Challenge
Our pharmaceutical client owned a product that had been on the market for over 25 years. It had established dominant market share, experienced few branded or generic competitive threats and held a second-tier status in most managed care plans. This second-tier status created a reliable stream of revenue year after year. The product's consistent success drew little attention to aligning pricing levels with inflation and the marketplace. As a result, the product was undervalued. Our client felt it had brand loyalty, but harbored concerns that any price increase would move its product from second- to third-tier status, subsequently eroding market share.
Business Unlimited was asked to develop definitive guidance for price increases over a 36-month period. To achieve this objective, our client asked us to:
• Identify how managed care would react to potential alterations in the pricing landscape
• Analyze how managed care would respond to a one-price strategy across various strengths for the product
• Evaluate if and how eroded formulary position or increased managed care attention to the category would impact physician prescribing
• Assess the susceptibility of the category to therapeutic switching
• Evaluate the threshold for price sensitivity, and estimate the out-of-pocket expense level that would affect patient preference
Proposal
Business Unlimited based its findings on two initiatives: price sensitivity research with managed care organizations and case study research with physicians and patients.
Through qualitative in-depth interviews and extensive quantitative consultations with HMOs, PPOs and PBMs, Business Unlimited determined the product's formulary status under various future pricing scenarios. We valued the product's brand equity versus competitive brands and gauged the importance of maintaining favorable formulary position from managed care's perspective. We summarized the current contracting arrangements within the category and estimated the pricing thresholds that would attract managed care attention. We also assessed the potential impact of a flat, one-price strategy versus a unit-based or hybrid approach.
The rigorous physician and patient case study development process evaluated both physician and patient responses to potential formulary changes. We identified six analogous product situations to study and analyzed second- to third-tier switches among these products within 10 MCOs. From this information, we built a second- to third- tier share loss index incorporating the impact of brand loyalty and co-pay differentials. We were than able to test price elasticity in multiple scenarios that varied product price increases over a three-year horizon and included anticipated competitive responses. For each pricing scenario, Business Unlimited forecasted expected product coverage amounts, tier placement, and usage restrictions.
Outcome
Based on numerous managed care interviews and pricing scenario tests, we found that the pricing threshold that would move the product from second- to third-tier status was significantly higher than previously assumed. This higher pricing threshold was due not to an expectation that patients would resist switching products because of brand loyalty, but to a combination of market factors including the current market pricing schemes, the client's high market share, its low product differentiation relative to competitors and its rebate program.
We recommended that our client raise product price by a greater percentage per year for three years. This price increase maximized revenue contribution despite some erosion of second-tier formulary position. Additionally, the increase maintained a price point still well below other drugs of comparable clinical value. We projected that an annual rather than bi-annual price increase maximized the revenue contribution. We also recommended transitioning to a flat pricing structure at the indifference point as soon as possible, as MCOs preferred flat structures.
With a strong understanding of the optimal price level that could be attained over the three year period, the client was prepared to follow a tactical plan for modifying its drug's price structure. The client also had a blueprint for the frequency, size, and timing of price increases, as well as a defined pricing framework for different dosage amounts. Business Unlimited's findings confirmed that a more proactive pricing strategy was warranted, and our client acted on the recommendations by increasing prices by a greater number than it would have done previously.
