Global Pricing Strategies for Pharmaceutical Product Launches - Assignment Example

Principles of Economics Name: Unit: Course: Professor: Submission Date: Qn1. Case summary Following the hiked prices of cancer drugs, various medical cancer expertises has sought to question the pricing issue, which is thought as unsustainable and unrealistic. This article looks at various reasons for pricing strategies of cancer drugs (Goldman, Leive and Lakdawalla, 2013 p1). In determining the value of cancer drugs the drug manufacturers have to rely on an approval and reimbursement system that interferes with their expected value of their drug product thus leaving them with no other option rather than recovering from their investment via high price set. Some regulators for instance have put forth their threshold, to ensure cost-effectiveness that not only brings forth a price floor but also a price ceiling, which if binding interferes with the market price. The concerned parties thought that these systems ought to be placed within a pricing flexibility measure that accommodates patients upon information availability of a new drug. Thus, matters of demand and supply of a new drug ought to be looked at to ensure accessibility of new drugs. Oncologists, points out that cancer drug pricing comes with a package of how long or effective is the drug likely to support the person upon its use (the drug worth, the drug social value) were aggregates of concern towards reducing or increasing the prices. The article argue that the manufacturers of cancer drugs would appreciate a 10% return on their investment on a new drug, although this sounds reasonable, to aid in more research and development of new drugs, but this would not be practical in either developed or developing country. This is because, some cancer drugs, in reference to prolonging life are only realized upon consumption. Unfortunately the regulators are not prepared to review the cost henceforth as such the initial price is set high ((Goldman, Leive and Lakdawalla, 2013 p40). Some readers may question on the need to wait until such social value are realized prior to approval, however with cancer drugs justification of quality of life improvement may take more than a decade. While this may be feasible within research, the challenge is that there may be many cancer victims going to the soil while effective therapeutic product was on trial. Further, the longer the length of research the longer the expected start up cost following the long-term investment. As a result following this pertinent issue Food and Drug Administration among other prominent regulators have pointed out the option of “surrogate endpoints” like observing tumor size reduction during drug trial as an indicator of expected clinical survival outcome. However, there exists a unique difference between reimbursement and approval decisions. Bearing in mind most research are funded by insurance, in cases more so when the drug is expensive they may not rely on the surrogate end point approval, prior to evidence supporting that the drug actually is reliable to extend life or increase survival. Thus, lack of immediate coverage is a contributory reason to high price tag. The present reimbursement system does not capture social value of drug use and thus, does not match incentive with the drug value. In other cases, the drug could be found to meet the objective of therapeutic management of other diseases or ailment that the research did not capture for instance imatinib, while more benefits should trickle to the manufacture, the reimbursement does not capture such. Therefore, no more benefit accrued by the manufacturers for their innovation. It is good noting that if the regulators took the initiative to raise prices in reference to added value, manufacturers will not set high prices while launching the drugs as they would have less incentive. Also, regulator would campaign for lower reimbursement until and only when a new clinical evidence is garnered that would promote new higher prices setting. Owing to the insensitive stock market regulation to new information that fails to match the price of the drug to its value the manufacturers increases the price (Goldman, Leive and Lakdawalla, 2013 p41). Also, cancer drugs are only reimbursed in reference to amount of sales made thus, calling the need for increased cancer drug prices per unit (p42). Qn 2 Schipper, Pai and Swain, (2008 p3) similar to other economic activity, health care imperative is to come up with a product that is on demand and affordable. Competition in healthcare does not bring on board the Schumpeter’s creative innovative power. In a business world, where there inherent competition, services, products and institutions come and pass and people change their undertaking. In healthcare there is lack of such mechanism that can quickly remove all resources from failing products, otherwise the sticky system administered looks unto the undesired or obsolete scarce resources, the drugs. But, the system lacks the patient’s voice. This, is clear from the article as the patient may suffer while unapproved and potential drug to certain ailment queue waiting decision for approval it its use(Goldman, Leive and Lakdawalla, 2013 p41). Garber, (2008) also adds that the conventional fee-for-service Medicare they are tied to limited Advantage plans that might be imposed to control utilization on health care. Such include the capitation, utilization review, selective contracting and prior authorization. Reimbursement is a fundamental tool geared towards expenditures and utilization control. Medicare’s for instance it has enormous power and thus, providers ought to limit the offered reimbursements. Further, the reimbursement fall prey of lack of willingness to set reimbursement tool. The reimbursement system suffers from lack of reimbursement cuts, leading to skepticism in reference to its ability to control Medicare program expenditures. As thus, it assesses the services and products in the healthcare to reimburse following evidence on an evaluation to ensure effectiveness. Hence, the reflection of hidebound reimbursement system in our market today. In a normal circumstance, the demand of a product or service if it increases the supply increases. Increase in demand is factored in by the price in the market. When the price is goes down the demand will increase. However, decrease in price will result to limitation in quantity supplied, thus decrease the product or services supplied. There will be more research and development taking place if there were clear, efficient and effective reimburse system, leading to increase in cancer drugs in the market at low prices affordable by many people. However, owing to the paucity in the reimbursement system despite the fact that the demand for patent drugs remains high following the willingness to make the pay of those with cancer, supply will be low, thus not meeting the needs for everyone due to high cost, figure 1. Thus, due to production cost, technology and investment on biology substitute which are costly, there is always price shifting upon realizing the value of the cancer drugs on the patient. Thus, the manufacturers may choose to raise the price, and thus there will be change in demand of the same drug, since it remain unsubtitutable product as cancer suffering patient long for long health and improved quality of life. In this case, demand will shift to the left, figure 1; alternatively, since demand might remain high regardless of the price, this may result in the movement within the demand curve. The hidebound reimbursement system though the key cause of the demand-supply elasticity, and high drug cost, the reimbursement system is fundamental. This is because many patients (demand side) rely on the system for management failure to which the cost would be unaffordable. According to Goldman, et al., (2010) when out-of-pocket cost is reduced by 25% there is increase in 5% chances that a cancer patient’s starts specialty drug therapy. Thus, demand shifts to the left figure 2. Also, findings show that those who begin specialty cancer therapy following 25%-out-of-pocket cost reduction the treatment claims are likely to go down by 1-3% although this depends with the drug, thus shifting the supply to the left figure2. Also, realizing the value of these drugs is estimated at 4 times what the insurer or patient pay, the supply and demand owing to the end mutual fact they are likely to all be high, thus calling for policy regulation not to over-price the healthcare. Goldman, Leive, and Lakdawalla, (2013) Also, it ensures the cancer drugs in place are effective in reference to value promised in the research. Garber, (2008) points that if the reimbursement system decides not to cover a certain intervention then it means there is no payment made, and should reduce and eliminate its utilization. Thus, coverage policy application remains a vital element in expenditures control, and a well-designed coverage policy should promote medical care use which is effective, as it avoids inappropriate and ineffective care. As thus, it will contribute towards value health for money. Figure 2: Supply, Demand and Price Movement in the Drug Market The hidebound reimbursement system can be a key reason to market failure. Since the manufacturers understands the shortcoming of the system, they have a mindset that they choose their prices to accrue returns. This result to the target population bearing the deadweight loss, shortage in surplus impacts the population as it incurs the burden, subsequently resulting to a price ceiling consequence where the market price is below the market equilibrium Figure 3. Figure 3: Price ceiling Qn3 Pricing strategy Price determination is a key element among any pharmaceutical company. The process is affected by analysis of demand in reference to, regulation constraints evaluation, analysis of health outcomes, account segmentation and market research (Rankin & Bell, n.d. p1). Drug pricing is a core aspect in determining the profits of any pharmaceutical industry. Premium pricing with a new drug entrant into the market aids in covering the innovation high cost and ensure the enterprise is profitable. Depending on the objective of the firm, the pricing may be set for various reasons; utilizing capacity, improving margins, gaining new customers, enhancing brand loyalty, gaining and defending market share (Kolorama Information, 2007). Bearing in mind that a firm’s objective is to ensure economic profit maximization, XYZ will adopt a strategy that ensures this main objective is achieved. Economic profit (EP) is termed as the sum of all total revenue (TR) of the firm minus the sum total of implicit cost (IC) and explicit cost (EC). Thus, total profit has to be spread to all factors of production and subsequently attain surplus in company XYZ. To understand the profit expected to aid in pricing of the new drug, the company will run function of production to understand the input and output relationships (Nabin & Rafiq, 2016). The new cancer drug by company XYZ will employ monopoly as a price marker. This is so as close competitors only use drugs that do not cure cancers, but prolong and improve the quality of life. This strategy is not affected by the supply law, as the option on the demand is the product in the market, which has no close competitors. As thus, despite the fact that the monopolistic option may indicate the company XYZ to charge any price, the price will be that will ensure garners more profits before competitors enter the market, but the strategies only gives the company to use a common pricing for all clients, rather than considering the type of customers. Thus, with the strategy P>MR=MC. subsequently, the firm will earn more compared to a competitive firm. This is because it is able to capture some or all consumers’ surplus as it utilizes market power and lack elastic demand as it is with competitive market where elastic in demand implies customers may opt for other substitutes in case of high price(Nabin & Rafiq, 2016). The demand curve will slope downward in monopolistic competition. Thus, its MR (Marginal revenue) Read More