Drug Pricing Strategies in India

1. Cost-based pricing:

The Indian cabinet ministry proposed to control the prices of 354 essential medicines by taking into account their cost of production. Today 1/4^th of Rs. 23,000 crores domestic pharma market is controlled. The ministry has not accepted the industry’s offer to lower the current prices of essential drugs by 5-10%, because the revised policy will prevent companies escaping price control by adding new ingredients to drugs and going out of the essential drugs list. Without such measures, drug makers may add vitamins and other unnecessary components, leading to risky irrational combinations besides defeating the purpose of price control.

The essential therapeutic drugs constitute the painkillers, antibiotics, psychotic drugs, cancer and HIV drugs. The companies making essential drugs are given 150% margin of production cost, whereas price controlled drugs are given 100% margin for the post manufacturing expenses.

2. Value-based pricing:

Biotech industry has been accused of the excessive prices that have been emphasized on the cost of R & D, years of lab and clinical trials, innumerable failures for each successful product and imperative to reward investor’s high risks with commensurately high rewards.

Cost-based justification of high biotech drug prices is based on 2 nontrivial problems. 1) Biotech companies do not base prices on the cost. 2) The industry is beginning to realize that it does not want public to think that the prices are based on the cost.

The price for new product must cover the incremental expenditures on manufacturing and marketing but there is no logic to quantify past expenditures on R & D. Rather, prices are based on what the market will bear. These prices may or may not reimburse past efforts and investments, but their social purpose is to encourage future efforts and future investments. The prices for today’s products finance research for tomorrow’s products either directly through the retained earnings of biotech firms or indirectly by enriching investors who remain attached to the sector rather than moving their money elsewhere.

So, biotech companies now promote the language of ‘value-based pricing’ for their products; which offers the virtue of honesty. With this, we need face these questions: How to define value in healthcare, how do we measure it? Or is it only about value and not cost.

The link between innovation and market-based pricing: Innovation in the biotech industry is created and driven by multiple factors: the existing market-based pricing, size of the biopharma companies’ R & D budget, level of venture capital investment and level of government intervention in market. The recent history has shown that threat of price control drives investors out and dries up the resources those researchers must have to develop tomorrow’s medical miracles.

Price Control of Biotech Drugs: Potential Impact on the Biopharma Industry

Life saving, less expensive biotech drugs, isn’t a good deal for consumers?

The large public outcry or critics about the biopharmaceutical drugs are very expensive and that the biopharma industry is so greedy in making profits. The prices are so high because of the labour intensive, long term process involved, from the hypothesis that a drug might work to actually getting it through the testing and approval and getting it on the market. It takes a lot of money to do that, and of course the drug companies do make a lot of money, but it’s a win-win situation, where they make a lot of money and we get these fantastic life saving drugs. The advancements that are being made are absolutely astonishing. Do we really want to kill the goose that lays golden eggs by putting in price controls? There has to be some incentives for the investors and the biopharmaceutical companies. Again, although a good idea, the drug companies invest so heavily on bringing a drug to market, ideally the market forces should dominate or decide the price of the drug.

Drug importation is a major obstacle. People buy drugs on the internet, from overseas to get it in low prices. These drugs are sold under the international treaty to price control countries with low prices. They are not supposed to be sent it back to the original countries from where they are innovated. Thus, buying drugs overseas introduces price control into the original country, which is undesirable.

Government should stay away from any issue concerning the price control of drugs. The biopharma industry needs to be innovative, creative, energetic and astonishing. A great deal of excited anticipation is required as to what kind of drugs will be coming up in the future. This is only possible, if the biopharma industry can operate in an environment where they can be profit incentive. Thus, Government control of science or negotiating Government purchase of drugs does not guarantee or encourage creating innovative drugs.

When we talk about price control, we are taking the oxygen out of the system. That might not worth the investment and that might stop breathing. Look around and ask a question, how many countries that have the price control system in place have actually innovated new drugs, and the answer is ‘basically almost none’.

Unlike Unites States, many developed countries like Canada or England or much of the Europe have price control systems for drugs. Let us not overlook the fact that more than 90-95 percent drugs are innovated in U.S. compared to the rest of the world comprising price control countries. The price controls presents a major disincentive to create a new medication.

With the Government’s intervention, if the health insurance companies like Medicare negotiates the drug prices with the biopharma industry? It’s a very bad idea. That would create a monopoly but in reverse. Basically, that would allow the largest purchaser of drugs to negotiate the prices with the sellers. This will force down the price of drugs. Although, initially sounds like a good deal to consumers, ultimately would create disincentives to drug companies to actually invest in innovative drugs.

Some might argue that, the Government agencies like research institutions are actively involved in discovering new molecular entities that are later licensed to biopharma companies. There is a huge difference in investing, marketing and profiting new approved drugs verses the basic research. In contrast, the pharma companies actually create the pharmaceutical product drug. The venture capitalists need to get repaid too for their efforts and contribution, don’t you think so?

Biotechnology Management: The science and the business

There are so many definitions of biotechnology exists today that we do not feel inclined to add to them. Not that the definitions are wrong but they do not necessarily convey the very realistic ideas of the subject. Biotechnology is no more just an innovative academic activity, but rather an intense industrial and commercial involvement. This monograph is an attempt to provide you with a variety of issues, their relative importance and their interrelatedness in managing commercial biotechnology. By understanding the factors influencing biotechnology companies it is possible to select opportunities and position for a rewarding career. Examining existing biotechnology firms can reveal desirable credentials for careers. Many companies list the academic qualifications of their senior management. Job postings also describe necessary qualifications for specific positions. The key to a career in biotechnology, regardless of educational background or expertise, is to appreciate the unique challenges faced by biotechnology companies.

Broadly speaking, the path to commercialization of a new technology may be identified by three phases of evolution: phase one (science-driven), where primary emphasis is placed on scientific research; phase two (technology-driven), with primary emphasis on technology development and standardization; and phase three (commercialization), with primary emphasis on commercial development and application. Modern biotechnology perhaps provides an exemplar of a new form of knowledge production where academia-industry collaboration has been evident in all three phases of this evolution since its inception, driven largely by scientific and commercial requirements. Biotechnology management is a model based on multidisciplinary approaches and problem solving in the context of business applications. This model is characterized by the convergence of a diverse set of skills from a variety of disciplines.

The ultimate test of corporate strategy occurs in the marketplace. The biotechnology industry is finally starting to bring products to market. Most of the biotechnology companies are establishing links with larger, more established drug companies to give them the financial and marketing muscle they need for the next stage of their development. Marketing and sales experts are needed to study and develop markets and ultimately enable the delivery of products to consumers. The significant negative impact of patent expirations on sales represents a great opportunity for individuals who can successfully develop strong brand positions for pioneers to help them sustain sales post-expiration. The more you can explain and demonstrate the understanding of the market, the increasing levels of confidence investors have in the concept and ultimately the firm.

Biotechnology is a very capital intensive business. The manager of a biotechnology start-up faces the challenge of fostering a transition within the founding team from science-oriented to commerce-oriented thinking and action. The central role of funding and financial management in biotechnology establishes a demand for individuals with proven financial expertise. Furthermore, the potential for substantial financial returns has attracted great interest for biotechnology in public markets, creating a demand for analysts, venture capitalists, and investment bankers with an understanding of biotechnology-related financial issues. The major challenge for the biotech manager is the timely acquisition of funding to picking up a financial partner in the strategic business.

Likewise, the primary resource of any technology enterprise is its people. Attracting, motivating and retaining these highly trained individuals are the key concerns of the human resource manager. However, keeping those hearts and minds loyal to the cause is no easy feat. Today's biopharmaceutical projects have a high degree of complexity. In order to properly utilize staff and other resources like suppliers and internal groups, a manager must be able to clearly visualize the desired goal. Human resources constitute an increasingly critical function in any biotechnology company, particularly in an industry that's in an increasing state of inflation. Middle managers and human resources experts are needed for their specialized abilities.

All businesses have to keep ahead of the competition and there is no business activity more dependent on innovation than biotechnology. The creation of innovations in a knowledge intensive biotechnology sector had a profound impact on the biopharmaceutical sector. Considering the prospectus of patenting new drugs and diagnostics both the inventor and a manager of an invention-intensive business will need to understand to make meaningful decisions on the subject. Because of the importance of intellectual property protection in biotechnology, the life science graduates with technical and legal expertise are needed to write and defend patents and assist in the collection and evaluation in the competitive biotechnology industries.

Although, an attempt is made to touch upon all the major aspects – marketing, finance, human resource, intellectual property, etc. - that are part of the business, it would be impossible to cover biotechnology management in one such write-up. In such a rapidly changing environment much of the technology and managers will appear very different next year, next month, and even tomorrow. What an exciting industry it is! It is risky and deeply rewarding. It is fascinating and frustrating but never dull. For all that excitement, you must become, like me, part of the experiment.

References:

1. Konde, V. (2007). Biotechnology Management Blog.
   
2. Konde, V. (2008). Biotechnology in India: Public-private partnerships. Journal of Commercial Biotechnology (2008) 14, 43–55. doi:10.1057/palgrave.jcb.3050079; published online 27 November 2007