Part 4: Impact of International Price Reference on Pharma Revenue
By Voytech Sudol, Director & Katie Hayes, Content Writer, Product Marketing Life Sciences, Model N
This is the final part of a four-part blog focused on Model N’s Global Pricing Management (GPM) suite, which maximizes revenue by enabling users to optimize and protect prices globally, throughout the entire lifecycle of the product. Parts one, two, and three of the four part blog can be found here, with emphasis on data consolidation through the GPM Foundation module in addition to approaching an optimized global launch sequence realistically with Global Launch Excellence (GLE).
Drug prices remain an intense focus for global payers and manufacturers, as the complexity of treated diseases increase therefore prompting higher costs of development. Costs of developing a drug are now an average of $2.6 billion—roughly one billion dollars more than they were in the early 2000’s. Company stakeholders are therefore pressured to regain those expenses, however increasingly narrower indications leave the only option to raise prices.
We’re now in a situation where manufacturers of products launched in the last 24 months are looking to achieve combined peak sales of more than $72 billion while global payers are trying to decrease costs. A major weapon used by the global payers to ensure lower prices is International Reference Pricing (IRP).
A concept that first originated in Europe, IRP is the practice of using the price of a medicinal product in one or several countries in order to derive a benchmark, or reference price, for the purposes of setting or negotiating the price of the product in a given country. If not mitigated, the payers’ practice of IRP can erode the price by as much as 15% over the lifecycle of the product. That’s why approximately 90% of European payers currently utilize IRP and of those, almost 70% use it as a main driver for decision-making.
IRP is not confined to the European region; it is used in 87 of the 196 countries worldwide to drive down medicine costs. That said, manufactures traditionally focus on the 85% of global pharmaceutical spending in the top 20 developed countries. However, the focus must shift as within two years, US and Canada derived Rx revenues will decrease to 46% of the total. The rapidly aging, and increasingly wealthier, populations of Asia, Africa and Australia will deliver 30% of the total global Rx revenue. Naturally, this shift will force manufacturers to consider a sizable expansion of visibility and ability to control prices in those markets.
In tandem with the necessity of having global price optimization is the ability to offer flexibility throughout the lifecycle of the product in response to market changes. Within the last four years, 37% of EU countries changed their IRP methodologies—each change having the potential to result in up to an 80% price cut in another country. Hence, it is extremely important to develop a systematic approach to handle price change requests and approval processes, which at any large organization can easily reach upwards of 2,000 change requests per year. In fact, automating these processes will not only deliver superior results but at the same time significantly reduces operational costs.
With continuous changes occurring globally, having a set strategy in place to continuously adapt to market changes is critical for company success. As part of the GPM suite, Model N’s IRP module increases the overall revenue of the product by designing and consistently executing the optimal price strategy. Manufacturers will be able to increase their market responsiveness by efficiently responding to price change requests and has the proven potential to increase the total revenue by 6% as a result of reducing price erosion. All facets of the suite work in sync to respond to inevitable market changes while maximizing revenue across the entire lifecycle of the product.
Join us October 10-12 in Vienna, Austria for our Commercial and Pricing Innovation Forum to exchange ideas and discuss innovative strategies with other industry thought leaders.
If you have any questions about this blog post or would like to discuss this topic further with the author, feel free to contact Voytech Sudol at email@example.com.