The price of medicines has always been a matter of animated, even acrimonious, debate. Most of the time, activists assume that the only way to solve social challenges is through government and charity and that the only purpose of business and investing is to make money. Responsible sections of the pharmaceutical industry reject that worldview. Consider this.
Swiss drug maker Roche reduced the price of its blood cancer drug Mabthera by 50% in South Africa. Sanofi slashed prices on its diabetes drug Lantus and its cancer treatment Taxotere in the Asia-Pacific region. Eisai cut prices of its Alzheimer’s drug Aricept in 6 Asian countries and GSK cut prices on “essential” drugs by 40% to 50% in Kenya.
These recent Big Pharma attempts at tiered pricing in the developing world signal a deviation from the age-old strategy of recovering research costs through high prices. What’s changed?
As healthcare reforms gain momentum, governments in the developed world have begun to re-examine the economic feasibility of bearing the high prices of medicines through full reimbursement to citizens. The US government has been supporting austerity pricing encouraging a shift from brand-name drugs which cost approximately $1,382 per person per year to unbranded generic drugs that cost $234 (for chronic therapy at 2009 prices).
Price cuts in five fiscally-troubled European countries cost the drug industry more than €7 billion ($8.8 billion) in 2010 and 2011. Other countries are demanding similar discounts. South Korea cut prices recently of over 6500 medicines while Australia reduced prices for over 1000 products. Both are considered developed geographies.
Clearly, growth is under threat for Big Pharma in its traditional markets.
Emerging markets in Asia, Africa and Latin America with their combination of rising incomes and deteriorating health indicators offer tantalizing prospects. There is an opportunity to extend the life-cycles of medicines that have lost patent protection in the developed world through new product indications or formulations, manufacturing improvements such as efficient making/buying of active ingredients and commercial strategies including geographic expansion, strategic pricing, disease management programs, authorized generics, and prescription-to-OTC switches.
There is also a market for new under-patent drugs as seen by Big Pharma’s investments in research for region-specific diseases. Examples include GlaxoSmithKline’s research on malaria and other neglected tropical diseases and Pfizer’s investment into understanding cancers that occur commonly in Asia.
But emerging markets are far more price-sensitive. A report released by IMS Institute for Health Informatics last week said that spending on off-patent generic medicines would likely increase from $242Bn to $400-430Bn by 2016 of which over half would be from low-cost generics in so-called ‘pharmerging’ markets. Recently, India announced that it would spend billions of dollars over the next few years on procuring and distributing drugs but that these would all be generics.
The upside of these pricing pressures is that they have led to commercial innovation. Pharma majors are developing and testing customized approaches and applying different strategies. Product offerings range from a pure-play innovative drug portfolio to branded generics to biosimilars. Sometimes, a combination of all three.
Some are experimenting with matching product ranges and pricing to geographies. Large cities – known as tier one – receive a different set of products and pricing than rural markets.
To augment portfolios, Big Pharma has struck deals with generic manufacturers or acquired some of them. It is sourcing a variety of relatively low-cost drugs from pain killers to complex cancer-treating biologics for emerging markets from them.
Customizing distribution channels (through deals with consolidated generic pharmacy chains or supermarket chains such as Walmart etc.) to reach lesser-served populations, and adapting both packaging as well as discounts to suit these new suppliers, are a few of the tactics deployed by companies to gain market share in emerging markets.
In sum, a combination of government intervention and market pressures has forced business-model changes such as portfolio augmentation, tiered-pricing approaches and creative distribution strategies. In the process, Big Pharma has begun to create access to millions of people who previously couldn’t afford these medicines.
It remains to be seen if the emerging markets strategy will succeed for these companies. International reference pricing is a continuous challenge as low prices in an emerging country can influence price determination in a much larger market, squeezing margins.
In the meantime, patient groups and health advocates ought to see in these actions proof that for-profit investment can be both a morally legitimate and an economically effective way to address affordability issues.