturer may price their product at whatever level they choose, but it does not guarantee that the payer will buy the product.

Over the last few years the media has buzzed around the concept of value based pricing. However, many of these articles actually refer to generally value based payment or contracting.

Value based pricing

Value based pricing is the process through which a manufacturer sets a price strategy based on their understanding of the additional therapeutic or economic benefit their product brings to the patients and the wider health economy.

This may seem simple when we have hard endpoints and comparators in the market which have already set the price benchmark; a 10% increase in overall survival worth + your direct competitor price = value based price.

But what if your product does not have endpoints so clean cut as overall survival or if your product’s benefits are not in efficacy, but in safety, tolerability, the ease of route of administration or other value drivers that payers are less clear about?

Can the novel mechanism of action be a value price driver? What if you bring a novel therapy to the market, something that has never been seen before and so has no direct comparison or even an analogue product? The further away from direct comparison you get the more difficult estimating the value based price becomes.

If the manufacturer is finding difficulties in pricing the value of their product it may be that they have a truly innovative product that could bring significant benefits to the population. Or it could mean that the cost of producing the product is so high, they need to move away from value based pricing into a cost based model where the price is set using a bottom up calculation including production costs, overheads, royalties and profit.

Value messages

Whatever the perceived value price drivers are the manufacturer still needs to communicate these to the payer and gain their perception of what the added value means in monetary terms.

A clear outline of the product’s added benefits, its place in therapy and its value price drivers enable payers to objectively understand the product’s true value.

To achieve this, the manufacturer needs to fully understand a population’s unmet needs and communicate the significance of these issues to the payer. Critically, they need to convey how their product addresses some or all of these complications.

Without this process the product runs the risk of being disregarded as another ‘me-too’, even being overlooked.

Value based payment

So the manufacturer has set the price based on a 10% increase in overall survival over their competitor. As a payer buying this product you could say: ‘I will buy this product but you need to prove that over the next year the overall survival in my health economy’s population has indeed increased by 10%, otherwise I want my money back’.

This is value based payment or contracting. A simple example that relies on all else being equal however technological advances means our ability to capture disease progression and treatment effects in real time, or near real time, increases allowing payers to determine if the drugs they have paid for are actually doing what they have been priced to do.

The limitations in measuring are not due to the lack of technology in today’s market, but the following three conditions;

1)     The availability of technology that is sufficient enough to capture the required data to adequately demonstrate the outcomes

2)     The cost to the manufacturer to collect the data. Although not to the scale of an international, multicentre, double blind phase III trial, someone has to pay to collect the data and the only source of income available to the manufacturer is driven by sales of their products

3)     Trust between payers and manufactures to develop an value or outcomes based contract or payment agreement that meets both parties’ requirements

Writing about this topic led me to think about the parallels with my mobile phone. My phone is old, but I pay very little each month and use perhaps 40% of its functionality. A top of the range phone would cost me five times the amount I currently pay but I would use even less of the functionality. Has the manufacturer done enough to communicate the added benefits I could get for five times the price?

Value based pricing and the techniques behind it have been around for many years, however the pitfall I see many manufacturers falling into is focussing on one endpoint, usually efficacy, and determining price on the back of this.

A complete view of the landscape and how the product will improve that landscape is the picture that needs to be painted and exhibited to payers for product value to be truly realised, priced and reimbursed.