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Nov 05

2 Reasons Why the Traditional Biopharma Drug Pricing Model Will Fail

Public policy and generic drugs undermine biopharma’s drug pricing mode

Traditionally, biopharma companies can increase their revenue for research and overhead through price increases for exclusively owned products. (First, raise the price on drugs you’ve got a patent for. Then, people will pay the mark up to become and stay healthy.)

However, that status quo is shifting, thanks to two factors: Public policy and low-cost generic drugs. Here’s how the current environment will impact your biopharmaceutical planning – and what you can do to mitigate the risks.

Drug Pricing Policy: The Outcry Against Rising Costs and Drug Patent Exclusivity

Drug pricing policy may be the biggest minefield for the biopharma industry. At a February 2019 Finance Committee hearing, seven prominent biopharma industry CEOs faced bipartisan condemnation for high drug prices. Under specific scrutiny were so-called “patent thickets”. These patents “surround” lucrative drug franchises long after their original composition-of-matter patents have expired, maintaining exclusivity.

If Congress passes legislation that curtails industry incentives or your ability to patent improvements on existing drugs, many long-standing franchises will lose much of their current value.

The Trump administration has so far refrained from backing up the president’s early-term pronouncement that the industry is “getting away with murder” with its pricing practices with any draconian action. However, the administration’s blueprint to lower drug prices and reduce out-of-pocket costs includes several mechanisms that – should they be implemented – will further constrain drug companies with respect to pricing in the U.S.

For example, the administration’s proposed international pricing index takes aim at the dichotomy between what Americans pay for drugs and what patients pay in similarly developed markets – mostly European markets, but also Canada and Japan. Anchoring US prices for certain medicines to a reference price paid in other countries could erode your profitability.

Remember, the international pricing index is just one lever that Congress or the administration may pull to pressure your drug prices. There are many others.

The Rise of Generic Drugs – and the Fall of Your Bottom Line

If policy isn’t the killer to current biopharma pricing strategies, competition will be. Indeed, pricing constraints are just as likely to be the result of self-policing by a wary pharmaceutical industry as they are to be legislated.

Several industry heavyweights have recently introduced lower-cost “authorized generic” forms of their branded medicines as a response to public outcry for lower prices. (See Eli Lilly’s recently introduced generic version of its own blockbuster insulin product Humalog. This generic will sell at a 50% discount to its branded version.)

This trend does benefit biopharma companies in two ways.

  1. Authorized generics provide a positive public relations story to counter the floor of recent “greedy corporation” rhetoric.
  2. Generics also serve as an end-around the byzantine system of rebates and contracts they have with various insurers and supply chain middlemen like pharmacy benefit managers.

However, these generics cut into previously dependable revenue streams. Your company relies on that income to create and market new products. Without that cash flow, it’ll stagnate.

Biopharma Companies Under Pressure: What Happens Next?

This combined pressure can lead to several different outcomes. A biopharma company may:

  • Increase funding to internal pharmaceutical research & development teams, either through clever asset management or debt management using current assets as collateral. New products from R&D pipelines eliminate reliance on formerly patented product lines.
  • Seek to acquire additional products through pharmaceutical M&A – which may also require raising the debt load of a business.
  • Fold under pressure, unable to sufficiently adapt to the changing market environment or market a new product in time to boost falling revenues from undercut primary product lines.

Of course, the last outcome doesn’t have to happen – not if a company properly manages its current assets to recover previously sunk costs and fund future R&D or M&A efforts.

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