Pharma: Please stop blaming R&D for high prices!

I cringe every time I hear a CEO or pharma policy representative suggest that high prices are necessary to encourage innovation. It implies that pharmaceutical prices ARE high because of the investments made to get products approved. Thinking in this way is a mistake. It’s falling victim of the Sunk Cost Fallacy – as the value of a product in the market is completely disconnected with the amount of investment to get that product to the market. Let’s look at this in more detail.

For years, Pharma, PhRMA, and Bio have made the argument that we need to have high prices (particularly in the United States) to enable investment in future biopharmaceutical research. However, the monies flowing into biopharma flow from the high profitability of the industry, NOT directly from high prices. In fact, high prices COULD divert broad scale research AWAY FROM diseases that affect large portions of the population, i.e. diabetes, heart disease, common forms of cancer, by making orphan diseases ‘artificially’ profitable. This is (potentially) fuel for another piece in the future.

Here I want to talk about what we really use to price pharmaceuticals in the United States. The process is simple. We take all possible clinical outcomes, model the financial offsets (also known as HEOR) if they are available, and talk about potential patient populations – both at launch and over the drug’s lifecycle. These are presented in a brief designed to mirror a condensed form of the pharmacy and therapeutics dossiers produced by U.S. payers during the review process. Yes, these dossiers do benefit from and include various outcomes of the R&D process. But there’s not a single payer in the U.S. – state, Federal, or commercial – who cares how much money was invested to produce those clinical outcomes.

Once these value propositions are completed we debate their merits and try to understand where the product fits within the current set of options available. We attempt to include developmental products that will likely come to market during the products’ protected period. We include competitive product characteristics and trade-off various products’ value propositions. Generics & biosimilars will typically offer more value-for-money versus branded alternatives. Many payers have generics first preferences. Understanding this, we work with payers to understand their preferred treatment pathway, and where the new agent fits within that treatment pathway. These treatment pathways create the drug Tiering and controls that define coverage. Depending on the therapeutic area’s unmet need Step Edits (through Generics or Brands) may be appropriate. Depending on the clinical outcomes from misuse or off-label use, prior authorization may be appropriate.

Again, at NO TIME do we talk about the investment required to bring products to market. Because these investments aren’t relevant to the value of the products we produce. Payers don’t care.

Imagine a couple of examples –

First, my wife and I purchase a property in the mountains, far off the road and away from others. We invest to bring expensive building materials to the site and construct our dream home. After we’ve built the home and enjoyed it for years, we decide we want to sell the mountain home to purchase something else. Buyers will come to the property and evaluate the value we’ve created relative to the replacement cost, building from scratch, and their perception of the value of being able to live/vacation at the property. They won’t and shouldn’t care how much money it cost us to build it – instead their perception of value will stem from what we’ve created.

Another example…imagine if the film industry constantly reminded us that we need to pay more for movies in which they’ve cast expensive stars. They’d say, ‘public, you’d better go see this movie because we spent $200m to film it!’ and ‘if you don’t go see these fancy movies, we won’t make them anymore.’ They don’t say that because it’s laughable. Everyone knows that stupid movies with expensive stars that don’t make money flop. And Hollywood, Bollywood, and now China will continue to make movies because SOME make a lot of money.

We need to get more sophisticated about the way we talk about value creation in the biopharma world. It would be great to have a consistent view of value creation and reward – and I believe that will happen in my lifetime. In the meantime, it’s important to discipline yourself, your organization, and your leadership to avoid falling for the sunk cost fallacy when pricing pharmaceuticals & talking about your pricing. Because those of us in the know see through it, and it sounds silly to pharmaceutical outsiders.

Pricing 202: The Importance of Customer Choice (The Sufferfest)

Rarely do I get to bring my passions together, but today’s one of those days.

On September 28, 2018 The Sufferfest, an on-line training tool for cyclists increased their prices from $9.99/month to $12.99/month while keeping the annual pre-paid subscription at $99/year. This was brilliant. https://thesufferfest.com/blogs/the-sufferfest-blog/why-were-changing-our-prices

Background about on-line cycling training platforms for folks who don’t know what a ‘smart trainer’ is

First, there are some important points that are critical to understanding The Sufferfest’s market. The Sufferfest is a tool for cyclists to use indoors on their ‘smart’ trainers. This is important for folks who are time crunched and/or live in climates where unseasonable weather limits their ability to ride outside for months on the year. The Sufferfest, like many global companies, derives much of its revenue from the USA, Canada, and Europe (I’m guessing, though they are based out of Singapore/Australia). Thus, the late Fall and Winter in the Northern Hemisphere is the time for them to make the bulk of their money.

Additionally, with a month-to-month model athletes are likely to only sign up for the Fall/Winter months and then will cancel their membership. SaaS (Software as a Service) pricing often provides (large) discounts for upfront payment. Companies love to lock in revenues and the cash flow favorability of such pricing strategies is obvious.

The price increase

Today I want to focus on both the SIZE of the price increase (30%) and the maintenance of the $99 annual price. As objective marketers and pricing professionals know, companies are more likely to benefit from price increases that are sensible and well communicated to customers. Put another way, it’s unlikely that revenues will go DOWN due to this price increase.

The Sufferfest faces steep competition from other, ‘more’ interactive competitors – Zwift is the best example. Most riders are unlikely to pay for both for the entire year…and even doubling up during the winter seems like a luxury (though I might do that as ANYTHING that keeps me on my bike in the winter is godsend…). Zwift took a price increase about the same time last year. Thus, the price increase could be seen both as reactive to Zwift’s pricing strategy as well to take advantage of the pricing differential that Zwift created.

Let’s analyze The Sufferfest’s pricing decision –

BEFORE

At $10/month and $99/year – the breakeven for an annual membership is 10 months.

Effectively, it’s more about whether you want to be charged up front or throughout the year. Sure, a 20% discount is generous. But, it’s easy to think that you’ll take a break during the heat of the Summer months. Surely, few do, but that’s the thinking.

After

A decision needs to be made upfront – the discount for prepayment is now 56% and the breakeven is 8 months. If you KNOW you’re going to ride (hard, really really hard, but that’s another post) only for the worst of the Winter months, then money can be saved with the month-to-month option.

I’d say that the $12.99/month option was a perfect price point. They are still $2 cheaper than Zwift and they’ve managed to increase their price by 30% (as mentioned above). This also enables them to increase the annual fee in 2019 to $120+

B2C pricing always has an element of optics to it. As a long-time The Sufferfest rider (I actually own all the videos before they went on-line, but love the new ones…thus I support their new business model) I can ‘see’ the value in $13/month being a sweet spot between $12 (otherwise why take a price increase at all) and $14/month (potential for folks to say ‘look you’re not offering as much interactivity as Zwift, I’m outta here). But I’ll have to jump on some The Sufferfest chat rooms to see how people are reacting.

Business implications

Before the pricing strategy didn’t really SAY anything to potential customers –

“come and try it out.”
“If you like it, stay.”
“If you pay up front, we’ll give you a (minor) discount.”

Now the pricing strategy says a lot –

“come and try it out.” (they’ve kept the trial period and the monthly rate is still low)
“There’s a 56% discount for paying for a year if you like it”

Customers then self-segment into annual folks and month-to-month folks. Consumers really have to make a tough decision when they sign up or shortly thereafter…

Self-segmentation is hugely valuable. As is getting annual pre-payment for SaaS offerings.

Why not take the annual price up?

While it’s likely that The Sufferfest would have made even more money by taking up the annual price too (as I mentioned a price point of between $110 and $120 inclusive seems optimal for 2019) the threat to the business of doing too much too fast exists. It’s clear from the post that The Sufferfest plans to retain as many current riders as possible using the $99/year strategy. It’s a great objection handler – yes, our MONTHLY prices went up, but we want you to stay for the year and that price strategy didn’t change.

And, as mentioned above, they should be considering an increase during 2019 for the annual price points as well.

Conclusion

I may be leaving out a passel of supportive details from years in the pricing trenches. Also, I realize that some of my arguments ($13/month and $99/year are and look ‘right’) are completely subjective. But I wanted to put together this post today to make the point about pricing against competition and allowing self-segmentation of pricing. Too many organizations are afraid of price as a true strategic option despite it being one of the most critical elements of ANY organization’s success. Also, I like getting out of the healthcare area every once-in-a-while to talk about other things that I’m passionate about.

Disclaimer: I pay for The Sufferfest and Zwift (though I’m currently, at the time of post NOT a subscriber of either; as I cancelled my subs during a period of zero riding as I got ChiralLogic off the ground). I do not and will not take money to post anything on ChiralLogic.com – and I don’t have a professional relationship with any company mentioned in this post.

Market Access is a Jam – How good is the groove your team is making?

I recently pitched, and lost, a large project where the client wanted to bring ‘innovation across the board in every aspect of the launch.’ While it’s critical to have aspirational targets, it’s too easy to underestimate how critical the basics are in building a platform that enables innovation. Only once the foundations for a successful launch are in place, can a company even begin to start innovating.

Market Access is like jazz music – first each member of the team needs to learn the tune, the melody, the harmony, and the various parts of the composition. While they focus on their area (or instrument) they need to appreciate the ways that other parts of the organization contribute to launch readiness (how the other instruments contribute to the score). In a Jazz band, the solos, riffing, and mind-blowing innovation can only arise AFTER everyone is completely comfortable with the entire song. Imagine if the drummer started a drum solo while the band was learning the song – and at the same time the bass player started experimenting with syncopation…the entire song would be a disaster.

But this is what happens when brand teams try to innovate from the outset, without building the frameworks necessary for success. As an experienced Market Access professional, I know the part/role I’m to play in the launch. I know where and when I need to take the lead and when I need to fade back into the background, while still ‘keeping the beat’. It’s exciting to work with the best in Pharma commercialization whether the professionals come from trade, legal, compliance, sales, contracting, finance, clinical/medical, or other areas. Problems exist however, when teams have a different vision for what’s needed, don’t agree on the basic strategy, or enable/allow a culture of blaming market access/pricing/legal/compliance/sales or any other part of the organization for failure. Continuing our analogy, this is permitting dissonance…

This isn’t about ‘staying in your lane’ – in fact, the beautiful part of Jazz is that the instruments often switch roles with the rhythm section taking the lead and the other parts of the band either stepping back or keeping the beat during other’s solos. It’s about making better music, about enabling and taking advantage of ideas regardless of where they originate within the organization.

Regardless of where your innovation is going to develop – get the basics down FIRST and COLD and THEN worry about pushing back the envelop. It’s likely that there are folks within your organization and outside who’ve succeeded or failed in similar circumstances. Why not get their insights and integrate them into your launch strategy? Also like Jazz, you can’t have one plan anymore – you need to have your preferred g to market strategy and at least one fallback strategy ready to go. The discipline of creating your fallback will open your minds to strategic alternatives and better enable your organization to make the right decisions when things, inevitably, go slightly off plan. (even if the likelihood that you identify ‘THE’ alternative outcome in the first instance is negligible – if we were that good at forecasting the future we’d nail the strategy the first time…or the second time…)

In an ideal world, Pharma market access would be more like a formal symphony – but it’s just Jazz in the real world. Instead of overly formal precise notes that each team plays, things come too fast and improvisation is much more valuable than the written plan. Which isn’t to say that you shouldn’t ‘plan tight and then hang loose’ (as a respected friend says) – and I’m the guru for formal pricing bands for BOTH managed care and field sales forces after all. There’s excellent reasons that ‘everybody’ does the basics of market access similarly – ignore those at your own peril. Learn the score. Build a formal, tight, integrated launch plan FIRST. Then enable the kind of trust, fluidity, and creativity of a seasoned Jazz quartet and you just might find yourself grooving (and truly innovating) together through a profitable, productive, and exciting launch.

Coupons: Transaction Cost Fallacy & Why Program Design Matters (More)

How to make a classic pricing error in Copay Card Vendor Selection

At the recent CBINET Formulary, Copay, and Access Summit, I heard tales of finance and procurement strongly suggesting and even forcing brand teams and Centers of Excellence (COEs) to select vendors based on lowering transaction costs. While establishing and maintaining cost effective programs IS important, focusing on transaction costs when selecting vendors is a classic pricing mistake, here’s why:

#1) Transaction costs represent a fraction of the investment in the program

Let’s simply assume that fees represent a total of 5% of total program cost, with patient benefit taking up 95%. That’s a ratio of 1/19. If the goal of the program is to truly cut costs, it would be 19 times more efficient to focus on reducing the patient out-of-pocket expenses, or better yet as we’ll see, enable those investment dollars to go farther.

#2) Reducing patient out-of-pocket expenses, though VASTLY more efficient than reducing program management/transaction costs, isn’t REALLY the goal either

As your sales force produces more scripts, your total expenses for these programs will increase. The goal of the program should be to increase NET revenues. Since BOTH the patient benefit AND the transaction fees are tied to filled scripts, the goal should be to increase the number of filled scripts. As Luke Greenwalt puts it, increase your script volume AND your efficiency ratio and you’ll increase net revenues. In this case you’ll have both higher transaction costs and higher patient benefit. But you’ll also have a lot more net revenue with which you can pay your expenses.

Unless your market is extremely mature with completely flat script generation and an immovable efficiency ratio – in which case, perhaps focus on optimizing BOTH expenses and patient benefit. This is because it’s not possible to increase net sales in this kind of market using patient assistance.

#3) Therefore, focusing on the 5% (expenses) at the expense of the 95% (dynamic program design) misses the point

From my experience, borne out at the conference as well, the focus on decreasing transaction costs may be due lack of differentiation in program design. Clearly, Finance and Procurement teams solely focused on expenses don’t believe in program differentiation. I tend to believe that card providers overstate the potential sales lift from their program designs; card providers should do a better job helping stakeholders to understand the dynamics of these leveraged programs.

I mentioned Luke Greenwalt’s efficiency ratio above – and spoke with the leaders of each of the major coupon providers at the conference. Each had his or her own suggestion for differentiating their services – via increased compliance offerings, better program design, improved data and reporting platforms.

As we’ve noted above – improvements in program benefit design are 19x more likely to improve your program’s bottom line. Let’s look at an example

ACME Pharma – procurement/finance tell brand team to switch from Good Co to Cheap Co

Savings on transactions = -20%

Loss on Program design = -10%

$100m program (to make math easy)

BEFORE: transactions and maintenance = $5m

Program investment = $95m

ROI of the program = 2 to 1 (this number was presented at the conference)

Yield = $180m – $100m = $80m net sales lift

AFTER: transactions and maintenance = $5m * 0.8 = $4m (reflecting the 20% transaction savings)

Program investment = $95m (held constant for analysis purposes)

ROI of the program = 1.8 to 1 (previous efficiency -10%)

Yield = $171m – $99m = $72m net sales lift (reflecting a loss of 10% versus the previous net sales level but an ROI of -800% versus sticking with your previous vendor + $1m saved versus -$8M lost)

But what if the company were to switch to a vendor that was 15% more expensive but 20% better at program design – after all the best doesn’t come cheaply

Excellence Pharma – COE and brand team switch from Good Co to Great Co

Increased Expenses on transactions = +15%

Gain from better Program design = +20%

Same $100m program

New: transactions and maintenance = $5m * 1.15% = $5.75m

Program investment = $95m (held constant)

ROI of the program = 2.4 to 1 (2 from before times 1.2)

Yield = $228m – $100.75m = $127.5m net sales lift

Versus the original program, that netted $80m, you’d be ahead 59%!

Coupon and copay dollars are leveraged – because they often take advantage of managed care money that you wouldn’t otherwise get. Please don’t focus on the pennies and miss picking up the dollars. And you shouldn’t WANT to work with vendors who want to play the low-priced transaction game. How can you trust that they have your best interests in mind when they can’t demonstrate their value in this way – and avoid an industry destructive price war. Maybe it’s better to go with a vendor who can explain the math behind WHY they’re maintaining their transaction fees at a profitable level.

Finally, at some point, copay and hub vendors are going to wise up and ask for percentage of WAC – as do wholesalers and specialty pharmacies. It might be a better overall deal for pharma to cease this race to the bottom before the industry’s best adopt this approach.

Also published on Linkedin

Building an innovative managed markets function…

Who’s responsible for managing and coordinating the Innovation center for your Managed Markets and Pricing group? I’d be willing to bet that it’s not centralized, not properly funded, and working on the wrong things. It’s hard to ‘fix a plane while you’re flying it’ – as one of my favorite mentors likes to say.

We all know the reasons that Innovation doesn’t get enough attention in the Managed Markets functions within medium to large pharma. And, no, I’m not talking about the work that you’re doing getting ready for so called ‘innovative’ contracts. I’m talking about preparing your organization for the tectonic changes that are coming through innovative technologies, blockchain, population demographics, etc. I realized recently that somewhere between 60 and 80% of my time in-house was spent on innovative programs – that’s a LOT of time spent on thinking about the future.

Reasons to consider making innovation a full-time focus of a single individual within your Managed Markets team include:

Skunkworks yield results
If you’re not innovating, you’re working on incremental process evolutions and are unlikely to be industry leaders
The future is coming, and not everybody can be a leader, but there’s no reason to lag behind

Let’s look at each of these:

#1) The history of skunkworks goes back to at least the Allied response to the Second World War. The idea that people are more innovative, especially when viewed in terms of results per unit of time, when focusing solely on innovative projects makes intuitive sense. However, how many managers do you know who can say, ‘while I have no idea about the value of the project or when it will be delivered, ‘SURE!’ let’s green light it.’ But it’s like R&D for your managed markets function. Without investing time, energy, and money into innovative approaches how do you know whether your planned improvements in your operations are world class?

If people and teams have daily tasks to support the current business AND a mandate to innovate, the day-to-day tasks will always trump thinking about building the future. Today’s fires ALWAYS burn brighter than tomorrow’s potential conflagrations.

#2) One of the biggest frustrations I’ve had in my professional career is how much of the business calendar is devoted to focusing on incrementally fixing fundamentally broken business processes. I’ve spent an inordinate amount of time developing integrated managed markets databases, sometimes because the working one we inherited was broken through mergers and acquisitions. How much of YOUR time is spent on building (for) the future? Clearly every successful biopharma company puts an incredible effort into building LAUNCH strategies – and I’d like to think that we’re pretty good at it. But what about capturing the learnings from what worked during one launch and applying it throughout your organization? What about building the contract management application of the future? Who’s working with finance on the next generation GTN solution for forecasting and monitoring your progress including coupons and copay cards each month of these launches? It’s very difficult to be both a best-in-class operator while being a world-leading innovator – in fact, there’s an argument to say that those are two different professional profiles entirely.

#3) One of my favorite lessons from business school was the fast follower theory. While it’s exciting to be a true innovator, it’s often even more profitable to be a fast follower – and specifically building capabilities to respond to competitive developments is the mark of a true strategist. For example, during my days guiding global pricing for Bausch + Lomb, we made a lot of money through taking strategic OTC price increases around the world. In every case, we considered the relative market position of the brand, the likely competitive response, AND the wholesaler/retailer responses. It was critical to understand these competitive responses from both a directional and timing perspective, to properly forecast when our price increases would generate profitable sales. And, most frequently, our competitors HELPED our cause by being fast followers and matching the strategic direction of our price increases (they didn’t need to ACTUALLY match our price increases, but that’s a matter for another blog post…)

When your competitors innovate, what can you copy quickly and adopt in your organization? You don’t have to follow every lead. Being a fast follower means that you can potentially avoid disastrous innovative ideas, but you need to build an agile enough organization to quickly follow others’ leads.

Where does this lead? There are two options – create a center for innovation within your Managed Markets team or bring in consultants with the ability to translate best practice ideas to your organization. Here’s where the insights from a company like ChiralLogic shine. We have the strategic thinking to keep up with consultants like McKinsey, Deloitte, and BCG. This is matched with exceptional domain expertise and recent launch experience from INSIDE pharmaceutical companies. It’s very difficult to understand the quality of a company’s innovative ideas internally; however, the pleasure of being independent is that I can now see where we were innovative and where we were lagging.

So dedicate someone from your team to be the champion of innovation for your managed markets and pricing team – and have them give us a call, we’re happy to help.