You can't have value-based drug pricing without value

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The world of drug pricing has changed – but you wouldn’t know it from recent comments by Bayer’s CEO Marijn Dekkers, who cries foul when pharma companies’ new agents are benchmarked against generics:

"We are all for only getting paid for really good drugs," [Dekkers] said, adding that as an innovative company "we have the ability to come up with treatments better than those on the market”. …

However he did add one important caveat. … "When we have a new drug that is significantly better than the previous drug but the previous drug just went generic, we are compared to the 20% price, not the 100% price".

Dr. Dekkers said that when one uses the 20% (i.e. generic) price for comparisons, it is hard to show continuously improvement of new drugs even though they are significantly better than older ones. It is "a huge dilemma [and] if we don’t solve it we will take away the economic motivation" for high-risk innovative projects. …

"[I]f the automotive industry have [sic] patents like we have, we would all still be driving around in Volkswagen Beetles from the 60s. All the innovations and continuous improvements VW has made would not have justified the price differential".

The key point that Dekkers misses is that in pharma, “better” – and, more specifically, the value of “better” – is a function of the current standard of care. In a market in which cheap agents are unavailable or ineffective, it’s not unreasonable to argue that it’s worth paying for even modest clinical improvements.

But in a clinical area that’s well-served by generics, you need to be not just better, but much better, to justify charging standard branded drug prices. An incremental innovation isn’t worth much more than an incremental price premium.

This is just one reason why pharma companies need to hold themselves to excruciatingly high standards when developing drugs in clinical areas in which cheap, safe, and effective drugs already exist. If new agents for hypertension, hyperlipidemia, and diabetes, for example, are only modestly better for most patients than the slew of generic alternatives, but priced at conventional branded-drug levels, they’ll be used sparingly, if at all - and rightfully so.

In fact, comments like Dekkers’ suggest that some pharma execs may not yet realize that there are only three options for a new drug in a genericized, well-served market: a premium-priced option uniquely suited to a high-need population (e.g., patients who have failed to respond to cheaper agents); a (relatively) cheap, somewhat differentiated first-line therapy that can compete with generics; or a groundbreaking, transformative therapy that blows the standard of care out of the water (and can be priced accordingly). If you don’t like those choices, pick a different clinical area for drug development.

Furthermore, by invoking Volkswagen as a supporting example, Dekkers perpetuates a long-held but misguided belief in pharma that innovation across all industries by definition requires premium pricing. In fact, the average smartphone price declined (in inflation-adjusted dollars) by almost 40% from 2003 to 2011, and has continued to fall in the face of increasing competition, even as products have become substantially more advanced. Today’s iPhone 6 (~$900 without a contract) costs about a third as much as a 1995 Pentium-based desktop computer (again, in constant dollars), despite the fact that this latest iToy has over 600 times more computing power than its ancient predecessor. Dekkers’ claim that sustained technologic advances are impossible without premium pricing does not appear to be true in some of the most innovative sectors of our modern economy - and pharma would be well-advised to abandon this counter-productive and logically flawed argument.

In pharma, as in most industries, price is a function of value – and value, in turn, depends on the price and performance of the available alternatives. Pharma companies that want to remain commercially viable in genericized markets need to figure out new ways to deliver innovation and remain competitive – and charging premium prices for incrementally better drugs won’t be one of them.