Pharma Pricing and Reimbursement

HEALTHCARE
Pharmaceutical Pricing and

Reimbursement
Strategies for market access across the US, Europe,
Japan and other key geographies
By Steven Seget
Steven Seget
Steven Seget is Principal at Delphi Pharma, and provides independent strategic
consulting services to the pharmaceutical and biotechnology industries. Steven
previously managed the strategic healthcare consulting function at Datamonitor and has
an MBA from the London Business School. sseget@delphipharma.com
Delphi Pharma provides strategic, financial and marketbased solutions to clients,

focusing primarily on the portfolio management, business development and licensing
functions. Delphi Pharma combines an extensive research network, applied analytical
expertise and an established track record to deliver high value results and measurable
impact to its clients. www.delphipharma.com
Copyright 2007 Business Insights Ltd

This Management Report is published by Business Insights Ltd. All rights reserved.
Reproduction or redistribution of this Management Report in any form for any purpose is
expressly prohibited without the prior consent of Business Insights Ltd.
The views expressed in this Management Report are those of the publisher, not of Reuters.
Reuters accepts no liability for the accuracy or completeness of the information, advice or
comment contained in this Management Report nor for any actions taken in reliance thereon.
While information, advice or comment is believed to be correct at the time of publication, no
responsibility can be accepted by Business Insights Ltd for its completeness or accuracy.
REUTERS and dotted and sphere logos are the house trade marks of Reuters Limited in more
than 25 countries world-wide.
Printed and bound in Great Britain by FPC Greenaway. Ormolu House, Crimscott
Street, London SE1 5TE. www.greenaways.com
ii
Table of Contents
Pharmaceutical Pricing and Reimbursement
Executive Summary
10
An introduction to price optimization
10
Pricing and reimbursement in North America
11
Pricing and reimbursement in Europe
12
Pricing and reimbursement in Japan and the rest of the world
13
Global pricing strategies
14
Lifecycle pricing strategies
15
Chapter 1
An introduction to price
optimization
18
Summary
18
Introduction
19
Delivering a return on investment

Sustained R&D productivity shortfall
Impending blockbuster patent expiries
19
19
23
Healthcare cost containment

Cost-containment initiatives
Pharmaceutical spend cost containment
24
26
27
Key issues impacting on pricing

Pharmaceutical price optimization
Pricing and reimbursement regulations
Reference pricing
Pharmacoeconomic evaluations
Parallel imports and reimportation
Generic substitution
29
29
30
34
34
35
37
Global versus lifecycle pricing
38
iii
Chapter 2
Pricing and reimbursement in

North America
42
Summary
42
Introduction
43
US pricing regulations
Medicare
Medicaid
Private healthcare
Pharmacoeconomics
43
44
46
47
48
50
Recent developments in the US

Medicare Part B revisions
Medicare Part D one year on
Average manufacturer price
Re-importation in decline
Follow-on biologics
Reverse payments to generic companies
51
51
52
53
54
55
56
Future pricing scenarios in the US

Best case pricing scenario
Worst case pricing scenario
Most likely pricing scenario
58
58
59
60
Canadian pricing regulations

Federal measures
Provincial measures
Common drug review expansion
Patented Medicine Price Review Board progress
60
61
62
64
65
Chapter 3

Europe
68
Summary
68
Introduction
69
European pricing regulations
69
French pricing regulations

State of the industry
70
71
Recent developments in France

Parallel trade
72
72
72
German pricing regulations

73
74
Recent developments in Germany

The Statutory Health Insurance Competition Enhancement law
74
74
iv
Italian pricing regulations

75
77
Recent developments in Italy

Regional cost-containment
2007 Finance Law
77
77
78
Spanish pricing regulations

78
80
Recent developments in Spain

Modified reference price system
Anti-parallel trade strategies
81
81
82
82
UK pricing regulations
83
Recent developments in the UK

The future of the PPRS
Risk sharing schemes
Declining parallel trade
Expanding the NICE remit
84
84
85
86
86
Future pricing scenarios in Europe

87
87
88
89
Chapter 4

Japan and the rest of the world
92
Summary
92
Introduction
93
Japanese pricing regulations
93
Recent developments in Japan

Biennial price cut
Generic substitution introduced
95
95
97
Future pricing scenarios in Japan

97
98
99
100
Australian pricing regulations

Benchmark pricing
Cost plus method
Average monthly treatment cost
Prices for new items
101
102
102
103
103
Recent developments in Australia

Pharmaceutical Benefits Scheme reform
104
104
Chinese pricing regulations
104
Recent developments in China

New drug pricing procedures
Price cuts
Generic prescribing
Chapter 5
105
105
106
106
108
Summary
108
Introduction
109
Local optimization
Market access and reimbursement
Free price markets
Orphan drugs
109
109
110
111
111
Global coordination
Launch sequence
EU launch order
Optimal price differentials
113
113
114
115
Implementing global pricing strategies
119
Chapter 6
122
Summary
122
Introduction
123
Launch phase pricing considerations

Submission dossiers
Identifying key decision makers
Failure to secure reimbursement
Working with decision makers
Applying pressure through lobbying
Brokering deals
123
123
125
126
126
127
127
Patent protected phase pricing considerations

Case study: the respiratory market
Innovative pricing strategies
128
128
131
Patent expiry phase pricing considerations

Price changes
US patent expiry
European patent expiry
Case study: generic simvastatin
Biosimilar pricing
132
132
133
134
135
136
Implementing lifecycle pricing strategies
137
vi
Chapter 7
Appendix
140
Glossary
140
Sources
142
vii
List of Figures
Figure 1.1:
Figure 1.2:
Figure 1.3:
Figure 1.4:
Figure 1.5:
Figure 2.6:
Figure 2.7:
Figure 2.8:
Figure 3.9:
Figure 4.10:
Figure 5.11:
Figure 5.12:
Figure 5.13:
Figure 5.14:
Figure 6.15:
Figure 6.16:
Declining trend in number of NDA and NME approvals, 1997-2006

Rise in the cost of drug development, 1975-2001
US patent expiries for top ten selling drugs, 2006-2011
Trends in healthcare spending as a proportion of GDP, 1970-2005
Pharmaceutical expenditure as a share of total healthcare expenditure in 2005
Source of prescription drug expenditures, 2005-2006
Canadian cross border internet pharmacy sales, 2002-2006
Compensatory final settlements (reverse payments), 2004-2006
Average ex-factory drug prices in key European markets, 2005
NHI price cuts by therapeutic class, 2006
Market share for new products launched in last five years, 2005
External reference pricing in Europe, 2007
Global pricing and the interaction between countries
Leading respiratory drugs by global sales, 2006
21
23
24
26
27
53
55
57
81
96
110
117
118
120
129
138
List of Tables
Table 1.1:
Table 1.2:
Table 1.3:
Table 2.4:
Table 3.5:
Table 4.6:
Table 4.7:
Table 4.8:
Number of NDA and NME approvals by the FDA, 1990-2006

R&D expenditure within the US and abroad by PhRMA members, 1980-2006
Trends in healthcare spending as a proportion of GDP, 1970-2005 (%)
Co-payments for drugs/services in Japan
Classification for price premium (Japanese healthcare system)
viii
20
22
25
58
87
94
95
98
Executive Summary
Executive Summary
An introduction to price optimization
Optimizing global product prices and securing the broadest possible reimbursement
status for a product is becoming increasingly important as pharmaceutical
companies seek to generate a high return on investment from current and future
drugs in light of a sustained R&D productivity shortfall and a wave of impending
blockbuster patent expiries.
While the pharmaceutical industry faces pressure to maintain revenue and earnings
growth, healthcare providers face pressures of their own with respect to containing
increasing healthcare costs. Over the past decade, there has been significant growth
in global healthcare expenditure, with healthcare representing a growing share of
gross domestic product (GDP) in developed nations. In 2007, the Organization for
Economic Co-operation and Development (OECD) published data demonstrating
that the annual increase in per capita spending on healthcare across OECD
countries has increased by more than 80% in real terms between 1990 and 2005,
compared with the 37% growth in per capita GDP growth. One in four OECD
countries now spends over 10% of GDP on healthcare.
The key issues involved with the optimization of pharmaceutical pricing begin with
developing an understanding of the explicit aims of price optimization. The key
levers of cost containment set the current price optimization climate, which
involves a proliferation of reimbursement regulations and the increasing use of
reference pricing systems.
Price optimization is also significantly affected by a number of related disciplines,

including the use of pharmacoeconomic evaluations, the impact of parallel trade
and reimportation and the pricing effects of generic substitution.
10
Pricing and reimbursement in North America
Unlike the other major pharmaceutical markets, the US does not have a
government-sponsored health insurance plan that ensures access to healthcare for
the entire population. As a result, the national government does not directly
influence the prices of pharmaceuticals, but allows drug prices to be determined by
the free market.
Drug prices are influenced by competition between rival products, the market size
of the drug, the number of substitute products, the costs of R&D for new products,
and most importantly the willingness to pay demonstrated by payors.
Medicare Part D benefits were introduced by the Medicare Prescription Drug,

Improvement, and Modernization Act of 2003 and came into effect on 1st January
2006. The federal program subsidizes the costs of prescription drugs for Medicare
beneficiaries. The benefit is administered by private insurance plans that are
reimbursed by the Centers for Medicare and Medicaid Services.
According to CMS, nearly 24 million individuals were enrolled in Medicare Part D

drug plans as of January 2007.
Under the most likely future pricing scenario for pharmaceutical companies in the
US, the introduction of Medicare Part D will generate mixed results, including
increased access and compliance alongside future budget cuts. State-level
supplementary Medicaid rebates will be more limited in the future, while overall
government drug expenditure will remain relatively high.
Health economics will be used more frequently to justify premium prices, while
reimportation will remain limited to the private level.
11
Pricing and reimbursement in Europe
The major European pharmaceutical markets operate a variety of different

healthcare systems subject to differing cost containment measures. In pricecontrolled countries, such as Spain and Italy, budgetary responsibilities and
controls are devolved to the regional level. In traditional prescriber-led markets,
such as the UK and Germany, national hurdles including NICE and positive lists
have been introduced.
Historically, European regulatory authorities have taken different approaches to

controlling public drug benefits, with some focusing on limiting demand, as
evidenced by the devolved budgets found in Germany and the UK, and others on
regulating price, as is found in France, Italy and Spain. However, some countries,
including Italy and Spain, are adopting both approaches, extending greater regional
autonomy for healthcare and budget delivery.
Over the next five years, the most likely European pricing scenario will involve
continued convergence of prices across different markets, resulting from the
ongoing pressures of parallel trade and reference pricing. Average prices will tend
towards the middle of the current range, with high price markets such as the UK
and Germany lowering prices and low price markets such as France, Italy and
Spain increasing average prices, particularly for innovative therapies.
In the most likely pricing scenario the impact of pharmacoeconomics, parallel trade
and generic substitution will continue to increase gradually. These indirect cost
containment measures will continue to play an important role in managing the
healthcare spend for all European governments. The accession of 10 new countries
to the EU will have a small, but negative, effect on prices throughout the EU-15.
Reference pricing systems will be adjusted to protect against a lower average EU
price, but some reference pricing relationships will inevitably result in downward
pressure on prices.
12
Pricing and reimbursement in Japan and the rest of the

world
The Japanese healthcare system is characterized by high pharmaceutical

expenditure and price controls are an important part of the system. The upper limit
for pharmaceutical prices in Japan is the NHI drug price. The NHI drug price list
fixes the names and prices of drugs for which healthcare providers can be
reimbursed under Japans health insurance programs. The reimbursement price is
determined separately by the MHLW. All drugs included in the NHI drug price list
are fully reimbursed except for a patient co-payment.
On 1st April 2006, the Ministry of Health Labour and Welfare (MHLW) announced
a 6.7% average price cut on drugs listed on the National Health Insurance (NHI)
reimbursement list. These were the highest price cuts for six years, following
average cuts of 4.2% and 6.3% in 2004 and 2002 respectively.
Over the next five years, the most likely pricing scenario prevailing in Japan will
involve a continuation of the current reimbursement reform led by biennial pricecutting. By weighting the cuts against generic and me-too products, innovative
products can still continue to receive premium prices, while the overall drugs bill is
reduced.
Price setting is likely to become more complex in the Japan, with the addition of
health economic data and pro-generics regulations to the current reference pricing
system. However, the Japanese market will continue to be protected from parallel
trade. With no principle of international exhaustion in Japan, companies will
continue to prevent their products from being imported from other countries using
their trademark rights.
13
The global price perspective has two parts. The complexity of global drug prices
are a result of local differences in pricing and reimbursement systems.
Understanding these complexities and developing locally optimal pricing strategies
for key drugs is critical for maximizing the returns from pharmaceutical
investments. In addition to the local perspective, a global coordination of prices and
price-differentials between key markets is also required. The impact of external
reference price schemes and parallel trade require prices to be optimized across
markets.
Local optimization involves adapting pricing strategies to fit national-level, and in

some cases regional-level, regulations. The successful development and approval of
new drugs is not enough to guarantee market access. Countries place different
levels of fourth hurdle barriers to receiving full reimbursement, which require
economic data to ensure a broad use at a high price. These evaluations have begun
to limit the ability of pharmaceutical companies to set prices for new drugs in
traditionally free price markets and restrict access to drugs targeted at areas of
significant unmet need.
The coordination of local pricing at the global level ensures that price differentials
that impact on external reference pricing and parallel trade or optimized. The global
price perspective involves determining appropriate launch sequences and the
optimal price differentials between country markets. However, the two processes
are inextricably linked.
Through the impact of reference pricing and parallel trade, the ability of
pharmaceutical companies to achieve premium prices in some markets can be
compromised by lower prices in others. These cross-country pressures are best
illustrated by the situation in Europe, where both reference pricing and parallel
trade have a significant impact on pricing.
14
Lifecycle pricing strategies are largely dominated by two major lifecycle events,
launch and patent expiry. Pricing at launch has the primary window for achieving
an optimal price and reimbursement coverage, while patent expiry strategies
involve maximizing brand value in competition with low-priced generics. However,
at all points in the drug lifecycle between launch and patent expiry there are key
competitive considerations that significantly impact on pricing strategies.
It is imperative that pharmaceutical companies ensure that evidence demonstrating

product value in support of the initial case for reimbursement is effectively
communicated and accounted for in the reimbursement decision-making process.
Companies must therefore identify and exploit opportunities to communicate the
value of products and influence decision-makers thinking.
Following the successful launch of a drug, the competitive environment can

regularly change following the launch, expansion or patent expiry of competitor
products. In response, pharmaceutical companies must be able to identify the
pricing implications associated with on-patent lifecyle events and respond
appropriately. A number of novel approaches to pricing and reimbursement have
emerged that deal with reactions by payors to initial prices a launch.
Following the loss of patent protection, the branded drug faces significant
downward pricing pressure from the introduction of generic competition. However,
a brands optimal retaliatory strategy differs by market, but both upward amd
downward price adjustments have been successfully applied in the past.
15
16
CHAPTER 1
optimization
17
Chapter 1
optimization
Summary
Optimizing global product prices and securing the broadest possible

reimbursement status for a product is becoming increasingly important, as
pharmaceutical companies seek to generate a high return on investment from
current and future drugs in light of a sustained R&D productivity shortfall and a
wave of impending blockbuster patent expiries.
While the pharmaceutical industry faces pressure to maintain revenue and

earnings growth, healthcare providers face pressures of their own with respect to
containing increasing healthcare costs. Over the past decade, there has been
significant growth in global healthcare expenditure, with healthcare representing
a growing share of gross domestic product (GDP) in developed nations.
In 2007, the Organization for Economic Co-operation and Development (OECD)

published data demonstrating that the annual increase in per capita spending on
healthcare across OECD countries has increased by more than 80% in real terms
between 1990 and 2005, compared with the 37% growth in per capita GDP
growth. One in four OECD countries now spends over 10% of GDP on
healthcare.
The key issues involved with the optimization of pharmaceutical pricing begin
with developing an understanding of the explicit aims of price optimization. The
key levers of cost containment set the current price optimization climate, which
involves a proliferation of reimbursement regulations and the increasing use of
reference pricing systems.
Price optimization is also significantly affected by a number of related

disciplines, including the use of pharmacoeconomic evaluations, the impact of
parallel trade and reimportation and the pricing effects of generic substitution.
18
Introduction
Business Insights Pharmaceutical Pricing and Reimbursement Outlook report outlines
the critical importance of price optimization in the pharmaceutical industry. Navigating
a pricing and reimbursement policy through many different markets and competitive
environments is increasingly complex and difficult to coordinate. A global, productbased view allows for consistent development and positioning efforts, but this must be
balanced against an individual country-level view accounting for the specific pricing
and reimbursement developments in each of the key markets. It is essential, therefore,
to manage the pricing function effectively by retaining a clear understanding of both
the key strategic issues surrounding pricing as well as the different pricing and
reimbursement environments found across North America, Europe and the rest of the
world.
Delivering a return on investment

Optimizing global product prices and securing the broadest possible reimbursement
status for a product is becoming increasingly important, as pharmaceutical companies
seek to generate a high return on investment from current and future drugs in light of a
sustained R&D productivity shortfall and a wave of impending blockbuster patent
expiries.
Sustained R&D productivity shortfall

The pharmaceutical industry is currently in the grips of research and development
productivity shortfall. This continued fall in R&D productivity is clearly illustrated by
examining annual Food and Drug Administration (FDA) data relating to the number of
new drug applications (NDA) and new molecular entities (NME) approved by the FDA
each year.
19
Despite a wave of high innovation during the early 1990s, peaking in 1996 when 131
NDAs and 53 NMEs were approved, pharmaceutical R&D productivity has declined
on almost a year-on-year basis through to 2003. In 2004, the number of NDAs and
NMEs increased, but largely as a result of the inclusion of therapeutic biologics, which
where now to be approved through the CDER, rather than the CBER. Despite this
technical change, the number of NDAs approved annually has declined by 3 year-onyear and NMEs by 3.1 year-on-year over the past 10 years. Table 1.1 and Figure 1.1
show the trend in the number of NDAs and NMEs approved by the FDA between 1990
and 2006.
Table 1.1: Number of NDA and NME approvals by the FDA, 1990-2006
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
NME approvals
NDA approvals
23
30
26
25
22
28
53
39
30
35
27
24
17
21
37
20
22
64
63
91
70
62
82
131
121
90
83
98
66
78
72
119
80
101
Business Insights
Source: FDA
While pharmaceutical R&D productivity levels have slowed, R&D expenditures have
continued to increase. According to the industry group Pharmaceutical Research and
Manufacturers of America (PhRMA), R&D investment has increased significantly
year-on-year for the last three decades. Total pharmaceutical R&D spend has increased
from $1,977 million in 1980 to $42,974 million in 2006, representing a compound
annual growth rate (CAGR) of 12.6%..
20
Figure 1.1: Declining trend in number of NDA and NME approvals, 19972006
140
120
NDA
approvals
100
NME
approvals
80
60
Trend (NDA
approvals)
40
Trend
(NME
approvals)
20
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Business Insights
Source: FDA
Table 1.2 shows trends in R&D expenditure within the US and abroad by PhRMA
members between 1980 and 2006.
21
Table 1.2: R&D expenditure within the US and abroad by PhRMA

members, 1980-2006
1980
US
Non-US
Total
*
1985
1990
1995
2000
2001
2002
2003
2004
2005
2006*
1,594 3,379 6,803 11,874 21,364 23,502 25,655 27,065 29,556 30,969 33,968
428
699 1,617 3,334 4,667 6,221 5,357 7,388 7,463 8,889 9,006
1,977 4,078 8,402 15,208 26,031 29,723 31,012 34,453 37,018 39,858 42,974
PhRMA estimates
Source: Pharmaceutical Research and Manufacturers of America (PhRMA)
Business Insights
The overall investment required to successfully develop a new drug has also increased
over the last 20 years. In 2001, the Tufts Center for the Study of Drug Development
(CSDD) revised its estimate of the average cost to develop a new prescription drug to
$802 million. This figure was the result of a Tufts study using information obtained
directly from research-based pharmaceutical companies. Tufts performed a similar
study nearly two decades ago estimating that the average cost of a new drug developed
in 1987 was just $231 million, without adjusting for interest and inflation rates. The
$231 million figure in 1987 would be equivalent to $318 million in 2000 US dollars,
adjusted for inflation.
Figure 1.2 shows the rise in drug development costs between 1975 and 2001, expressed
in equivalent 2000 US dollars.
22
Figure 1.2: Rise in the cost of drug development, 1975-2001
$900
Expenditure per new drug

($ millions, 2000)
$800
$700
$600
$500
$802
$400
$300
$200
$100
$318
$138
$0
1975
1987
2001
Business Insights
Source: PhRMA; DiMasi J et al. (2003)
Impending blockbuster patent expiries

Alongside low productivity and rising R&D expenditures, the wave of pharmaceutical
innovation experienced in the 1990s is now being followed by a related wave of patent
expiries. Figure 1.3 shows the impact of US patent expiries on the top ten selling drugs
in 2006. Patent expiries will impact on five of the leading 10 pharmaceuticals by sales
in 2006, representing more than half their overall market value. Norvasc has lost patent
protection in 2007, and will be followed by Advair/ Seretide in 2008. Prevacid comes
off-patent in 2009, followed by the market leading drug, Lipitor, in 2010. Finally,
Zyprexa will lose patent protection in 2011.
23
Figure 1.3: US patent expiries for top ten selling drugs, 2006-2011
70
Diovan
Prevacid
2006 global sales ($bn)
60
Zyprexa
50
Remicade
40
Enbrel
Nexium
30
Norvasc
20
Plavix
Advair/ Seretide
10
Lipitor
0
2006
sales
2007
2008
2009
2010
2011
On-patent drugs (2006 sales)
Business Insights
Source: Company financials, FDA Orange Book
Leading pharmaceutical companies will experience a significant reduction in their

revenues associated with blockbuster products as generic competition erodes market
share. As a result, given that R&D productivity has stagnated while the cost of
developing new drugs has risen to an all time high, the pharmaceutical industry faces
considerable challenges with respect to delivering significant revenue and earnings
growth in the future.
Healthcare cost containment

While the pharmaceutical industry faces pressure to maintain revenue and earnings
growth, healthcare providers face pressures of their own with respect to containing
increasing healthcare costs. Over the past decade, there has been significant growth in
global healthcare expenditure, with healthcare representing a growing share of gross
domestic product (GDP) in developed nations. In 2007, the Organization for Economic
24
Co-operation and Development (OECD) published data demonstrating that the annual
increase in per capita spending on healthcare across OECD countries has increased by
more than 80% in real terms between 1990 and 2005, compared with the 37% growth
in per capita GDP growth. One in four OECD countries now spends over 10% of GDP
on healthcare.
Table 1.3 and Figure 1.4 show the trends in healthcare spending as a proportion of
GDP between 1970 and 2005. Throughout this period, the US spent the highest share
of GDP on healthcare, with expenditure increasing from 11.9% of GDP in 1990 to
15.3% in 2005. Additionally, the US spends more on healthcare per capita than any
other country.
Table 1.3: Trends in healthcare spending as a proportion of GDP, 1970-2005

(%)
1970
1980
1990
1995
2000
2005
US
France
Germany
Italy
UK
Spain
Japan
7.0
5.4
6.0
4.5
3.5
4.6
8.8
7.0
8.4
5.6
5.3
6.5
11.9
8.4
8.3
7.7
6.0
6.5
6.0
13.3
9.9
10.1
7.3
7.0
7.4
6.9
13.2
9.6
10.3
8.1
7.3
7.2
7.7
15.3
11.1
10.7
8.9
8.3
8.2
-
OECD average
5.0
6.9
9.0
Business Insights
Source: OECD Health Data 2007
25
Healthcare spend as a proportion of GDP (%)
Figure 1.4: Trends in healthcare spending as a proportion of GDP, 1970-2005
16
14
12
10
8
6
4
2
0
US
France
Germany
1970
1980
Italy
1990
UK
1995
Spain
2000
Japan
OECD
2005
Business Insights
The recent growth in health expenditure has been, in part, a deliberate policy in some
countries, such as the UK and Canada, which realized that cost containment during the
mid-1990s had strained their healthcare systems. However, all governments are under
continuous pressure to reconcile economic and health concerns, with public funds
continuing to contribute the bulk of health spending in most countries.
Cost-containment initiatives
In the light of increasing budgetary pressure, many countries are seeking to restrict
growth in healthcare spending and have implemented a range of cost-containment
initiatives. Three main types of cost-containment policies have been employed:
Regulating prices, input resources and healthcare service volumes;
capping health spending;

26
shifting costs to the private sector.
Pharmaceutical spend cost containment

Advances in medical technologies, population ageing and rising public expectations
have resulted in significant health spending growth, and particularly in the area of
pharmaceuticals. Between 1995 and 2005, spending on pharmaceuticals in the US grew
by 1.4 times the rate of total health expenditure growth. Pharmaceutical expenditure
accounted for between 12.4% and 22.9% of total health spending in the leading
pharmaceutical markets in 2005. Figure 1.5 shows the share of healthcare expenditure
generated by pharmaceutical expenditure in 2005 across the main markets.
Figure 1.5: Pharmaceutical expenditure as a share of total healthcare

expenditure in 2005
22.9%
Spain
Italy
20.1%
Japan
19.0%
16.4%
France
Germany
15.2%
US
12.4%
Latest data for Japan is from 2004

Business Insights
27
The key factors driving pharmaceutical spend growth include:
The ageing population;
the emergence of life-style drugs;
a shift to newer and more expensive drugs;
an increase in therapeutic coverage (i.e. new drugs for diseases that previously
could not be treated).
Many governments are using the systems employed to price and reimburse
pharmaceuticals as a key component of their strategy to reduce healthcare expenditure.
This has resulted in a fundamental shift in the way in which pricing and reimbursement
decisions are made. Healthcare decision-makers have moved towards cost management
and quality assurance strategies for healthcare provision in order to find the most
efficient and effective combinations of medical care.
The current approach to healthcare provision has been accompanied by a shift towards
the inclusion of economic considerations in healthcare decision-making, and in
particular, with respect to pharmaceuticals. As a consequence, efficacy, safety and the
degree of medical need are no longer the only key product attributes with respect to
reimbursement decision-making. Economic considerations have emerged as a major
influencing factor.
While governments in major markets are being forced to adopt cost containment
strategies due to budgetary pressures, providers of private healthcare coverage are also
placing increased emphasis on economic evaluations as they strive to increase
efficiency and improve their competitiveness.
28
Key issues impacting on pricing

The key issues involved with the optimization of pharmaceutical pricing begin with
developing an understanding of the explicit aims of price optimization. The key levers
of cost containment set the current price optimization climate, which involves a
proliferation of reimbursement regulations and the increasing use of reference pricing
systems. Price optimization is also significantly affected by a number of related
disciplines, including the use of pharmacoeconomic evaluations, the impact of parallel
trade and reimportation and the pricing effects of generic substitution.
Pharmaceutical price optimization

Strategic pricing in the pharmaceutical industry is a critical mechanism through which
companies attempt to maximize profitability. However, successfully obtaining a high,
reimbursed price is increasingly difficult given that pharmaceutical companies operate
in markets subject to various country-specific legislations and regulations. When
pharmaceutical companies have little or no restriction on price, which is largely true
only in the US, they can maximize profits by pricing pharmaceuticals like any other
product, subject to price-volume forecasts. Outside of the Medicare and Medicaid
programs the US government does not fund a national health insurance scheme. With
no central regulation on pharmaceutical prices, the US has the highest drug prescription
prices of the developed world and generates more than 60% of the average major
pharmaceutical company profits.
National governments outside of the US have put in place legislative and regulatory
mechanisms to restrain healthcare expenditure. Examples include the UKs profit
control mechanisms, Germanys budgetary ceiling for general practitioners and
reference price system, and Frances price cuts and rebates to control the costs of
health care. These pricing and reimbursement regulations distort price optimization
efforts, with pharmaceutical pricing decisions often simplified down to a negotiation
for the highest price with various reimbursement bodies.
29
In the context of regulated markets, pharmaceutical price optimization primarily

involves supporting a claim to gain the highest reimbursement price. High prices
require substantive data showing that a product is safe, efficacious and that it provides
a relative therapeutic improvement on available treatments. In some markets additional
data showing a drugs pharmacoeconomic benefit is also used to help support a high
price. Notable exemptions from this rule are lifestyle drugs used to treat conditions
such as sexual dysfunction, baldness and obesity. These drugs are considered not to
warrant a high reimbursement price and are instead often launched outside of
reimbursement in order to achieve optimal returns.
The ultimate aims of pharmaceutical price optimization are to generate sufficient

returns in order to fund continued R&D efforts and to launch and market new products.
Pharmaceutical innovation involves significant investment and risk and therefore
warrants a high level of reward. However, where pharmaceutical purchasing power is
centralized by large reimbursement bodies, including health maintenance organizations
(HMO) and national health systems, a significant share of the power to set prices is
ceded to the buyer. In light of continued cost containment pressures, pharmaceutical
manufacturers must be prepared to defend their claims for high reimbursement prices
ever more vociferously in the future.
Pricing and reimbursement regulations

The pricing and reimbursement framework for pharmaceuticals is primarily set by
individual national regulations. There are several tools used by governments, to
varying degrees, to regulate prescribing and reimbursement:
Reference pricing systems set pricing levels using a cohort of prices taken from
similar drugs or from the same drug across different national markets;
reimbursement groups determine proportional price levels up to which products are

reimbursed. For example, products for chronic and acute serious diseases are often
reimbursed to 100%, while non-life-threatening diseases are reimbursed to a lower
proportion of the actual price;
30
patient co-payment levels determine the relative contributions of patients and

reimburser;
pharmaceutical spending budgets are used to force physicians to keep the cost of
their annual prescriptions below a set ceiling.
The free pricing of pharmaceutical products is considered to be an effective lever for

encouraging innovation and the overall development of the pharmaceutical industry.
The US has the closest system to a free market, where the government has no direct
control over prices. However, pharmaceutical prices of drugs are indirectly controlled
by large agencies such as the Veterans Administration, Medicaid retailers, chain
pharmacies, and managed care providers. Other countries have free pricing schemes for
parts of their market. For example, Germany freely prices patented products, while the
government directly influences off-patent and generic prices through a reference
pricing system.
Profit control measures limit prices indirectly by arbitrarily capping the profits made by
pharmaceutical companies, based on the capital invested into research, development,
and manufacturing. The most prominent example of profit control measures is the
Pharmaceutical Price Regulation Scheme in the UK. While this scheme is voluntary,
companies
comply
because
the
agreement
effectively
bars
non-compliant
manufacturers from operating in the UK.
The general agreement is negotiated between the Department of Health and the
Association of the British Pharmaceutical Industry, with individual company details
negotiated directly between the Department of Health and the company concerned. The
agreement operates at the level of a pharmaceutical companys total business with the
National Health Service (NHS), rather than in relation to individual products.
Companies within the scheme have a profit cap, measured as a return on average
historic capital employed. This means that building, plant, land and other relevant
items are valued at the time they were purchased as opposed to current prices. If
excessive profits are not reached, pharmaceutical companies can increase their prices.
31
Alternatively, if profits exceed target profits, then these profits must be returned to the
government.
Direct price controls describe a situation whereby the government or payer directly
influences pharmaceutical prices. Direct price controls are country specific, and often
take into consideration the production costs of the product, including the costs of local
R&D and promotion. Governments can then determine an appropriate price through
intense negotiations, and potentially comparing the prices set in other benchmark
countries. Reference pricing is a direct price control tool currently used in a number of
markets to price drugs.
A further way to control pharmaceutical expenditure is to introduce incremental price

cuts on established reimbursement rates. Price cuts reduce the amount governments
will reimburse over a certain time period. This method is used widely across many
European markets, including France and Italy. In Japan, wide-ranging rounds of price
cuts are implemented every two years as a way of reducing pharmaceutical
expenditures.
Negative lists contain the names of pharmaceutical products that do not receive
reimbursement. This type of pricing control has been used in a number of European
countries since the 1980s and has been periodically updated and extended in those
countries. Products are added to a negative list where there are better, more effective
drugs available or where the price is set at an excessively high level. European
countries making use of negative lists include Germany, Spain and the UK.
Positive lists include products that receive some level of reimbursement. Products not
on the positive list do not receive reimbursement from healthcare providers, and
therefore the positive list is a stronger form of price control than the negative list.
Positive lists can be found in Belgium, Denmark, France, Greece, Italy, Portugal,
Spain, and Germany. In the US, there is no government organized positive list, but
32
some of the most powerful pharmaceutical buyers, such as the Health Maintenance
Organizations (HMOs), operate their own versions of positive lists via formularies.
Pharmaceutical expenditure ceilings place an overall cap on pharmaceutical

expenditure within a countrys budget. This system is used to contain cost, but is very
difficult to implement and manage, with budget overspending often having no direct
consequences for the authorities. In the countries where expenditure ceilings have been
in operation, including Italy and Spain, budgets have been breached several times.
Pharmacoeconomics has emerged as a fourth hurdle to gaining reimbursement in a

number of healthcare systems. After assessing a products safety, quality and efficacy
in markets such as Australia, the Canadian province of Ontario and the Netherlands,
there is a mandatory requirement by reimbursement authorities to present evidence of a
products cost effectiveness. Regulatory authorities and governments that use
pharmacoeconomics have adopted one of two approaches. The first is a mandatory
pharmacoeconomic assessment before a new products reimbursement status or price is
allocated, and the second is to use a pharmacoeconomic assessment after a products
launch to provide guidelines for its use.
Of all the countries operating government-led reimbursement systems, Japan and

Germany have the most generous reimbursement systems. In these countries, all
products are generally covered by the statutory health insurances and reimbursed to
100%, except for relatively low patient co-payment per prescription item. The UK
reimbursement system works in a similar way, but the criteria for placing products on
the positive list are stricter than in Japan and Germany. In France and Italy, patients
with chronic diseases receive 100% reimbursement on their prescriptions, while other
conditions have partial or no reimbursement. In Spain, outpatient prescriptions are
never fully reimbursed, except for those for retired people.
33
Reference pricing
Internal and external reference pricing is being used more and more widely in markets
outside the US. Internal reference pricing of products based on the active ingredient is
becoming increasingly widespread, often in combination with the promotion of generic
substitution by pharmacists. Internal reference pricing represents an attempt by
governments to lower the price of a branded product once it loses patent protection, as
opposed to waiting for market forces to take their effect. The most important
implication for pharmaceutical companies is that pricing options following patent
expiry of a key product become more limited. Previously, branded pharmaceutical
companies could attempt to compete with generic versions of their drugs through the
strength of their brand, often maintaining a higher price for their original product.
However, under a reference pricing system based on generics this is not possible.
Drug prices are no longer priced independently in Europe and are becoming
increasingly controlled elsewhere. Price differentials between different countries are
becoming more transparent as companies increasingly operate globally, leading
governments to compare prices externally as well as internally. As countries continue
to reference each others prices, drug prices will continue to converge, both in Europe
and in the rest of the world.
Reference pricing affects products in different ways. When drugs are priced with
reference to similar drugs in the same market, prices tend to converge to the lower end
or middle of the price corridor. When the price of a product is compared externally
with the price of the same product in other countries, the price of the drug tends to
harmonize across the relevant markets. However, products sold in countries with strict
price control are generally still below the average EU price.
Over the last decade, cost containment pressures in the healthcare industry have led to
the emergence of pharmacoeconomic and health economic evaluations, both of which
aim to determine the optimal allocation of resources within a restricted budget. For
34
pharmaceutical companies, the rise of pharmacoeconomics and closely related

disciplines, such as health economics and outcomes research, has generated a need for
new processes and areas of expertise. However, pharmacoeconomic procedures are not
established to the same extent in all markets, since requirements and regulations differ
widely, making a comprehensive strategic approach difficult for pharmaceutical
companies.
The major driver of pharmacoeconomics lies in the increasingly cost-conscious

healthcare environment. This has led to a need for more effective and consistent
resource allocation within a limited healthcare budget. Resistors to pharmacoeconomic
approaches are often related to negative perceptions of the methodologies on which the
studies are based, as well as difficulties arising from integrating such studies into R&D
and drug approval processes. Although the cost of pharmacoeconomic studies is
relatively low compared to pharmaceutical R&D and marketing budgets, it is
sometimes mentioned as a potential resistor.
Parallel imports and reimportation

Parallel importing does not yet play a significant role in the two largest pharmaceutical
markets, Japan and the US. Although the US operates a general principle of complete
international exhaustion of intellectual property rights, since 1988 it has been illegal for
pharmaceutical products to be imported in bulk into the country because of the
perceived fear of low quality or counterfeit products entering the market. Japan does
not subscribe to the principle of international exhaustion, with companies able to
prevent their products from being imported from other countries using their trademark
rights.
Parallel importing has a particularly significant effect upon those pharmaceutical

markets found within the EU. With individual countries operating different degrees of
control over the prices of pharmaceutical products, price disparities remain strong
despite the free trade within the area. As a result, parallel importing has become a
35
significant factor in the development of the European pharmaceutical market, affecting

company sales and related pricing strategies.
Parallel importing in Europe had its genesis in the early 1980s when pharmacists in
high priced countries, such as Germany and the UK, realized that they could increase
their profit margins by buying pharmaceutical products outside of their domestic
markets. Since then it has gradually grown into an industry sector that has a significant
impact on the pharmaceutical market within low price export markets, such as Spain,
and high cost import markets, such as Germany and the UK.
Following the creation of the European free market, a series of court cases brought by
pharmaceutical companies against importers during the 1990s has clarified the extent to
which manufacturers can prevent parallel trade impacting their own sales. To date, the
importers have won every major case and this has stimulated further development of
the sector.
The key factor in a parallel traders decision to import a product is the difference in
price between the source and import markets. It is this single factor that most clearly
influences the amount of profit that can be achieved by importing a drug. Although
most parallel traders are unwilling to specify the critical range for price differentials, a
margin of less than 15% is considered highly unlikely to be profitable.
In principle, it is unimportant whether an imported drug is a premium priced product

carrying a high margin for the manufacturer or a low cost, low margin drug, given that
an importers margin is generated entirely by the price differential. However, given the
impact of reference pricing on pricing in some European countries, a drug that is
premium priced in one or more markets is more likely to carry a high cost differential.
As a result, premium priced, high margin products can generate a high level of parallel
importing.
36
Since margins can be relatively low for drug importation, drugs for diseases with large
patient populations are preferred. In addition, chronic diseases with consistent demand
for drug therapy are also highly attractive. For example, an anti-hypertensive is more
likely to be affected by parallel importing than an antibacterial, even though they may
have the same market size.
Generic substitution continues to have a significant impact on the pricing of
pharmaceutical products both pre- and post-patent expiry. The ability to protect the
original product from generic substitution is largely determined by the size and market
presence of the products marketer. It is clear that branded pharmaceutical products
cannot compete effectively on price with generic products and, as a result, the growth
of the generics industry will continue to have a significant influence on pricing
throughout the product lifecycle.
With pricing regulations varying considerably from country to country, the effects of a
growing generics industry on pricing will be diverse. In the USs comparatively free
market prices and pricing strategies are relatively flexible, while in more heavily
regulated European markets the potential to change prices and pricing strategies is
more limited.
For major pharmaceutical companies a large part of the battle against the destructive
effects of generic substitution is over once generics reach the market. As a result, major
pharmaceutical companies pricing strategies focus on maximizing pre-patent expiry
revenues and then rely upon a strong brand presence in order to retain as much market
share as possible following patent expiry.
The loss of patent protection for gold standard products in major disease markets, such
as the antidepressant Prozac (fluoxetine) and the anti-ulcerant Losec (omeprazole),
commonly has a major effect on the pricing of other patent protected products in the
same class. The key factors in determining the size of the pricing effect include the
37
level of generic competition, physician awareness of generic equivalents and the

therapeutic profile of the competing proprietary products. If a competing patented
product can be reformulated to show therapeutic advantages over the generic version,
then its market share is likely to have some protection and pricing strategies will not
change significantly. However, if there is little difference between the generic gold
standard and the competing patented product, the pharmaceutical company will need to
reduce the price of its drug in an attempt to maintain volume share.
The treatment regime associated with a gold standard generic also determines the
degree to which it will affect competing branded products. For chronic conditions, such
as severe depression, where a product is likely to be prescribed for a period of several
years, competition from similar generic products will be relatively slow because
physicians are often unwilling to change a patients long-term treatment on the basis of
cost alone. However, patent protected drugs indicated for conditions where shorter
periods of treatment are the norm, such as bacterial infections, will experience greater
indirect competition from gold standard generics. In this situation, physicians are less
concerned with slight variations in a drugs therapeutic profile and are more inclined to
prescribe the most cost-effective therapy.
Global versus lifecycle pricing

Pharmaceutical companies are tasked with two distinct challenges in optimizing the
price for a pharmaceutical product. At a global level, a great deal of coordination is
required in order to maximize price and reimbursement coverage across different
markets with different regulations and pricing environments. A keen local knowledge
is required in order to adapt pricing policy to the different pricing and reimbursement
systems found across key North American, European and other markets. However, a
more comprehensive global view is also required in order to mitigate against the effects
of international reference pricing schemes and potential parallel trade.
38
The pricing of drugs also involves a lifecycle dimension, whereby the competitive
pricing environment changes over the lifecycle of the drug. Most work around pricing
is conducted at the approval and launch stage of the product lifecycle. However, the
data used to achieve price premiums are collected during in clinical trials carried out in
advance of receiving approval for launch. At the later stages of the product lifecycle
new competitors enter the market or go off-patent to alter the competitive pricing
environment, following by the eventual loss of patent protection for the drug itself and
the associated generic competition. Both regulatory and competitive pressures provide
a dynamic pricing journey right across the product lifecycle.
39
40
CHAPTER 2

North America
41
Chapter 2

North America
Summary
Unlike the other major pharmaceutical markets, the US does not have a
government-sponsored health insurance plan that ensures access to healthcare for
the entire population. As a result, the national government does not directly
influence the prices of pharmaceuticals, but allows drug prices to be determined
by the free market.
Drug prices are influenced by competition between rival products, the market size
of the drug, the number of substitute products, the costs of R&D for new
products, and most importantly the willingness to pay demonstrated by payors.

Improvement, and Modernization Act of 2003 and came into effect on 1st
January 2006. The federal program subsidizes the costs of prescription drugs for
Medicare beneficiaries.
The benefit is administered by private insurance plans that are reimbursed by the
Centers for Medicare and Medicaid Services. According to CMS, nearly 24
million individuals were enrolled in Medicare Part D drug plans as of January
2007.
Under the most likely future pricing scenario for pharmaceutical companies in the
US, the introduction of Medicare Part D will generate mixed results, including
increased access and compliance alongside future budget cuts.
State-level supplementary Medicaid rebates will be more limited in the future,

while overall government drug expenditure will remain relatively high. Health
economics will be used more frequently to justify premium prices, while
reimportation will remain limited to the private level.
42
Introduction
This chapter outlines the current pricing regulations impacting on the US
pharmaceutical market. Recent developments are analyzed, along with future pricing
scenarios for the next five years. A brief overview of the Canadian price and
reimbursement system is also presented.
US pricing regulations
Unlike the other major pharmaceutical markets, the US does not have a governmentsponsored health insurance plan that ensures access to healthcare for the entire
population. As a result, the national government does not directly influence the prices
of pharmaceuticals, but allows drug prices to be determined by the free market. Drug
prices are influenced by competition between rival products, the market size of the
drug, the number of substitute products, the costs of R&D for new products, and most
importantly the willingness to pay demonstrated by payors.
Although the federal government does not directly regulate drug prices, they are
influenced by other segments of the market. The US healthcare market is managed
through a number of different schemes, including private health insurance, health
maintenance organizations (HMOs), and the federal sponsored health insurance plans
for the poor and the elderly. The market is financed primarily by private health
insurance, which charge different premiums to different segments of the population
based on a range of health risk factors. A growing trend in the US is the use of HMOs.
These organizations combine an insurance company and a medical team in order to
give cost effective incentives to medical workers. The premiums paid to HMOs are
generally based on a flat rate, taking the average of low and high risk individuals.
However, low risk individuals who consider their risk to be lower than the costs of
health insurance often opt out of full insurance coverage.
43
In addition to those individuals paying into private health insurance schemes and
HMOs there is also a significant part of the US population that cannot afford health
insurance. The federal government provides for the very old through Medicare and
each state manages its own healthcare insurance, Medicaid, for the very poor. As a
result, healthcare provision in the US is very diverse, and so is the coverage of
prescription drugs. The out of pocket prices for prescription drugs vary across
individuals based on their level of health insurance coverage.
Hospital, institutional, and managed care customers usually pay well below the
manufacturers list price as a result of heavy discounting and negotiations between the
pharmaceutical companies and those organizations. These high discounts are
principally the result of the significant purchasing power held by these organizations.
Drugs sold directly to wholesale distributors and pharmacy chains for individual
physicians and patients are priced at the higher end of the price scale. Recently, drug
prices have become a key political issue in the US, as the price differentials within the
US and between the US and different countries have become increasingly highlighted
and discussed in the public arena.
Medicare
Medicare is a federal insurance scheme made available for people over the age of 65.
In addition to this demographic group, in some circumstances people under the age of
65 with disabilities are also covered. The scheme currently covers approximately 40
million US citizens, corresponding to around 15% of the US population.
The Medicare scheme has traditionally been divided into two main parts. Part A
provides basic cover for hospital care and certain follow-up costs, such as post-hospital
nursing. Medicare pays a certain amount of hospital costs for any period of illness,
dependent on the chosen provider, such as hospital, psychiatric clinic, nursing facility.
44
Part B of the Medicare scheme covers basic medical outpatient costs, including
physicians fees, medical tests performed on an outpatient basis, medical equipment
and supplies, such as glucose monitoring equipment and heart pacemakers, and
outpatient hospital treatment. However, most notably Medicare has not historically
covered prescription drugs given to outpatients. Many routine examinations are also
not reimbursed, resulting in the reimbursement of only around 50% of all medical bills
incurred by Medicare patients.
Medicare remained similar to its original form until 1997 when Part C,
Medicare+Choice, a Medicare plus private managed care scheme, was added to control
costs and offer expanded benefits, most notably, prescription drug coverage. To fill
some of the gaps in Medicares insurance coverage, patients have the option to join
Medigap, a private health insurance scheme that works in conjunction with Medicare.
Following the Medicare Prescription Drug, Improvement, and Modernization Act of
2003, Medicare+Choice plans became known as Medicare Advantage plans, which can
also offer Part D coverage.

Improvement, and Modernization Act of 2003 and came into effect on 1st January
2006. The federal program subsidizes the costs of prescription drugs for Medicare
beneficiaries. The benefit is administered by private insurance plans that are
reimbursed by the Centers for Medicare and Medicaid Services. According to CMS,
nearly 24 million individuals were enrolled in Medicare Part D drug plans as of
January 2007.
Beneficiaries most enroll in one of two types of private plan. Prescription Drug Plans
(PDP) provide drug coverage only, while a Medicare Advantage plan (MA) covers
both medical services and prescription drugs. The drug plans control drug costs
through tiered formularies whereby lower cost drugs are assigned to lower tiers to
make prescribing easier. In 2007, the standard benefit includes a $265 deductible, a
25% co-payment and a coverage limit of $2,400.
45
Part D drug coverage does not have an established formulary but excludes drugs not
approved by the Food and Drug Administration (FDA), drugs not used for approved
indications and drugs covered under Parts A or B of Medicare.
Medicaid
Medicaid is a public health insurance program put in place in 1965 for individuals and
families with low-income and also acts as an additional insurance program for lowincome elderly and disabled Medicare beneficiaries.
Medicaid is overseen at the federal level and is administered on a state-by-state basis.

As such, benefits vary widely between states. Under federal guidelines, each state has
autonomy over standards of eligibility, scope, type and amount of services, payment
rates for services and overall program administration. However, changes made to state
guidelines require federal approval. Therefore, in reality there are in excess of 50
Medicaid programs, with each state, the District of Columbia and other US territories
operate their programs differently.
The flexibility built into the Medicaid system allows states to provide optional services.
The provision of prescription drugs is one such service and currently 50 states and the
District of Columbia have opted to include this benefit. Under federal requirements
Medicaid covers all prescription drugs deemed to be medically necessary and there is
no exclusion solely on the basis of cost. The maximum reimbursement for classes of
drugs is set at the federal level.
The states and the federal government share responsibility for funding Medicaid with
the federal government matching state spending. The federal matching rate varies by
state and is determined by a formula based on income per capita in each state. The
federal contribution varies from 5076% with the US average close to 60%. Medicaid
represents a significant proportion of federal and states spending.
46
Medicaid spending growth declined for the first time in 2006, with a 0.2% fall largely
the result of Medicare Part D drug benefits shifting the coverage of prescription drugs
for dual eligibles from Medicaid to Medicare. Enrollment growth was also down in
2006 as a result of an improving economy and state efforts to control program growth.
Pharmaceutical companies also price drugs for government organizations such as the
Medicaid program and the Veterans Administration on a negotiated discount basis. The
Medicaid Drug Rebate Program, created by the Omnibus Budget Reconciliation Act
(OBRA) of 1990, requires a drug manufacturer to enter into and have in effect a
national rebate agreement with the Secretary of the Department of Health and Human
Services for States. This agreement allows the drug manufacturer to receive federal
funding for outpatient drugs dispensed to Medicaid patients. The drug rebate program
is administered by Health Care Financing Administrations (HCFA) Center for
Medicaid and State Operations (CMSO). In 1992, this law was amended by the
Veterans Health Care Act, which requires a drug manufacturer to enter into discount
pricing agreements with the Department of Veterans Affairs in order to have its drugs
covered by Medicaid.
Private healthcare
Managed care is a cost containment system that has arisen in the US over the last three
decades as a response to high growth in healthcare expenditure. Managed care
organizations (MCO) now cover upwards of 95% of employer-insured Americans.
Managed care plans seek to manage the costs, access and quality of the healthcare
services provided for their members. Health expenditures are controlled through the
central management of a range of services for large numbers of enrolled patients.
However, criticisms relating to the decreased quality of care caused by such programs
are often leveled by patient groups and healthcare providers. As part of ongoing costcontainment efforts, MCOs restrict patients choices of primary care physicians and
specialists and limit the number of reimbursed medical procedures.
47
Within the fragmented private healthcare insurance landscape, HMOs are the most
common type of MCO. HMOs fix prices in advance of treatment, set up formulary lists
of reimbursable drugs and collaborate with pharmacy benefit managers to offer the
most cost-effective treatments available. For limited access to specialist services,
HMOs often either contract with or directly employ physicians and other healthcare
providers.
According to the Pharmaceutical Care Management Association (PCMA), more than

80% of all prescriptions dispensed in the US annually are paid through a prescription
benefit plan administered by a pharmacy benefit manager (PBM). PBMs offer
employers and health insurer plans cost savings by organizing large networks
combining the purchasing power of their participants. With 95% of all US retail
pharmacies included in PBM networks, PBMs leverage their purchasing power to
secure rebates from manufacturers and discounts from retail pharmacies. PBMs
manage prescription benefit plans through contracting directly with health plans,
HMOs, managed care groups, employers, insurance companies, unions, Medicare and
Medicaid managed care plans, and government entities at the local, state and federal
levels.
Pharmacoeconomics
There
have
been
no
significant
regulatory developments in the use of
pharmacoeconomics by either the public or private bodies that provide healthcare in the
US. However, considerable cost containment pressures on formularies make
pharmacoeconomics a supporting tool for price negotiations with both private and
public insurers.
The Healthcare Financing Authority (HCFA) is a US government organization that,

through Medicare and Medicaid, funds healthcare for the elderly and those with low
incomes. The HCFA establishes policies for paying healthcare providers, assesses the
effectiveness of different methods of healthcare management, treatment and financing
and takes actions to guarantee a certain level of quality care. However, at present, the
48
HCFA has no formal mechanisms for evaluating the cost-effectiveness of a

pharmaceutical product or for using pharmacoeconomic studies to support
reimbursement decisions.
Private healthcare providers in the US attempt to contain costs by issuing restricted

formularies of reimbursable drugs. These formularies also give private healthcare
providers some leverage over the prices set by pharmaceutical companies, as the
generation of successful sales for a pharmaceutical product will require formulary
inclusion. The use of pharmacoeconomics continues to be limited within the private
market in the US, both amongst MCOs and HMOs. There is no explicit inclusion of
pharmacoeconomic criteria to aid reimbursement-related formulary decisions. For
example, one of the largest MCOs, Blue Cross/Blue Shield, generally allows FDA
approved drugs to be reimbursed based on the single criterion of clinical efficacy.
In October 2000, in an attempt to standardize the content of formulary submissions, the

Academy for Managed Care Pharmacy (AMCP) published a set of guidelines entitled
Format for Formulary Submissions. While only guidance, since publication, adoption
of the AMCP Format by health systems and the pharmaceutical industry has exceeded
AMCPs expectations. Over the past five years, a network has developed among health
systems stimulating initial adoption by managed healthcare systems and PBMs and
most recently by hospitals, integrated healthcare systems, state Medicaid agencies and
the Department of Defense. As adoption of the Format has spread, manufacturers have
begun to standardize the framework within which they present formulary submissions.
Traditionally, formulary decisions have been made on the basis of efficacy, safety and
acquisition cost of pharmaceutical products. However, now the additional hurdle of
demonstrating value for money has been introduced. Products failing to meet these
standards will either appear low down on the treatment list or will be made available
only at full price. Certain drug classes for life-threatening diseases, such as cancer and
HIV, will be exempt from this practice.
49
The highly fragmented nature of the market for pharmaceutical products in the US,
together with the limited role of pharmacoeconomic analysis in formulary evaluations,
has prevented the emergence of national guidelines for information and analysis to
support formulary submissions. For guidelines to have any significant effect on the
reimbursement process in the US, they would have to be enforced by MCOs and
HMOs as well as by Medicare and Medicaid.
It is likely that the growing emphasis on cost containment within formulary decisions
will see cost-effectiveness been used more frequently in the US. The nature of
competition prevailing throughout the US healthcare market will promote the
differentiation of products through cost-effectiveness and, therefore, this factor may
help determine reimbursement decisions.
The Waxman-Hatch Act, which dates back to 1984, is an integral part of FDA
regulations and its influence on prescription drug pricing and development makes the
US a particularly attractive market for generic products. The Act is designed to
encourage generics manufacturers to launch products as soon as possible after a
branded product has lost patent protection. The Roche/ Bolar provision of the
Waxman-Hatch Act of 1984 allows generics companies to develop versions of patent
protected products (i.e. run production and laboratory tests) while the patent is still in
force. Furthermore, Waxman-Hatch permits generics manufacturers to view the
original drug developers safety and efficacy data filed at the FDA as part of the
regulatory approval process. After this, generics companies can submit an abbreviated
new drug application (ANDA) to the FDA, together with proof of bioequivalence.
Finally, a 180-day exclusivity period is granted to a generics manufacturer that
successfully challenged a brand patents validity (a paragraph IV litigation). In return
for these privileges and to reward and encourage innovation, brand manufacturers may
be entitled to additional patent protection from generic competition:
Five years of additional market exclusivity may be granted for new active
ingredients;
50
three years of additional exclusivity may be granted for a new drug application
(NDA) if another NDA with the same active ingredient has previously been
approved and certain other conditions are met;
three years of additional exclusivity may be granted for an NDA supplement.
According to IMS Health, generic medicines accounted for 63% of all prescriptions
dispensed in the United States amounting to sales of $54.1 billion. 8,730 of the 11,487
drugs listed in the FDAs Orange book have generic counterparts. On average, generics
cost 30-80% less than their reference brands. According to The National Association of
Chain Drug Stores, the average retail price of a generic prescription drug was $32.23 in
2006, compared with an average price of $111.02 brand name drugs.
Recent developments in the US

Medicare Part B revisions
The Medicare Modernization Act included significant changes to the reimbursement
for Part B drugs as well as introducing Part D drug benefits. On 1st January 2005 the
reimbursement of Part B drugs changed from 85% of average wholesale price (AWP)
to 106% of the average selling price (ASP), excluding best price exempt purchases
such as Medicaid and the Veterans Associations (VA). By taking away the margin
payment system the changes are directed at reducing overpayments caused by
inappropriate physician utilization incentives.
Part B drug reimbursement was also affected by the introduction of a Competitive

Acquisition Program (CAP) intended to further remove physicians financial interest
from drug selection. CAP empowers third party intermediaries to acquire drugs and
biologics on a competitive basis resulting in lower prices and mitigated risk to
physicians associated with drug access. However, how the CAP system will play is
difficult to foresee as it is not clear physicians are giving up on managing drug
acquisition despite the ASP plus 6% basis on which reimbursement is established.
51
Medicare Part D one year on

Despite much controversy and skepticism when Medicare Part D plans were initially
outlined, the first year experience of the drug plan seems largely positive. Uptake for
the voluntary drug benefit has approached 90% with very high satisfaction levels. Over
the same period, drug prescription costs for beneficiaries have more than halved, which
in turn has helped to improve overall compliance rates for chronic disorders.
However, with drug costs continuing to rise healthcare is set to increase from 16% to
20% of GDP in the US over the next ten years significant pressure is building on
Medicare drug prices. House bill HR 4: Medicare Prescription Drug Price Negotiation
Act of 2007 is looking to replace private plan price negotiations with direct
government intervention for Part D drugs. While direct price negotiation might not
prove to be the most effective way of limiting drug prices, the increase in the
governments share of overall drug expenditures looks likely to result in significant
pressure on prices. The figure below shows the increase in the governments share of
expenditures on drug prescriptions between 2005 and 2006, increasing from 24% to
41% largely as a result of Part D drug benefit uptake.
52
Figure 2.6: Source of prescription drug expenditures, 2005-2006
Source of prescription drug spend
100%
90%
20%
29%
Out-of-pocket
80%
70%
Private insurance
39%
60%
50%
47%
41%
40%
Other public spending
4%
30%
20%
4%
10%
18%
9%
Medicaid
28%
Medicare
24%
2%
0%
2005
2006
Source: CMS, Office of the Actuary, National Health Statistics, 2005
Business Insights
Average manufacturer price

Modifications to Medicaid payments for prescription drugs set to come into force on 1st
October 2007 have been published by the Centers for Medicare and Medicaid Services
(CMS). As well as being used as the basis for determining manufacturers Medicaid
rebates, the average manufacturer price (AMP) can also now be used by states to set
reimbursement limits and by the CMS to set Federal Upper Limits (FUL) for
multisource products. The AMP is the average unit price paid by wholesalers for drugs
distributed through retail pharmacies.
The CMS has also outlined a more consistent definition as to how AMPs are
calculated. Retail pharmacy sales will exclude those sales to pharmacy benefit
managers (PBM) and all third party payers. Prompt payment discounts routinely
offered to wholesalers will also be excluded. Sales to mail-order pharmacies will now
by included, along with the sales of authorized generics to wholesalers.
53
Another key change is the intention of the CMS to make AMPs publicly available.
Monthly updates on AMPs will replace quarterly updates with the previously
considered proprietary information now disclosed on the internet.
Re-importation in decline
Given its impact on reducing the burden of healthcare costs, re-importation from
Canada continues to generate significant interest at the political level in the US. Bulk
reimportation of products into the US continues to be prohibited in the US and, despite
importation legislations being included in the currently proposed legislation (the
Pharmaceutical Market Access and Drug Safety Act of 2007), the ban is likely to
continue for the foreseeable future.
Recent trends have also shown a decline in the level of personal importation occurring
in the US. As shown in Figure 2.7, Canadian cross border internet pharmacy sales have
been in decline since 2004, largely as a result of changes in relative exchange rates.
However, continued decline in 2006 was also aided by the introduction of Medicare
Part D drug benefits, which provide seniors (the most prolific reimporters) with
comprehensive coverage, but does not cover purchases from sources outside the US.
54
Figure 2.7: Canadian cross border internet pharmacy sales, 2002-2006
Cross border sales (Can$ million)
700
593.1
581.9
600
500
420.1
400
300
252.0
211.2
200
100
0
2002
2003
2004
Source: Neil Turner, RTI Health Solutions based on IMS Health data
2005
2006
Business Insights
Follow-on biologics
Momentum has finally begun to build in the US, looking to move closer to initiating a
regulatory framework for the approval of biosimilars (follow-on biologics). In February
2007, a bill was introduced to amend the public health service act (PHSA) authorizing
the Secretary of Health and Human Services to approve abbreviated applications for
products deemed comparable to approved, reference biological products in the same
way in which small molecule generics are approved. It must be demonstrated that no
clinically meaningful differences exist between an original product and a comparable
biological with respect to safety and effectiveness. In addition to comparability, the two
products must also share the same mechanism of action, route of administration, dosage
form and strength.
The bill also provides the opportunity for biosimilar manufacturers to demonstrate
interchangeability, which requires both proof of comparability and an expectation to
55
produce the same clinical results in any given patient. As with the burden of
comparability, the required studies are at the discretion of the Secretary, and are likely
to be assigned on a case-by-case basis. The first applicant to receive interchangeability
status would gain a period of market exclusivity up to 180 days post-marketing. The
bill would prohibit the marketing of a rebranded interchangeable product by the
reference product holder during the exclusive marketing period.
It is clear that the difficulty of demonstrating comparability and interchangeability for

biosimilars, coupled with complexity of the patent situation for biologics will continue
to limit the ability of legislators to map out satisfactory approval frameworks.
However, with significant price pressures in the US beginning to focus on the high cost
of biologics, and with effective biosimilar regulations beginning to rolled out across
Europe, Australia and elsewhere, some progress in expediting the approval if
biosimilars in the US is inevitable in the short to medium term.
Reverse payments to generic companies

Reverse payments, or exclusion payment settlements, refer to agreements made
between brand and generic companies resulting in the abandonment or delay of
marketing for a new generic product. Reverse payments made in compensation to a
generic company as part of patent litigation settlements include payments for
intellectual property to the brand, an agreement by the brand not compete with an
authorized generic, payments for co-promoting the branded drug and co-development
payments relating to collaborative R&D projects.
The number of final settlement agreements involving compensation paid to the generics
company has increased significantly over the past three years. As shown in Figure 2.8,
according to Federal Trade Commission (FTC) figures, the number of compensatory
settlements has increased from five in 2004 to 14 in 2006.
56
Figure 2.8: Compensatory final settlements (reverse payments), 2004-2006
16
Number of agreements
14
12
Reverse payments for

other generic applicants
10
8
6
4
2
Reverse payments to
first-filers
1
2
0
2004
2005
2006
Fiscal year (October - September)

Business Insights
Source: Federal Trade Commission
The recent increase in reverse payments follows the Eleventh Circuit Appeals court
decision in March 2005 upholding the legality of such agreements, following a longrunning legal case brought by the FTC against earlier settlements involving the heart
drug, K-Dur 20, between Schering-Plough and the generic manufacturers, UpsherSmith Laboratories and ESI Lederle. However, concerns that such practices are
restricting patient access to cheaper generic products have resulted in the introduction
of the Preserve Access to Affordable Generics Act bill, which expressly prohibits
brand name drug manufacturers from pay-off agreements to keep generics from
entering the market. However, the high cost of entering into long running patent
litigation battles with big pharma companies with deep pockets may instead result in a
reduction of initial patent challenges should patent litigation payoffs be restricted,
which may result in reduced rather than expanded access to low-priced generics.
57

In a continually changing pricing environment, it can be difficult to predict future
pricing scenarios. However, for the purposes of planning and forecasting, three
alternative pricing scenarios in the US are presented below. The scenarios are based on
a five year outlook and include a best case, worst case and most likely scenario.
Scenarios are presented from the perspective of the pharmaceutical company aiming to
achieve the highest price possible and the broadest coverage for its products.
Table 2.4: Future pricing scenarios in the US

Best case
Worst case
Most likely
Wider access and compliance

through Medicare funding,
while maintaining high prices
Medicare Part D results in

lower prices, limited access
and budget cuts elsewhere
Mixed results from Medicare

bill, including wider access/
compliance and budget cuts
Limited state-level cost cutting

while Medicare and Medicaid
expenditure increases
Cost containment limits

Medicaid expenditure, while
individual states negotiate
additional rebates
State-level rebate interventions

are limited, while government
expenditure remains high
Re-enforced protection from

Canadian reimportation and
slow development of generics
and biogeneric regulations
PBM use of health economics,

reimportation legislation and
biogeneric equivalent ANDAs
Health economics used to justify

premium prices, reimportation
limited to private-level and
generic competition unchanged
Business Insights
Source: Delphi Pharma

Under the best case pricing scenario for pharmaceutical companies in the US, the 2003
Medicare Prescription Drug Act and the introduction of Medicare Part D drug plans
would lead to wider access, improved compliance and increased utilization. Prices for
effective drugs would remain high while volumes would increase in line with the
widened coverage. The reduced pressure from lobbying seniors means that drug prices
for chronic diseases associated with old age remain high into the future.
A best case pricing scenario would also involve a cut-back on state-level activity
involving the negotiating of supplemental rebates for Medicaid. Rebate schemes would
58
be limited to the handful of states already running such schemes, such as Maine and
Florida, and would not be extended nationwide. Federal level and high court-level
intervention would limit state-rebates. Meanwhile, the overall increase in combined
Medicare and Medicaid spending remains high with budget relief coming from other
cuts in federal level funds.
Finally, a best case scenario would involve re-enforced protection from Canadian
reimportation. Legislative plans will be shelved and state-level importation programs
will be successfully challenged in the courts and limited though limitations in supply.
Generic legislation will continue unchanged, but pharma companies will work harder
to challenge generic entry and limit uptake through line extensions and reformulations.
Biogeneric regulations will be enforced requiring submission of full trial data for
follow-up copy products.

Under a worst case pricing scenario, the pharmaceutical industry in the US would be
hard hit by the results of the governments $400 billion Medicare bill. The results of
the extended coverage would be slow in generating further increased usage, while
quick in generating cost containment cuts across Medicare and other government-level
drug benefit schemes.
In a worse case pricing scenario Medicaid expenditure would be severely limited in the
future in order to reverse 10 years of continued growth. The result would be significant
rebates and limited formulary lists for Medicaid drug plans. At the same time, more
states would sign on to individual supplemental rebate schemes, generating significant
rebates on a company-by-company basis.
Finally, in a worse case scenario, PBMs would make a wider use of pharmacoeconomic
evaluations in line with AMCP guidelines. Reimportation legislation would come into
force, allowing the free trade of products from Canada by licensed wholesalers. At the
same time regulations would be established allowing biogeneric copy products to
59
submit ANDA-type submissions based on bioequivalence and requiring no additional

studies.

Over the next five years, the most likely pricing scenario in the US will involve mixed
results from the recent Medicare drug plan. Returns from widened access appear
positive, while increases in government funded drug prescriptions are likely to result in
some degree of negative influence on prices.
In the most likely pricing scenario state-level rebate interventions already in place will
continue, but will not escalate to a wider number of states. Cost containment at the
state level will continue but will maintain Medicaid budgets at their current levels.
Budgets will still be overallocated, but Medicaid expenditure will be given high
priority and remain high.
Finally, in a most likely scenario health economic evaluations will only be used on a
voluntary basis for pharmaceutical companies to justify high prices for premium
products. Canadian reimportation will continue to be limited to personal use and statelevel programs, with no consensus reached at the legislative level. Generic competition
will continue unchanged, striking a balance between the protection of innovative
product returns and maximizing access to effective medicines, with no significant
progress in definitive biosimilar legislation.
Canadian pricing regulations

Health care provision in Canada is primarily funded by the federal government, with
the majority of healthcare free at the point of use, The federal government pays transfer
payments to each province, which in turn manage the delivery of health care. The
Canada Health Act sets out the regulatory framework within which Canadian provinces
administer the majority of health care services. However, the Act only covers
60
medications prescribed as part of institutional care. All other aspects of pharmaceutical

policy are left to individual provincial health care ministries. A wide variation exists
across provinces in the way in which medicines are financed.
Public funding is used primarily to subsidize drug costs for the elderly and those
receiving social assistance. As a result, the share of total pharmaceutical expenditure
accounted for by public expenditure is significantly lower in Canada compared with
other developed countries. Each of the provinces subsidizes the cost of prescription
medicines for some part of the population through their provincial drug benefit
programs. The vast majority of Canadians also have some form of private coverage for
prescription medicines.
Federal measures
The patented medicines price review board (PMPRB) is an independent body created
by Parliament in 1987 to protect consumer interests and contribute to Canadian health
care by ensuring manufacturers do not charge excessive prices. The PMPRB reports
directly to Parliament through the Minister of Health.
The PMPRB is responsible for regulating the prices of patented prescription and nonprescription products. If the Board finds that an ex-manufacturing price is excessive it
may order the patentee to reduce the price and take measures to offset any excessive
revenues received. The PMPRB has no authority to regulate the prices of non-patented
drugs, including generic drugs sold under compulsory licenses, and does not have
jurisdiction over prices charged by wholesalers or pharmacists.
Section 85(1) of the 1987 Patent Act sets out those factors that the PMPRB must take
into account when determining whether a medicine is being sold at an excessive price.
These factors include:
The prices at which the medicine has been sold in the relevant market;
the prices of other medicines in the same therapeutic class;
61
the prices of the medicine and of the other medicines in other countries;
changes in the Consumer Price Index;
such other factors as may be specified by regulations.
The reasonable relationship test considers the association between the strength and
the price of the same medication in the same or comparable dosage forms. The test
defines a maximum non-excessive introductory price for the new drug.
The therapeutic class comparison test compares the price of the new drug under
review with the prices of drugs that are clinically equivalent and are sold in the same
market at prices that the PMPRB considers not to be excessive.
The international price comparison test compares the average transaction price of the
drug under review with the publicly available ex-manufacturing prices of the same
medicine sold in other countries, including Germany, France, Italy, Sweden,
Switzerland, the UK and the US.
Government-led measures have recently looked to ease access to generics. Changes to

intellectual property regulations have been proposed to speed up the market entry of
generic drugs, while at the same time encouraging the continued research and
development of innovative new drugs. Generic manufacturers have welcomed the
regulations limiting the practice of evergreening, which in the past has allowed brand
manufacturers to file new patents on a product towards the end of the original patents
life, with the purpose of delaying generic competition.
Provincial measures
The provincial drug benefit programs differ in the subsection of the population they
assist. The provinces of Alberta, British Columbia, Quebec, Manitoba and
Saskatchewan offer universal coverage. In Ontario, the Tillium Drug Plan is available
62
to those not covered by the Ontario Drug Benefit Plan, providing they meet the income
requirements.
Large variations exist in employee benefit plans, both in terms of the services covered
and the amount of coverage. Typically, the terms of coverage and contributions are
arrived at through negotiations between individual employers and insurance
companies. Each provincial drug plan, except BCs Pharmacare, employs a formulary
to set out the drugs available for reimbursement. If a drug is not included on a
formulary, the drug plan will reimburse only the cost of a therapeutically equivalent
product.
In British Columbia, a reference pricing system was introduced in 1996 by the

provinces Pharmacare drug benefit program. In this system drugs which are used to
treat the same clinical conditions are assigned to the same reference class. Patients are
reimbursed at the price of the lowest cost drug within a reference class. Patients
prescribed higher priced products have the option to pay above the reference price, or
to ask for a cheaper drug. Reference pricing has also been introduced in the province of
New Brunswick, with a system similar to that of the system used in British Columbia.
Each province employs a committee which reviews drug submissions to determine if a
product can be placed on the formulary of the drug benefits list of approved
medications.
Each provincial drug benefit program includes cost sharing or user fees policies.
Beneficiaries are required to make a financial contribution towards the price of the
medicines they acquire. These policies are able to reduce overall costs, but do not
necessarily lead to increased use of lower cost medicines.
Generic medicine prices are established in provincial formulary pricing policies.

Across the country, the average discount in price associated with purchasing a generic
versus an originator drug is estimated at 50%. In Ontario, it has been determined since
63
1994 that the first generic product on the market must be 25% cheaper than the original
brand, and subsequent generic entrants must be priced a further 10% lower.
All provincial drug benefit plans have prescribing guidelines and formularies that favor
generic medicines. Additional policies to encourage the prescribing of generics by
physicians includes instruction and encouragement during medical education to use
generic drug names and prescribe generic medicines.
Each province in Canada mandates generic substitution to some extent. The methods
used are to either regulate substitution by pharmacists as mandatory, or to cover only
the low cost alternative or reference-based price in the reimbursement conditions of the
provincial plan. In the provinces of Alberta, British Columbia, and Quebec the latter
system is in place.
Common drug review expansion

Since its introduction in 2003, the Common Drug Review (CDR) has been restricted to
clinical and cost-effectiveness reviews of new molecular entities and combination
products. However, from the end of 2007 the CDR will begin to review all new
indications for already approved drugs. Reviews for new indications will now be
centralized in order to provide a single, consistent process for receiving inclusion on
the formularies of all federal, provincial and territorial drug plans.
If the centralized CDR approach was to replace the need for public drug plans
independent reviews then new indications should receive a more efficient route to
market access. However, it appears likely that a certain amount of independent reassessment at the public drug plan level will persist resulting in the CDR becoming an
additional, rather than alternative, hurdle for gaining market access in new indications.
An additional hurdle represented by the current CDR process is the failure of the costeffectiveness process to capture the value of drugs for significant unmet needs. A
number of orphan drugs, including Somavert for acromegaly, Xolair for chronic asthma
64
and Sensipar for chronic kidney disease, are approved widely in the US and across
Europe, but have failed to pass the CDR cost-effectiveness hurdle. There is growing
pressure to remove this group of drugs from the remit of the CDR process, as is the
case for cancer biologics, and more recently oral oncology drugs for ambulatory use.
Patented Medicine Price Review Board progress

The Patented Medicine Price Review Board (PMPRB) is tasked with the role of
ensuring ex-factory prices for patented drugs are not excessive. As part of its work a
series of Excessive Price Guidelines were published for advanced consultation in 2006.
These guidelines included limiting prices for most new patent drugs to the equivalent
highest cost of therapy for existing drugs to treat the same disease, while the prices of
breakthrough new patented drugs will generally be limited to the median prices for the
drug found in France, Germany, Italy, Sweden, Switzerland, the UK and the US.
Annual price increases were also limited by links to the consumer price index.
Eight Voluntary Compliance Undertakings (VCU) were initiated in 2005 by

manufacturers found not to be in compliance with the PMPRBs guidelines. These
commitments to reduce prices in line with the guidelines were given for JanssenOrthos Evra, 7/7/7 and Risperdal, for GlaxoSmithKlines Paxil CR, for Hoffman-La
Roches Tamiflu, for Amersham Healths Ceretec, for Novartiss Starlix and for Sanofi
Pasteurs Dukoral. Pending hearings to determine non-compliance for 2006 include
Shires Adderall XR, Janssen-Orthos Risperdal Consta, 3Ms Airomir and Tevas
Copaxone.
65
66
CHAPTER 3

Europe
67
Chapter 3

Europe
Summary
The major European pharmaceutical markets operate a variety of different

healthcare systems subject to differing cost containment measures. In pricecontrolled countries, such as Spain and Italy, budgetary responsibilities and
controls are devolved to the regional level. In traditional prescriber-led markets,
such as the UK and Germany, national hurdles including NICE and positive lists
have been introduced.

controlling public drug benefits, with some focusing on limiting demand, as
evidenced by the devolved budgets found in Germany and the UK, and others on
regulating price, as is found in France, Italy and Spain. However, some countries,
including Italy and Spain, are adopting both approaches, extending greater
regional autonomy for healthcare and budget delivery.
continued convergence of prices across different markets, resulting from the
ongoing pressures of parallel trade and reference pricing. Average prices will
tend towards the middle of the current range, with high price markets such as the
UK and Germany lowering prices and low price markets such as France, Italy and
Spain increasing average prices, particularly for innovative therapies.
In the most likely pricing scenario the impact of pharmacoeconomics, parallel

trade and generic substitution will continue to increase gradually. These indirect
cost containment measures will continue to play an important role in managing
the healthcare spend for all European governments. The accession of 10 new
countries to the EU will have a small, but negative, effect on prices throughout
the EU-15. Reference pricing systems will be adjusted to protect against a lower
average EU price, but some reference pricing relationships will inevitably result
in downward pressure on prices.
68
Introduction
This chapter outlines the current pricing regulations impacting on the key European
pharmaceutical markets. The different regulations underpinning the French, German,
Italian, Spanish and UK markets are presented in detail. Recent developments are also
analyzed, along with future pricing scenarios for the next five years.
European pricing regulations

The major European pharmaceutical markets operate a variety of different healthcare
systems subject to differing cost containment measures. In price-controlled countries,
such as Spain and Italy, budgetary responsibilities and controls are devolved to the
regional level. In traditional prescriber-led markets, such as the UK and Germany,
national hurdles including NICE and positive lists have been introduced.

controlling public drug benefits, with some focusing on limiting demand, as evidenced
by the devolved budgets found in Germany and the UK, and others on regulating price,
as is found in France, Italy and Spain. However, some countries, including Italy and
Spain, are adopting both approaches, extending greater regional autonomy for
healthcare and budget delivery.
Economic evaluations are increasingly being used by decision-makers as part of the

pricing and reimbursement process. Most of the major pharmaceutical markets now
either require mandatory submission of economic evaluations by pharmaceutical
companies or will use economic evaluations to some degree in decision-making.
Adoption has occurred rapidly over the past five years and there is a shift towards the
adoption of mandatory requirements.
69
In Europe, three of the five major pharmaceutical markets employ external reference
pricing systems. France, Italy and Spain reference the prices of drugs in other European
markets in order to arrive at a weighted price for reimbursement. Along with parallel
trade, international reference pricing reinforces the links between key European
markets, whereby prices in one market can directly affect price and sales in another
market.
French pricing regulations

The French statutory health insurance system has close to universal coverage of the
countrys population. Individuals are enrolled into an insurance fund based on their
occupational status. Approximately 90% of the French population are voluntary
members of supplementary sickness funds or subscribe to private health insurance.
To gain reimbursement, drugs must be registered on the list of reimbursable drugs with
costs covered for members of the social security scheme (liste Scurit Sociale et
Collectivits). To achieve registration, drugs are assessed by the Transparency
Commission. Whereas approval is based on efficacy, tolerance and safety of use, the
Transparency Commission assesses the medical benefit delivered by the new drug.
Technical dossiers, which manufacturers must submit to the Transparency
Commission, contain a wide range of details:
Product characteristics (classification, pharmacology);
epidemiology of the disease;
comparator products;
recommendation of a therapeutic strategy;
analysis of clinical trial results (safety and efficacy);
sales estimates by target population.
70
Drugs are also assessed in the context of the Amelioration du Service Medical Rendu
(ASMR). The ASMR is a scale that evaluates the level of medical service delivered by
a drug. In applying the ASMR, the Commission considers the added therapeutic value
that the proposed drug would offer to the French healthcare system. The medical
benefit offered by a new drug is then compared with that of existing therapies.
The Transparency Commission then forms an opinion as to whether a drug should be

added to the list of drugs that are reimbursable under the national health system, and at
which particular reimbursement rate. Depending on the results of these assessments,
reimbursement can range from 35% to 100% of a products cost. The Transparency
Commission then passes its opinions onto the Economic Committee for Health
Products (Comit des Produits de Sant, CEPS), which has final responsible for setting
the products price.
The drugs manufacturer must submit a separate dossier to the CEPS containing
information regarding any economic evaluations that have been carried out and any
comparisons of cost with other products. As part of its assessment, the CEPS may
consult with an advisory group of experts in pharmacoeconomic evaluations. The
CEPS will then engage in negotiations with manufacturers, which ultimately result in
agreement over the products pricing.
Over recent years, the French authorities have sought to increase the role of economic
evaluations in pricing and reimbursement decisions for new drugs. Submission of
economic evaluations is not mandatory, but pharmaceutical companies are advised that
submission is good practice and as such economic evaluations are a regular component
of submissions.

In 2006 total reimbursed medicine sales increased by just 1.8% to 22.9 billion
according to the French pricing committee, Comit Economique des Produits de Sant
(CEPS). The slow down in sales growth was in part the result of several cost
71
containment measures initiated in 2005-2006. Price cuts on off-patent medicines

affecting 19-20% of the market by value resulted in a reduction of 450 million, while
delisting drugs of insufficient medical benefit resulted in further savings of 320
million.
Sales of generics through retail pharmacies rose 11.5% to 1.6 billion in 2006, largely
as a result of a number of high price drugs entering the off-patent market. Hospital
sector drug sales increased by 7% to 4.8 billion in 2006, with around half of all sales
relating to drugs on the retrocession list.
Recent developments in France

Parallel trade
Frances first parallel import licenses were approved in early 2007, 33 years after the
Netherlands granted its first licenses. While French drug price levels do not offer the
same opportunities to parallel importers as those found in Germany and the UK, a
number of companies, including Pharma Lab and Mediwin UK, are now beginning to
ship drugs to the French market. Initial imports are set to include AstraZenecas
Arimidex (anastrozole) from Spain and the UK, Serviers Coversyl (perindopril) from
Spain and Takedas Ogast (lansoprazole) from Portugal.
An agreement between the three main pharmacists associations and the National
Union of Health Insurers (UNCAM) set the national generic substitution rate target at
75% for 2007. The target rate involves drugs on the substitution list (repertoire des
medicaments gnriques) and will remain at 75% through to 2011. A total of 30 active
ingredients were issued with separate substitution targets in 2007.
72
German pricing regulations

Germanys statutory healthcare system covers 90% of the population and is financed
by payroll and general taxes (80%) coupled with a contribution (20%) from private
insurance and patient co-payments.
The state health system covers approximately 80% of prescription drug costs. In
general, the reimbursement rate for most prescription pharmaceuticals runs at 100%.
Patients typically pay a small fee per dispensed pack of between four to five euros. For
some products, patient have to pay the difference between a fixed price (Festbetrag) set
by the government and the actual price. However, pharmaceutical companies tend to
set prices below this level.
Historically, the pharmaceutical industry has enjoyed a relatively free pricing system in
Germany leading to some of the highest pharmaceutical prices outside of the US. A
reference system has been in place since 1989, and primarily covers older genericized
drugs. The German association responsible for setting the reference prices, the Federal
Committee of Physicians and Sickness Insurance Funds (BAK) considers the following
factors when deciding on a pricing reference group:
Whether the indication for a product is actually a disease;
whether the disease must be treated by the Statutory Health Insurance Scheme
(GKV);
if the disease is to be treated under the GKV, whether there already are drugs
available to do this;
whether the disease can be treated equally well with simple, non-pharmacological
methods;
how the cost-effectiveness of the different options compare.
73

Out-of-hospital pharmaceutical sales in Germany increased by 16.8% to 25.3 billion
in 2005, according to the annual drug prescription report (Arzneiverordnungs). The
growth has been generated by a 3.6% increase in the total number of prescriptions
alongside a continued shift towards the prescription of innovative, more expensive
drugs. Drug spend accounted for 16.5% of total statutory healthcare insurance
expenditure in 2005, compared with 15.6% in 2004.
Recent developments in Germany

The Statutory Health Insurance Competition Enhancement law
A new healthcare reform law in Germany, the Statutory Health Insurance Competition
Enhancement law (GKV-WSG) came into effect on 1st April 2007. A key element of
the reform is the centralization of healthcare funding from 2009 in order to promote
efficiencies across Germanys 242 statutory health insurers. The centralized health
fund (Geshundheitsfonds) will be financed through employee and employer
contributions and through the tax system. As of 2009, private health insurers must also
offer a basic rate package comparable to those of the statutory health insurers.
A number of pharmaceutical sector changes also accompany the healthcare funding

reforms outlined in the GKV-WSG. A major reform is the introduction of cost-benefit
assessment for new, already approved drugs. These assessments will be carried out by
the Institute for Quality and Economic Efficiency within the Health Service. While
reimbursement decisions will be carried out in advance of any cost-benefit assessment,
a negative result can result in statutory health insurers imposing a maximum
reimbursement price for drugs not included in the reference pricing system.
GKV-WSG also reformed the generic substitution regulations. Agreements between

statutory health insurers and pharmacies now require a pharmacist to dispense versions
of the prescribed drug falling under a discount agreement, unless a doctor prohibits
74
generic substitution. As of August 2007, around 200 statutory health insurers had
agreed discount deals with over 50 generic manufacturers according to the ABDA
pharmacists association.
Italian pricing regulations

The pricing of drugs in Italy is controlled through the Central Pricing Agency
(Comitato Interministeriale per la Programmazione Economica, CIPE). For new drugs,
pricing negotiations take into account a number of factors, including:
The degree of innovation;
the products price in other countries;
sales estimates;
epidemiology;
the target population for the drug;
the number of patients expected to take the drug;
comparator products;
relationship to other therapies;
improvements in quality of life;
any available pharmacoeconomic data.
Within the Italian reimbursement system, prices are set using the average European
price as a guide for each product. Prices are set according to the average for equivalent
products in 12 EU benchmark countries, of which at least four are mandatory and two
have to be price controlled. Failure by manufacturers to bring the price of a product in
75
line with the European average results in an immediate delisting from the fully
reimbursed Class A to the non-reimbursed Class C.
Prescription pharmaceuticals are grouped into four reimbursement categories:
Category A Fully reimbursed and including drugs for chronic diseases. Patients
often have to pay a fixed price depending on the number and type of items
prescribed;
Category B Partially reimbursed and including important drugs not covered by

category A. For these, 50% of the price is reimbursed by the state (this category
was removed in January 2003);
Category C Non-reimbursed products and manufactures are free to set prices for
this category;
Category H Hospital only drugs.
The assignment of a product to a reimbursement category is based on the importance of

the disease, the drugs risk-benefit profile (safety versus efficacy) and the cost of
therapy. While economic evaluations are formally required for the negotiation of
prices, reimbursement decisions look only at the cost of therapy in relation to the
national drug expenditure budget.
The Italian Group for Pharmacoeconomic Studies (GISF) provides guidelines for use in
agreeing prices for products approved through the EU centralized and mutual
recognition procedures. Apart from these guidelines, CIPE regulations detail the
pharmacoeconomic methodology to be used to derive the required cost-effectiveness
data for submissions. These studies are particularly important for innovative products
in new classes, or in classes where existing therapies are not adequate or where the
product is claimed to have a better cost-benefit profile than products available for the
same indication.
76

According to the Italian pharmacy association, Federfarma, pharmaceutical expenditure
in Italy increased by just 4% in 2006 to 12.3 billion. The number of prescription
dispensed increased by 5.8% between 2005 and 2006. Price cuts introduced by the
Medicines Agency (AIFA) in July and October of 2006 where the main causes of the
slowdown in drug sales growth.
Recent developments in Italy

Committed to clearing their healthcare budget deficits by 2009, the regions with the
most serious deficits have begun implementing a series of new cost-containment
measures. Liguria, Lazio and Calabria will introduce therapeutic reference pricing
policies that operate in addition to the national reference price system. The main
change to therapeutic prices in these regions will be the limitation of full
reimbursement for generic lansoprazole in the proton pump inhibitors class.
Other regional cost-containment measures include a restriction on multiple

prescriptions and a requirement to prescribe generics where appropriate and available
in Calabria. Lazio is set to extend the direct distribution of drugs to include interferon
and antibiotics, while Sicily will introduce a temporary co-payment system based on
drug price.
The Italian pharmaceutical industry association (Farmaindustria) and the Italian

Medicines Agency (AIFI) are opposed to additional regional fragmentation in
healthcare services. Both groups are concerned that regional reference pricing and costcontainment measures will lead to different levels of access to drugs and healthcare
across regions.
77
2007 Finance Law

The 2007 Finance Law set the public healthcare budget at 96.0 billion in 2007,
including a further 2 billion to cover the 2006 healthcare budget deficit. Medicines
Agency (AIFA) cost containment measures already in place were reconfirmed,
including 5% price cuts, 0.6% manufacturers discounts, and selected price reductions
up to 10%. These measures are anticipated to save over 2 billion during 2007.
Manufacturers have been offered a payback option in order to avoid the 5% price cuts
scheduled for October 2007. New updated diagnostic and therapeutic guidelines will
also be introduced along with electronic prescribing, enabling the Health Ministry to
more closely control and monitor drug use and consumption levels.
Spanish pricing regulations

Spanish pharmaceutical prices are set by the Interministerial Commission of
Pharmaceutical Prices. Spain operates a cost plus pricing system where maximum
drug prices are based on the costs incurred by the drugs manufacturer (R&D,
manufacturing and marketing and administration) plus a premium. The maximum
return on each product is limited to between 12% and 18% over capital employed with
the exact percentage determined by level of innovation and the availability of
therapeutic equivalents and their prices. In addition, European price comparisons and
the potential volume and value of sales are also taken into account. Tight control of
pricing has traditionally kept Spanish prices well below those prevailing in other major
European markets.
Reimbursement decisions are undertaken by the National Committee for Rational Use
of Medicines and are largely based upon the following factors:
Importance of the disease;
priorities of different population groups;
therapeutic and social utility of the drug;

78
budget limitations;
availability of similar or better alternatives at a lower price or lower treatment cost.
The Spanish reimbursement system uses three different reimbursement levels:
Drugs in class R include chronic diseases, such as diabetes, hypertension, HIV or

depression, which are reimbursed at a level of 90%;
drugs in group N are reimbursed to a level of 60%;
remaining drugs are not reimbursed at all.
Retired people receive all drugs in groups R and N free of charge. However, in 2001
the Health Minister, Celia Villalobos, re-opened a debate looking at reviewing
reimbursement for the elderly. The government considered changing the current system
so that pensioners would pay 10% of the price of medicines, with the other 90% being
reimbursed by the state. This would be used as a deterrent measure to combat fraud
and over purchasing.
During the late 1990s, Spains healthcare and pharmaceutical policy has been
concerned primarily with cost containment. In recent years Spain has experienced an
annual growth in public prescription drug spending in the order of 10% and there is
concern that the public reimbursement system, which is regarded as one of the most
generous in Europe, is unsustainable. Spain has traditionally used a wide range of
unconnected pharmaceutical policies influencing the supplier side of the market in
order to drive its cost-containment efforts. These include:
Negative lists of excluded drugs;
rebates;
reference pricing (introduced December 2000);
price cuts;
79
pharmacy discounts;
encouragement of generic substitution;
international price comparisons.
Historically, the system has had little positive impact on prescription drug spend and
has been criticized for being unfocused and ultimately exhibiting a lack of control.

The Spanish pharmaceutical industry association (Farmaindustria) reported that the
Spanish pharmaceutical sales increased by 7.3% to 12.2 billion in 2006. Retail
prescription pharmacy sales increased by just 6.7% to 8.9 billion in 2006, feeling the
effects of a 2% across the board price cut imposed in 2006. Generics represented just
6.1% of total prescription drug sales in 2006, with new generic products accounting for
75% of all new drug launches in 2006.
The weighted average drug price for all drugs marketed in Spain was 7.91 in 2006.
European prices continue to harmonize, but as shown in Figure 3.9, average drug prices
in Spain continue to be almost half those found in Europes biggest pharmaceutical
market, Germany.
80
16
14
12
10
8
14.91
12.06
11.60
11.38
7.70
6.44
6.44
Fr
an
ce
ly
Ita
Sp
ai
n
UK
Be
lg
iu
m
G
er
m
Ne
th
er
la
nd
s
0
an
y
Average ex-factory drug price, 2005 ()
Figure 3.9: Average ex-factory drug prices in key European markets, 2005
Business Insights
Source: Farmaindustria
Recent developments in Spain

Following decentralization of the Spanish healthcare system in 2002, the regions have
become increasingly active in initiating demand-side measures to reduce healthcare
expenditures. Prescribing budgets in Andalucia involve rewards for physicians if INN
prescriptions (non-proprietary name prescriptions facilitating generic substitution)
account for over 60% of total prescriptions. Andalucia, Cataluna and Pais Vasco have
joined together to form the Joint Committee for the Evaluation of New Medicines
aimed at sharing data on perceived benefits for new drugs.
Maximum reimbursement prices below those in place at the national level have
historically been used as an effective cost containment mechanism at the regional level.
81
However, the implementation of the modified reference price system in March 2007
has led to regional maximum price reimbursement schemes been withdrawn. The new
reference price system involves substitution based on an identical product at the
cheapest price and not the second or third generic in a reference group used by regional
maximum price schemes.
Modified reference price system

A modified reference pricing system come into force in March 2007. The reference
price system, which dates back to 2000, now covers a total of 4,237 drug presentations
applicable to 119 active ingredients. Products continue to be grouped by active
ingredient and route of administration with each group containing at least one generic
version.
The reference price level will continue to be based on the arithmetic mean of the daily
treatment cost of the three cheapest drugs regardless of market share. However, there is
no longer the requirement for selected drugs to be produced by different companies.
Other changes include the pricing of off-patent drugs for which no identical
substitutable generic is marketed at or below the reference price level.
As was previously the case, prescriptions will be dispensed as written if the drug is
priced at or below the reference price. If a drugs price is higher than the reference
price the pharmacist must dispense the cheapest identical product. Drugs, such as
insulins, coagulation factors and cardiac glucosides, that are difficult to substitute will
now be excluded from the reference price system.
Anti-parallel trade strategies

Dual pricing in Spain, whereby pharmaceuticals are priced differently depending on
whether they are distributed and dispensed in Spain or not, was first introduced by
GlaxoSmithKline (GSK) in 1998 and by government regulations in 1999. However, the
European Commissions ruling that GSKs actions were uncompetitive led to the
scheme being abandoned before reinstatement following the 2006 European Unions
82
Court of First Instance ruling partially annulling the earlier decision. In October 2006,
Janssen-Cilag announced its intention to initiate a dual price system for its products,
followed by Merck, Sharp & Dohmes decision in February 2007 to apply a dual price
system to 14 key drugs including Cozaar (losartan) and Zocor (simvastatin).
Another strategy to limit parallel exports from the Spanish market is direct distribution.
Early intentions by Pfizer to initiate direct distribution in 2005 were replaced by a new
national distribution agreement and dual price contracts for which Pfizer is now
currently under investigation relating to anticompetitive behavior similar to GSK
above. However, since July 2006, Eli Lilly has directly distributed Zyprexa Velotab
(olanzapine) to retail pharmacies in order to limit supply shortages of the drug resulting
from exportation. The government is currently considering several options to help
improve the traceability of drugs through the distribution to both help limit parallel
exportation, but also to limit the unilateral efforts applied by leading drug
manufacturers in the areas of dual pricing and direct distribution.
UK pricing regulations
The National Health Service (NHS) is a statutory health system with total coverage of
UK residents. The Department of Health (DoH), overseen by the Secretary of State for
Health, is responsible for health services in the UK.
The majority of drugs sold in the UK are reimbursed under the NHS at a price
determined by the manufacturer. However, while the UK operates a system relatively
free of direct price controls, prices of prescription drugs are controlled in an indirect
manner by the Pharmaceutical Price Regulation Scheme (PPRS). The scheme
represents an agreement between government and the pharmaceutical industry that
controls the profit that pharmaceutical companies are able to make through their
trading with the NHS. The explicit aim of the scheme has been to balance the
conflicting needs of the NHS with the needs of the research-based pharmaceutical
industry.
83
In January 2005, a revised 5-year PPRS came into force. The new PPRS restricts the
profit (or return on capital) that manufacturers can make on sales of medicines to the
NHS to 21% of a companys total NHS sales. The headline news was a 7% price cut on
the NHS list price of all PPRS-covered medicines from 1 January 2005. However, as a
five-year deal it was considered to offer the industry some degree of stability for
ongoing R&D investments.
Aside from the price cut, the biggest change to the PPRS agreement is the allowances
that companies can claim against their sales to the NHS, which have been modernized
to reflect recent changes to the structure of the NHS. The R&D allowance has been
raised to a maximum of 28% under the new PPRS, compared with 23% under the old
agreement. The R&D allowance is seen as a way of countering the price cut and
helping to promote a strong R&D-based industry in the UK.
Drugs prescribed on the NHS are fully reimbursed with the exception of a fixed patient
charge per prescription item. The names of drugs that cannot be prescribed on the NHS
are kept on the limited list, which has been extended periodically since its introduction.
Recent developments in the UK

The future of the PPRS
In 2007, the Office of Fair Trading (OFT) published the results of its investigation into
the impact of the Pharmaceutical Price Regulation Schemes (PPRS) most recent
revision in 2005. The results were critical of the PPRSs ability to meet its key
objectives:
Securing NHS medicines at reasonable prices;
promoting a strong and profitable pharmaceutical industry;
84
encouraging the efficient and competitive supply of current and future medicines to
the UK and elsewhere.
The OFT determined that 500 million of 2005 drug expenditures could have been
saved by the NHS through more cost-effective prescribing. The OFT recommended the
replacement of current profit and price controls with a value-based pricing system,
linking a drugs price to its clinical and therapeutic value as can be found in Canada,
Australia and Sweden.
Despite continued support from the pharmaceutical industry for the current PPRS
scheme, it seems inevitable that the PPRS will be overhauled. However, the
introduction of value-based pricing will be complex and as a result is likely to be
introduced in incremental phases. Certainly, the current PPRS appears likely to remain
largely intact through to its completion at the end of 2009.
Risk sharing schemes

In February 2002, the Department of Health (DoH) formed an agreement with four
leading manufacturers of Multiple Sclerosis (MS) drugs to support the provision of MS
drugs through the National Health Service (NHS). Despite a negative opinion for the
use of beta interferons and glatiramer acetate in the long-term treatment of MS given
by the National Institute for Clinical Excellence (NICE), significant pressure from
patient groups resulted in a payment by results risk sharing scheme. In essence the
scheme involves a commitment by the four manufacturers to reduce prices if their MS
drugs fail to meet agreed cost effectiveness benchmarks over time.
A second risk sharing scheme was recommended by NICE in June 2007, involving
Janssen-Cilags (J&J) cancer drug, Velcade (bortezomib). The proposed refund
guarantee scheme followed the failure of NICE to recommend Velcade for routine use
in the NHS determining that the drug failed to meet its usual cost-effective thresholds.
Under the proposed payment by results agreement the NHS would receive a refund for
the cost of providing the product to patients who do not respond positively within four
85
cycles of treatment. From the perspective of J&J the scheme would allow UK market
access while protecting its UK list price, which would shield from any effects on price
in countries that currently reference UK prices.
Declining parallel trade

After being the largest market by volume of parallel trade for some time, recent
declines in parallel imports to the UK have resulted in it being overtaken by the
German market. The trend is largely a result of the 2005 Pharmaceutical Price
Regulation Scheme (PPRS) which included modulation provisions allowing
manufacturers to move prices up and down in order to maximize sales. Many
companies chose to use the provision to help mitigate against the arbitrage opportunity
for parallel traders and reduce the level of parallel imports for key products.
Further measures in the UK that are likely to result in a restriction on parallel import
opportunities are current trends towards direct distribution systems. Pfizer established a
direct distribution system in March 2007 in an attempt to limit the risk of counterfeit
products entering the supply chain, with other large companies are likely to follow suit.
However, direct distribution will also result in a block both on parallel imports and
exports to and from the UK.
Expanding the NICE remit

At the end of 2006, it was announced that the National Institute for Health and Clinical
Excellences (NICE) remit would be expanded to look at the use of ineffective
technologies currently on the market. This will result in recommendations that certain
ineffective technologies should be withdrawn from use, while other technologies would
be replaced by more appropriate approaches.
86

pricing scenarios. However, for the purposes of planning and forecasting three
alternative pricing scenarios in Europe are presented below. The scenarios are based on
a five year outlook and include a best case, worst case and most likely scenario.
achieve the highest price possible with the broadest reimbursement coverage for its
products.
Table 3.5: Future pricing scenarios in Europe

Best case
Worst case
Most likely
Continued reference pricing

and parallel trade results in a
convergence of European
prices at the high end of the
current range
Continued reference pricing

and parallel trade result in a
convergence of European
prices at the low end of the
current range
Continued reference pricing and

parallel trade result in some
convergence of European prices
at the middle of the current
range, but with some differences
No significant increase in the

impact of health economics,
parallel trade and generic
substitution
A significant increase in the

impact of health economics
substitution
A gradual increase in the

impact of health economics,
substitution
Limited negative exposure to

low reference prices in EU
accession countries
Significant exposure to
accession countries
Gradual negative exposure to

accession countries
Business Insights

In a best case pricing scenario, European prices will converge at the high end of the
current range as result of successful protection strategies against the pressures of
parallel trade and reference pricing. European prices would be maximized through
protecting the high prices currently achieved in the UK and Germany and raising the
lower prices prevailing in France, Italy and Spain. While some convergence of prices
appears inevitable, achieving a high average price will rely on the support of
87
governments in low price countries, which is unlikely given continued costcontainment measures.
Where cost containment concentrates on older and generic products, the opportunity
for achieving high prices in support of innovative and effective treatments will remain.
Even in light of the high cost of healthcare provision, most governments continue to
recognize the need for an incentives mechanism for innovative new therapies. In a best
case pricing scenario current levels of generic substitution and use of health economics
will prevail across European markets. Governments, such as the UK, are unlikely to
reverse pro-generics or pharmacoeconomics regulations, but similar legislation will not
be enforced in new markets, or extended in established ones.
In a best case pricing scenario the accession of 10 new countries to the EU will not
have any significant effect on prices throughout the EU-15. Reference pricing systems
will be adjusted to protect against a lower average EU price, and current measures
protecting against parallel imports and generic substitution will be extended.

In a worst case pricing scenario, European prices will converge at the low end of the
current range as companies fail to protect against the pressures of parallel trade and
reference pricing. If pharmaceutical companies were unable to initiate adequate
protection strategies against parallel trade and reference pricing, European prices
would be minimized through eventual price reductions in high price markets such as
Germany and the UK. While some convergence of prices appears inevitable, without
the continued support of governments in high price countries average European prices
will decline to levels similar to those found in low price countries.
In a worst case pricing scenario, government reimbursement bodies across Europe will
continue to implement wide-ranging cost containment measures. The prices of all
pharmaceuticals, including old, generic and innovative new therapies, will be cut and
reimbursement access will be limited. Governments may begin to compromise the need
88
for R&D incentives in order to achieve the significant reductions in healthcare costs
needed to provide continued coverage. In a worst case pricing scenario current levels of
generic substitution and use of health economics will be increased across all European
markets. Governments, such as the UK, that already implement pro-generics or
pharmacoeconomics regulations will extend their regulations, while those markets
without such regulations will implement new ones.
In a worst case pricing scenario the accession of 10 new countries to the EU will have a
negative effect on prices throughout the EU-15. Reference pricing systems will be
affected by a lower average EU price, and parallel imports and generic substitution will
be increased.

continued convergence of prices across different markets, resulting from the ongoing
pressures of parallel trade and reference pricing. Average prices will tend towards the
middle of the current range, with high price markets such as the UK and Germany
lowering prices and low price markets such as France, Italy and Spain increasing
average prices, particularly for innovative therapies. However, the availability of some
protection against the effects of parallel trade and reference pricing will result in some
continued price differentials between markets.
In the most likely pricing scenario the impact of pharmacoeconomics, parallel trade and
generic substitution will continue to increase gradually. These indirect cost
containment measures will continue to play an important role in managing the
healthcare spend for all European governments. The speed of uptake for these measures
will continue to be tempered by general objection from the pharmaceutical industry,
but inevitably the objectives of governments and the patient will carry greater weight
than the financial aims of pharmaceutical companies.
89
In a most likely case pricing scenario the accession of 10 new countries to the EU will
have a small, but negative, effect on prices throughout the EU-15. Reference pricing
systems will be adjusted to protect against a lower average EU price, but some
reference pricing relationships will inevitably result in downward pressure on prices.
Current measures protecting against parallel imports and generic substitution will be
extended, but general levels of activity will eventually be increased by the inclusion of
the new low-cost accession markets.
90
CHAPTER 4

Japan and the rest of the
world
91
Chapter 4

Japan and the rest of the
world
Summary
The Japanese healthcare system is characterized by high pharmaceutical

expenditure and price controls are an important part of the system. The upper
limit for pharmaceutical prices in Japan is the NHI drug price. The NHI drug
price list fixes the names and prices of drugs for which healthcare providers can
be reimbursed under Japans health insurance programs. The reimbursement price
is determined separately by the MHLW. All drugs included in the NHI drug price
list are fully reimbursed except for a patient co-payment.
On 1st April 2006, the Ministry of Health Labour and Welfare (MHLW)
announced a 6.7% average price cut on drugs listed on the National Health
Insurance (NHI) reimbursement list. These were the highest price cuts for six
years, following average cuts of 4.2% and 6.3% in 2004 and 2002 respectively.
products can still continue to receive premium prices, while the overall drugs bill
is reduced.
Price setting is likely to become more complex in the Japan, with the addition of
health economic data and pro-generics regulations to the current reference pricing
system. However, the Japanese market will continue to be protected from parallel
trade. With no principle of international exhaustion in Japan, companies will
continue to prevent their products from being imported from other countries using
their trademark rights.
92
Introduction
This chapter outlines the current pricing regulations impacting on the Japanese
pharmaceutical market. Recent developments are analyzed, along with future pricing
scenarios for the next five years. A brief overview of the Australian and Chinese price
and reimbursement systems are also presented.
Japanese pricing regulations

Japan operates a mandatory National Health Insurance (NHI) system covering the
entire Japanese population. Healthcare is financed by insurance premiums paid by
those enrolled in the countrys various health insurance schemes (employee health
insurance scheme, mutual aid associations and a health program for the elderly). The
Ministry of Health, Labor and Welfare (MHLW) manages pharmaceutical regulatory
affairs in Japan.
The Japanese healthcare system is characterized by high pharmaceutical expenditure

and price controls are an important part of the system. The upper limit for
pharmaceutical prices in Japan is the NHI drug price. The NHI drug price list fixes the
names and prices of drugs for which healthcare providers can be reimbursed under
Japans health insurance programs. The reimbursement price is determined separately
by the MHLW. All drugs included in the NHI drug price list are fully reimbursed
except for a patient co-payment. The level of patient co-payment is determined by
patients occupation and can range from less than 10% for an elderly inpatient to a 30%
contribution by agricultural workers and the self-employed.
93
Table 4.6: Co-payments for drugs/services in Japan

Occupational status
Agricultural workers/Self-employed
Employees
Family members of employees (Outpatient)
Family members of employees (Inpatient)
Elderly (Outpatient)
Elderly (Inpatient)
Level of co-payment per drug/service

30%
20%
30%
20%
10% (different methods in hospitals and clinics)
10% (maximum; varies by income level)
Source: Japan Pharmaceutical Manufacturers Association
Business Insights
The NHI price indicates the level at which health insurers will reimburse hospitals,
clinics and pharmacies for drugs dispensed to patients. Hospitals and clinics are able to
negotiate discounts from the manufacturer or wholesaler but can still claim full
reimbursement at the NHI listed price. The price discrepancy is known as yakkasa and
can be kept by the prescribing party. This practice has been a significant driver of
prescribing rates.
The MHW has tried to counteract the effects of yakkasa by encouraging bungyo.
Bungyo is the separation of the prescribing and dispensing functions, which used to be
carried out by hospitals under the Japanese medical system. Because yakkasa is
decreasing, Bungyo pharmacies are a growing feature of the Japanese market.
However, the reforms are not welcomed by, among others, hospitals or clinics, since
these specifically have to sacrifice the profits associated with yakkasa.
New chemical entities (NCEs) are added to the NHI drug price lists four times a year
and comparator drugs are used to determine prices. Drugs for comparison are selected
based on therapeutic category. The price of the new drug is based on the comparators
price with additional premiums being added based on the level of innovation,
usefulness and market size. The Drug Pricing Organization (DPO), established in 2000,
acts as an advisory body with the role of providing a secondary opinion on the price of
drugs.
94
Table 4.7: Classification for price premium (Japanese healthcare system)

Classification based on usefulness
Premium
Innovative
Useful (I)
Useful (II)
Standard 40%, range 2060%

Standard 3%, range 1.54.5%
Classification based on market size
Premium
Designated as orphan and pharmacologically new

Small market and pharmacologically new

Standard 3%
Source: Japan Pharmaceutical Manufacturers Association
Business Insights
Price cuts are a commonly used cost-containment tool in Japan and the MHLW revises
drug prices every two years. This has the effect of closing the gap between NHI drug
prices and market prices. Drug prices may also be changed following a review of
changes in market size, indications, dosage and administration. This is known as
'repricing'.
The price of generic drugs is listed annually. The initial price of a generic drug is set at
70% (previously 80%) of the price of the brand name drug. However, if other generics
are already out in the market, the price of the new generic drug is the price of the
cheapest existing generic drug. If there are 20 or more existing generic drugs, the new
generic drug will be priced 10% lower than the cheapest existing drug.
Recent developments in Japan

Biennial price cut
On 1st April 2006, the Ministry of Health Labour and Welfare (MHLW) announced a
6.7% average price cut on drugs listed on the National Health Insurance (NHI)
reimbursement list. These were the highest price cuts for six years, following average
cuts of 4.2% and 6.3% in 2004 and 2002 respectively. As shown in Figure 4.10, hardest
hit by the price cuts were the anti-ulcerants, with an average price cut of 10.5%, closely
95
followed by anti-hyperlipidemics and anti-bacterials. These classes represent areas with

limited class innovation, characterized by a high degree of off-patent and me-too drug
availability.
Figure 4.10: NHI price cuts by therapeutic class, 2006
Average price cut

10.5%
Anti-ulcerants
9.1%
Anti-hypertensives
8.9%
Agents for gram-positive and negative bacteria
8.2%
Synthetic antibacterials
Other anti-allergy drugs
8.0%
Vitamins A and D
8.0%
Anti-hypertensives
7.9%
7.5%
Vasodilative agents
7.0%
Antipyretic, analgesic, anti-inflammatory agents

Antiarrythmics
6.8%
Average NHI price cut
6.7%
Other cardiovascular agents
6.3%
Spasmolytics
6.2%
5.4%
Metabolic drugs
5.0%
Vitamin B
4.7%
Kampo (traditional) medicines
Business Insights
Source: Pharma Japan
The pricing of generic changed slightly in 2006, with the first generic entrant price
capped at 0.7 times (rather than 0.8 times) the NHI price of the reference branded
product. Subsequent generic entries are priced at the lowest price among existing
generics and 0.9 times that level once 20 different generics have been introduced.
96
Other changes involved improvements to the price incentives for new innovative drugs.
The premium for innovativeness increased from 40-100% to 50-100% in 2006.
Premiums for usefulness were also increased, along with the introduction of a premium
for pediatric drugs.
Generic substitution introduced

Generic substation was introduced in Japan on 1st April 2006. Pharmacists are now
permitted to substitute a prescribed branded product with a generic with permission
from the prescribing doctor. Financial incentives provide the basis for promoting
generic substitution. Pharmacists receive 20 Yen for dispensing a generic and 100 Yen
if written information about the product is also provided. Physicians also receive 20
Yen if they prescribe a generic or mark the generic substitution allowed box on the
prescription.
In efforts to further expand the availability of generic alternatives for generic

substitution the government is also set to introduce an obligation for manufacturers that
supply a given drug to provide all available strengths of the National Health Insurance
(NHI)-listed branded product. All new generics approved and NHI-listed from 1st April
2006 are required to comply with the rule from 1st April 2008. Manufacturers of older
generics will have until 31st March 2012 to comply.

pricing scenarios. However, for the purposes of planning and forecasting three
alternative pricing scenarios in Japan are presented below. The scenarios are based on a
five year outlook and include a best case, worst case and most likely scenario.
achieve the highest price possible with the broadest reimbursement coverage for its
products.
97
Table 4.8: Future pricing scenarios in Japan

Best case
Worst case
Most likely
Continued pricing cuts in the

place of wide-ranging reform
resulting in price differentials
supporting high prices for
innovation
Wide-ranging pricing reform

resulting in significant
downward pressure on prices,
reimbursement levels and
prescription volumes
Gradual pricing reform led by

differential price cuts
supporting innovative products
Refined reference pricing

accounting for purchasing
power disparities and product
differentiation
Strict internal and external

reference pricing resulting in
lower prices
Continued protection against

parallel trade and significant
generic substitution
Introduction of health
economics and pro-generics
regulations alongside refined
reference pricing
Continued protection from

Legislative changes resulting
parallel trade
in introduction of parallel trade,
increased generic substitution
and use of health economics
Business Insights

In a best case pricing scenario, the Japanese MHW would continue to postpone
significant, wide-ranging reform of the healthcare reimbursement system. Biennial
price cuts would continue, but their level would decline and their differential impact
increase, weighted more heavily towards older drugs and generics. Under this scenario
new products could still continue to command high prices, while current effective
therapies would not be significantly affected by price cuts or reform.
The reference pricing system would be refined over time, ensuring effective therapies
are isolated from the rigid referencing structure. Internal reference pricing parameters
will be relaxed to allow greater disparities between effective and ineffective therapies,
while external parameters would reflect differences in purchasing power prevailing
between Japan and its European reference markets. This would allow Japanese prices
to continue to display a greater level of internal and external price differentiation
compared to reference pricing in European countries.
98
Under a best case scenario, the Japanese pharmaceutical industry would continue to be
protected from both parallel imports and high levels of generic substitution. Until the
round of price cuts in April 2002 generic products were allowed prices often no
cheaper than a number of me-too branded products within a drug class. The
mechanisms for an effective generic substitution policy would require continued price
discounts for generics relative to their branded equivalents.

In a worse case pricing scenario, the Japanese MHW would undertake wide-ranging
reform to the healthcare reimbursement system, in place of continued price cutting.
Any reform would be aimed at achieving significant cost containment and a complete
reversal of yakkasa prescribing. Although the specific details of any such reform are
difficult to forecast, the effects are likely to result in both lower reimbursable prices, as
well as cuts in reimbursing per se. Whether reimbursement is cut as a whole through
formulary lists or physician budgets, or whether patient co-payments are increased, the
likely result would be a decline in prescription volumes for the pharmaceutical
industry.
The internal and external reference pricing parameters currently applied to price setting
would be made stricter in order to reduce prices further. Internal reference pricing
would drag high prices lower in line with cheaper me-too products and generics.
External reference pricing would use the lower prices in European reference markets to
place further downward pressure on the prices of current and future products sold in the
Japanese market.
In a worse case scenario, Japanese legislation could be updated opening up the market
to parallel trade. As global trade advances in all Japanese industries, it would seem
inevitable that the barriers to parallel trade with the domestic market would be relaxed
over time. Similar changes to legislation and regulations would also result in high
growth in the generics industry and in the utilization of pharmacoeconomic
evaluations. With levels of generic substitution in Japan amongst the lowest of all
99
major international markets, significant impact could be made by a robust, governmentled generics substitution strategy. Similarly, if pharmacoeconomic evaluations were to
be used more widely in the price-setting and reimbursement processes in Japan, further
cost containment pressures would be likely to follow.

products can still continue to receive premium prices, while the overall drugs bill is
reduced. A shift in the criteria needed to achieve a high reimbursement price is,
therefore, likely to occur, putting pressure on the innovation generated through R&D in
Japan.
Price setting is likely to become more complex in the Japan, with the addition of health
economic data and pro-generics regulations to the current reference pricing system.
While the parameters used in reference pricing decision are unlikely to change
significantly in the future, the addition of health economics evaluations to pricing
applications is likely to result in a further barrier to achieving higher prices. An
effective therapy does not always generate positive results in pharmacoeconomic
evaluations, depending on the criteria and parameters used. Further steps protecting the
generics industry in Japan, and regulating the right to launch a copy product rapidly
following a patent expiry, are likely to result in greater pressure on the prices of postpatent branded products.
In a most likely scenario the Japanese market will continue to be protected from
parallel trade. With no principle of international exhaustion in Japan, companies will
continue to prevent their products from being imported from other countries using their
trademark rights. While it is likely that such measures will be reversed over time, as
result of internal cost containment pressures and external free trade pressures, any
significant moves are unlikely over the next five years.
100
Australian pricing regulations

In Australia, a national Pharmaceutical Benefits Scheme (PBS) provides timely,
reliable and affordable access to necessary and cost effective pharmaceuticals.
Considerable subsidies are paid for pharmaceuticals covered by the PBS, resulting in
lower consumer prices. Approximately 90% of prescriptions in the Australian
pharmaceutical market are prescribed for PBS items.
Pharmaceuticals listed under the PBS fall into 3 categories:
Unrestricted these medications have no restrictions on their therapeutic uses;
Restricted Benefit the listing in the PBS Schedule details the specific therapeutic
uses for which these medications can be prescribed;
Authority Required Benefit as with the Restricted Benefit, the Schedule lists the
specific uses for which these medications can be prescribed. In addition, for items
listed under this category, the prescriber is required to obtain prior approval from
the Health Insurance Commission.
The majority of prescriptions in Australia are written for medications subsidized under
the PBS. The price of all products listed on the PBS are reviewed annually by the
Pharmaceutical Benefits Pricing Authority (PBPA). The price reviewed and agreed to
with suppliers is at the price to pharmacists level (including a 10% wholesalers
margin).
In reviewing the price of listed items and in considering the price of items
recommended for listing, the PBPA takes into account a number of factors:
Pharmaceutical Benefits Advisory Committee comments on clinical and cost

effectiveness aspects of items;
the price of alternative brands of a drug;
101
comparative prices of drugs in the same therapeutic group;
cost information provided by the supplier;
prescription volumes, economies of scale and other factors such as expiry dating,
storage requirements, product stability and special manufacturing requirements;
the level of activity being undertaken by a company in Australia, including new

investment, production, research and development;
prices of the drug in reasonably comparable countries;
other relevant factors which the applicant company may wish the PBPA to
consider;
any directions of the Minister for Health.
Benchmark pricing
The PBPA considers drugs in their therapeutic sub groups when reviewing prices. A
benchmark product is chosen on the basis of the lowest costs and other products are
priced in line with the benchmark product.
A premium above the benchmark price is allowed where the supplier of the product is
able to demonstrate an advantage in clinical and cost effectiveness terms. Most
products listed on the PBS are priced under this method. However, it is often the case
that no price increases can be justified as one or more products in the therapeutic group
have not sought any increase or prices are considered reasonable by the PBPA.
Cost plus method

Under the cost plus approach, the price recommended by the PBPA is based on the cost
of manufacture plus a margin. Costs allowed under this method do not include
distribution costs, promotional or marketing activity or general administration. This
102
method is used for stand alone items and for benchmark products. It relies on
pharmaceutical suppliers providing the PBPA with accurate cost data.
The margin provided under this approach can vary from 15% to 40% (equivalent to a
mark-up of between 18% and 67%) depending on a number of factors including the
price sought by supplier, the estimated usage, the unit price and overseas prices.
Average monthly treatment cost

This is a variation of the reference price method which can be applied within a
therapeutic sub group usually where a medicine used to treat chronic conditions is
supplied in a number of strengths. The method takes into account actual clinical usage
and requires detailed utilization data.
Prices for new items

The main mechanism to determine initial prices is the advice from the Pharmaceutical
Benefits Advisory Committee (PBAC) which is an independent body of medical
experts established to advise the Minister for Health about which products and for what
indications products should be subsidized by the government. PBAC provides advice
on clinical effectiveness and cost effectiveness. It has been a requirement for drugs
sponsors to submit cost effectiveness data on new items since the start of 1993.
In recent years, the PBPA has increasingly recommended the use of price/volume
arrangements (unit prices decrease as volume increases), particularly where unit prices
are reasonably high and there is the potential for significant volumes or where there is
uncertainty about future volumes.
103
Recent developments in Australia

Pharmaceutical Benefits Scheme reform
The Australian government is carrying out significant reforms of the Pharmaceutical
Benefits Scheme (PBS) in order to control future drug costs. A major element of these
reforms is the pricing of listed drugs, resulting in lower prices for generic and offpatent drugs. PBS covered drugs will be split into two formularies as of 1st August
2007. F1 largely covers patented drugs with the exception of those affected by the
therapeutic reference pricing system such as ACE inhibitors, calcium channel blockers
and proton pump inhibitors. F2 includes off-patent and generic products, as well as the
interchangeable patented drugs mentioned above.
Products listed in the F2 formulary are to face a series of price reductions from 1st
August 2008 in an attempt to divert the discounts currently offered by generic
manufacturers to pharmacists to prescribe their products. For drugs considered to
involve low price competition for the off-patent product a series of 2% price reductions
are scheduled over the next three years. For drugs where price competition is
considered high for the off-patent product a one-off 25% mandatory price reduction
will be introduced in 2008. All newly listed F2 formulary drugs will be required to
disclose their actual market prices to ensure the PBS reimbursement price for generic
and off-patent drugs more closely reflects the actual price at which the drug is supplied
to pharmacies.
Chinese pricing regulations

Starting as an experiment in Shanghai in 1994, China now maintains both a national
and provincial/local set of reimbursement lists for the sale of pharmaceutical products
in state-run hospitals or clinics. The national list contains more than 1,400 drugs that
are acceptable for reimbursement from state-controlled insurance organizations.
104
Provincial/local lists must mirror the national list but are given a 10% local readjustment flexibility. Inclusion on the lists is a largely negotiated process.
Prices for drugs on the reimbursement lists are tightly controlled and many foreign
importers have found prices too low for their inclusion. Since 80% of drugs sold in
China are sold through hospital pharmacies, being excluded from these lists means
huge losses in sales. However, only 10-15% of the population is covered by statecontrolled insurance plans, and exclusion from one or more of theses lists may not have
any significant adverse effects on a foreign importers market share.
The Chinese government currently imposes a tariff of around 9.6% on imported

pharmaceuticals, plus a 17% VAT charge, customs clearing charges and drug
inspection costs. However, pharmaceutical prices are further inflated by high
distribution costs and hospital mark-ups, with retail prices paid by hospitals often as
much as 10 times higher than the manufacturers price.
As in most developing nations, China is struggling to contain health care-related costs.

This problem is compounded by the fact that around 70% of Chinas total health care
costs are directly related to the sale of pharmaceuticals. More than 50% of this cost
can, in turn, be traced to the expensive imported drugs. In response to this, Chinese
central government authorities have established guidelines designed to place price caps
on imported drugs, with domestic drugs already subject to such measures.
Recent developments in China

New drug pricing procedures
From 1st March 2007, a new drug pricing procedure was implemented to improve
transparency and reduce corruption in the price setting process. The National
Development and Reform Commission outlined five stages for setting the price of a
pharmaceutical product:
105
Two drug price regulators visit the manufacturer to check the cost of raw materials;
new expert group on drug pricing evaluates the proposed price;
public hearing collects public comments on proposed price;
group discussions;
completion of group examinations.
Price cuts
In January 2007, the National development and Reform commission (NDRC) cut the
prices of more than 240 drugs by an average of 20%. These price cuts followed earlier
NDRC cuts in June 2006 involving an average 23% cut in the prices of 67 oncology
drugs.
Generic prescribing
Regulations requiring physicians to prescribe generically rather than by brand name
came into force on 1st May 2007. The reform is an effort to limit the kickbacks offered
by to physicians from drug manufacturers to incentivize the prescribing of expensive
and unnecessary drugs.
106
CHAPTER 5
107
Chapter 5
Summary
The global price perspective has two parts. The complexity of global drug prices
is a result of local differences in pricing and reimbursement systems.
Understanding these complexities and developing locally optimal pricing
strategies is critical for maximizing the returns from pharmaceutical investments.
In addition to the local perspective, a global coordination of prices and pricedifferentials between key markets is also required. The impact of external
reference price schemes and parallel trade require prices to be optimized across
markets.
Local optimization involves adapting pricing strategies to fit national-level, and

in some cases regional-level, regulations. The successful development and
approval of new drugs is not enough to guarantee market access.
Countries place different levels of fourth hurdle barriers to receiving full

reimbursement, which require economic data to ensure a broad use at a high
price. These evaluations have begun to limit the ability of pharmaceutical
companies to set prices for new drugs in traditionally free price markets and
restrict access to drugs targeted at areas of significant unmet need.
The coordination of local pricing at the global level ensures that price
differentials that impact on external reference pricing and parallel trade or
optimized. The global price perspective involves determining appropriate launch
sequences and the optimal price differentials between country markets. However,
the two processes are inextricably linked.
illustrated by the situation in Europe, where both reference pricing and parallel
trade have a significant impact on pricing.
108
Introduction
The global price perspective has two parts. The complexity of global drug prices is a
result of local differences in pricing and reimbursement systems. Understanding these
complexities and developing locally optimal pricing strategies for key drugs is critical
for maximizing the returns from pharmaceutical investments. In addition to the local
perspective, a global coordination of prices and price-differentials between key markets
is also required. The impact of external reference price schemes and parallel trade
require prices to be optimized across markets. This chapter is divided between the local
optimization and global coordination perspectives.
Local optimization
Local optimization involves adapting pricing strategies to fit national-level, and in
some cases regional-level, regulations. The previous three chapters outline these
differences, but national-differences in market access and pharmacoeconomics require
further analysis.
Market access and reimbursement

Figures published by the Association of the British Pharmaceutical Industry (ABPI)
show that the UK is the slowest country in Europe to take up innovative drugs, second
only to Japan amongst leading pharmaceutical markets. In the UK, recent cancer
breakthrough medicines are still being prescribed at two-thirds the rate found in
comparable countries. As shown in Figure 5.11, more than a quarter of pharmaceutical
sales in 2005 in the US were generated by products launched in the previous five years.
109
Figure 5.11: Market share for new products launched in last five years, 2005
Market share for new products
30%
25%
20%
15%
27%
10%
24%
24%
France
Spain
18%
14%
15%
Japan
UK
5%
0%
Italy
Source: Association of the British Pharmaceutical Industry
US
Business Insights
The successful development and approval of new drugs is not enough to guarantee
market access. Countries place different levels of fourth hurdle barriers to receiving
full reimbursement, which require economic data to ensure a broad use at a high price.
These evaluations have begun to limit the ability of pharmaceutical companies to set
prices for new drugs in traditionally free price markets and restrict access to drugs
targeted at areas of significant unmet need.
Free price markets

The UK and German markets have long been heralded as Europes free pricing
markets, where newly approved drugs could be launched under free market conditions.
However, the impact of NICE in the UK and the IQWiQ in Germany are beginning to
create a serious fourth hurdle in these two major European pharmaceutical markets.
While neither body has any impact on pricing, its pharmacoeconomics-based advice
110
does impact directly on reimbursement and clinical guidance at the national level. As a
result access to these markets involves preparation work in the early stages of
development, often as early as phase II. Drugs that cannot demonstrate clinically
superior economic profiles at review time will face restrictions on their use to more
limited patient populations in the UK and caps in the reimbursement level in Germany.
Orphan drugs
Orphan drugs have long stepped outside the traditional model of incentives offered by
price and reimbursement. However, as uptake of pharmacoeconomic evaluations
continues, the basis on which orphan drugs are priced requires further thought. Here,
the cost of developing and manufacturing/ distributing the drug begin to impact on the
required price incentive to ensure the future development of drugs for orphan diseases.
As has been found in Canada, the Common Drug Reviews cost-benefit criteria have
proved inappropriate for evaluating drugs for high unmet needs that have managed to
receive broad market access outside Canada. The social costs of diseases with few
patients but high unmet need to be highlighted to ensure a continued interest in the
development of orphan drugs.
Orphan drug schemes in the US and Europe have offered approval and market
exclusivity incentives for some years now, resulting in the development of several
groundbreaking drugs for orphan diseases. However, establishing an appropriate price
and then successfully receiving reimbursement from payers is still difficult.
Pharmacoeconomics emerged at the National level during in the 1990s as a reaction to
rising healthcare costs and a heightened requirement to demonstrate value for money in
healthcare budgets. In 1993, Australia set out binding guidelines requiring the
submission of economic analyses as part of the reimbursement system. Following this
groundbreaking development the rest of the worlds key pharmaceutical payers
responded with their own guidelines. Europes systematic use of pharmacoeconomics
as part of the reimbursement process began in the late 1990s with the introduction of
111
health economics assessments in Denmark, France and Italy. The UK, Portugal,
Finland, Belgium, Norway, the Netherlands and Austria have also introduced
pharmacoeconomic evaluations into their pricing and reimbursement processes.
In the US, individual managed care organizations were the first to employ
pharmacoeconomic guidelines, beginning with Regence Blue Shield in 1994. Revisions
of these guidelines have resulted in the Academy of Managed Care Pharmacys
(AMCP) Format for Formulary Submissions. The AMCPs Format has now become
widespread and is used by most private plans to provide guidance on
pharmacoeconomic requirements.
For many years, pharmacoeconomic assessments have played a notional role in pricing
decisions in Japan, while in practice have proved to have little impact on decisionmaking. Currently, there are renewed efforts to develop guidelines at the national level
to support the National Health Insurance pricing and reimbursement process.
In Germany, the Institute for Quality and Economic Efficiency has traditionally been
tasked with therapeutic evaluations for new drugs, with economic considerations only
added in 2007. Similarly, clinical, as opposed to economic, considerations continue to
be the primary end-point studied in support of pricing and reimbursement decisions in
France. In Spain and Italy, regional-level pharmacoeconomic evaluations continue to
provide a lack of clarity and consistency to reimbursement decision making.
The UK market has been at the forefront of recent developments in pharmacoeconomic

assessments, through its evaluations body, National Institute for Health and Clinical
Excellence (NICE). The agency takes into account health economic studies presented
by the industry and other external agencies in making their recommendations on
clinical use and reimbursement.
No major pharmaceutical market makes direct use of heath economic data in making its
pricing and reimbursement decisions. However, in some smaller markets, including
112
Canada, Australia, Sweden and New Zealand, pharmacoeconomics plays a more

central role. Despite this limited application, the use of pharmacoeconomics is set to
play an ever more important role in price and reimbursement decisions across major
markets. Following on from the work of NICE in the UK, the US and Germany are
likely to be charged with the next phase of pharmacoeconomic development,
implementing health economics analysis into their statutory healthcare provision
through the Centers for Medicare and Medicaid Services (CMS) and the Institute for
Quality and Economic Efficiency (IQWiQ) respectively.
This array of different pharmacoeconomic requirements across different markets leaves

significant work for pharmaceutical companies looking to generate reimbursement
coverage for their products. Ensuring the availability of adequate trial and economic
data for reimbursement submissions would require a combination of global and local
resources in order to be sympathetic to local needs while generating efficiencies at the
global level. Determining what elements of the pharmacoeconomic requirements for
local submissions can be centralized at the global level will provide competitive
advantages in achieving quick and successful price and reimbursement approvals.
Global coordination
The coordination of local pricing at the global level ensures that price differentials that
impact on external reference pricing and parallel trade or optimized. The global price
perspective involves determining appropriate launch sequences and the optimal price
differentials between country markets. However, the two processes are inextricably
linked.
Launch sequence
With respect to international launch sequence, a full understanding of who influences
and is influenced by who is required. As a result this might lead to a prioritizing of
product launches in free pricing markets, such as Germany and United Kingdom,
113
before eventually launching in large externally referencing countries such as France,

Spain and Italy. However, other variables such as historical price levels, approval
timings and local pricing and reimbursement policies will also impact on optimal
launch sequencing. In Europe, where reference pricing and parallel trade impact most
heavily on prices, great care is needed in determining an appropriate launch order.
EU launch order
Of the five major pharmaceutical markets in the EU, the UK provides the best
opportunity for initial product launch. Drugs are allowed to enter into a high value
market with freedom to command prices without the limitation set by reference pricing.
Companies have flexibility over their drug prices although, this is in part limited by the
profit caps found within the pharmaceutical price regulation scheme (PPRS).
France, Finland, Denmark and Sweden provide good opportunities as second launch
countries. The healthcare payers in these countries do not favor high priced branded
drugs unless the products come from an innovative drug class or have new modes of
actions. France has initiated a new reference pricing system that encourages the use of
generic drugs, imposed price cuts to branded products already on the market, and
reclassified the reimbursement system. However, in a move to create a positive
environment for innovative products, the country is seeking to raise prices for these
therapies to be in line with northern European markets. Finland and Denmark have
both amended their pricing criteria so that drug prices are in line with the European
average. Finland is proposing to reform its reimbursement system so that drugs will be
reclassified. In Denmark, a new reimbursement scheme has been introduced, which is
based on a medical need-dependent system. In Sweden, the healthcare system is
decentralized giving regional councils greater influence in pricing and reimbursement
decisions. Regions can then be targeted as a result of different healthcare needs defined
by regional demographics and budgets. However, they may also be fragmented due to
these differences.
114
Within the five major markets in the EU, Spain and Italy provide the best opportunities
as third launch countries. Other major EU countries included in this launch sequence
are the Netherlands, Ireland, Luxembourg, Belgium, Portugal and Austria. These
countries have a mixture of pricing and reimbursement policies that do not always
favor newer products that have moderately better benefits than predecessors indicated
for a similar disease market.
Spain and Italy both have regionalization policies that have led to the decentralization
of healthcare control. As a result, pricing and reimbursement negotiations may be more
complex due to the variations in healthcare needs and budgets between different
regions. Furthermore, both countries have implemented industry-government
agreements that have led to price cuts and capping. In a positive move for the industry,
Spain is addressing its healthcare needs by encouraging R&D innovation through the
funding of more non-industry-based research projects.
Although Germany is one of the five major pharmaceutical markets in the EU, the
country has recently undergone radical healthcare reform that will impose challenges to
the pharmaceutical industry. These cost containment legislations place the country as a
hostile environment to launch products into. Therefore, Germany is chosen as the
fourth choice country to launch in. Recent cost cutting measures has seen the
introduction of a new reference pricing system, plus requiring pharmacists to substitute
generic drugs over branded products. Furthermore, recent changes targeting the social
health system by reducing healthcare contributions will influence the choice and use of
drugs.
Optimal price differentials

As the impact of external reference pricing and parallel trade continues to increase the
interaction of prices between different markets is also increasing. The optimization of
pharmaceutical prices can no longer be limited to a market-by-market approach, but
must involve a comprehensive understanding of the interactions prevailing between
country prices. Country-specific pricing and product managers can no longer work in
115
isolation, but must collaborate to understand the impact of pricing in one country on
other markets.
Figure 5.12 illustrates the increasing interdependency and complexity found in

European price setting. The reference country coverage for the three major European
markets currently engaging in external reference pricing are outlined, with Ireland and
Portugal also included as illustrations of how intermediary countries can also result in
reference links between the five major markets. For example, not only does France
reference the UK, but it also references Ireland that in turn references the UK. France
also references Portugal, which in turn references Italy, which in turn potentially
references the UK through its flexible EU reference scheme.
116
Figure 5.12: External reference pricing in Europe, 2007
UK
Ireland
Germany
France
Spain
Italy
Portugal
Rest of EU
Country A
references
country B
Business Insights
Reference pricing can also impact on pricing by changes in a specific countrys pricing
policy. For example, in 2007 Portugal added Greece to its three previous reference
countries, Spain, Italy and France. Given that average prices in Greece are lower than
in Spain, Italy and France, average prices in Portugal are also likely to fall. However,
given that Portugal is a reference country for Spain, Italy and France in particular,
prices in these markets may also be expected to fall.
117
illustrated by the situation in Europe, where both reference pricing and parallel trade
have a significant impact on pricing.
Using the example of just two companies, France and Spain, the impact of pricing in
one country on pricing in another country can be shown. Prices in Spain are generally
amongst the lowest in Europe. However, France references the prices of Spain,
amongst other countries, in order to determine prices. Therefore, in order to be
reimbursed the price differential must be minimized. Similarly, a high price differential
results in parallel imports from Spain to France, cannibalizing pharmaceutical sales
revenues in France. Therefore, parallel imports results in further pressure to minimize
the price differential between countries. The pricing decision in France is impacted
significantly by the price in Spain and, therefore, the two markets and their interaction
must be considered together.
Figure 5.13: Global pricing and the interaction between countries
Reference pricing
Spain
Price
differential
France
Parallel trade
Business Insights
118
Implementing global pricing strategies

Global pricing strategies involve setting a delicate balance between price optimization
at the local level and high-level coordination at the global level. Rather than being
distinct processes, there is an iterative relationship between ongoing local and global
pricing efforts. An effective organizational effort at delivering local optimization
alongside global coordination would involve the following steps:
Global-level review and preparation of key product benefits and pricing policy;
Local-level feedback regarding competitive situation and pricing and

reimbursement environment;
Global-level plans for target price, price differentials and launch order;
Local-level preparations for pricing and reimbursement submissions;
Global-level support in provision of critical data and expertise;
Local-level submissions, negotiations and results;
Global-level reaction to unforeseen local-level results.
119
Figure 5.14: Global pricing strategies
Global
Coordination
Local optimization
Business Insights
Successful global pricing strategies require companies to develop effective channels of

communication between local and global pricing and reimbursement departments. Only
those companies able to manage the global-local relationship while providing informal
feedback channels in order to react quickly and effectively to changes as they occur
will deliver optimal global pharmaceutical prices. Buy-in across local markets for
global launch sequence and target price plans is critical to ensure new drugs are
launched as quickly, with the highest price and reimbursement coverage profile as
possible.
120
CHAPTER 6
121
Chapter 6
Summary
Lifecycle pricing strategies are largely dominated by two major lifecycle events,
launch and patent expiry. Pricing at launch has the primary window for achieving
an optimal price and reimbursement coverage, while patent expiry strategies
involve maximizing brand value in competition with low-priced generics.
However, at all points in the drug lifecycle between launch and patent expiry
there are key competitive considerations that significantly impact on pricing
strategies.
It is imperative that pharmaceutical companies ensure that evidence

demonstrating product value in support of the initial case for reimbursement is
effectively communicated and accounted for in the reimbursement decisionmaking process. Companies must therefore identify and exploit opportunities to
communicate the value of products and influence decision-makers thinking.
Following the successful launch of a drug, the competitive environment can

regularly change following the expansion or patent expiry of competitor products.
In response, pharmaceutical companies must be able to identify the pricing
implications associated with on-patent lifecyle events and respond appropriately.
A number of novel approaches to pricing and reimbursement have emerged that
deal with reactions by payors to initial prices at launch.
Following the loss of patent protection, the branded drug faces significant
downward pricing pressure from the introduction of generic competition.
However, a brands optimal retaliatory strategy differs by market, but both
upward amd downward price adjustments have been successfully applied in the
past.
122
Introduction
Lifecycle pricing strategies are largely dominated by two major lifecycle events, launch
and patent expiry. Pricing at launch has the primary window for achieving an optimal
price and reimbursement coverage, while patent expiry strategies involve maximizing
brand value in competition with low-priced generics. However, at all points in the drug
lifecycle between launch and patent expiry there are key competitive considerations
that significantly impact on pricing strategies. This chapter is divided between the
launch, patent protected and patent expiry phases of the drug lifecycle.
Launch phase pricing considerations

It is imperative that pharmaceutical companies ensure that evidence demonstrating
product value in support of the initial case for reimbursement is effectively
communicated and accounted for in the reimbursement decision-making process.
Companies must therefore identify and exploit opportunities to communicate the value
of products and influence decision-makers thinking. Ideally, activities initiated early in
product development (focus groups, policy tracking etc.) will have formed
relationships with decision-makers, enabling a detailed understanding of their
priorities, information requirements and decision making processes.
Submission dossiers
Submission dossiers are often the primary source of information available to decisionmakers when undertaking evaluations upon which reimbursement decisions are made.
As such, they represent the primary opportunity for pharmaceutical companies to
communicate product value and present arguments to support pricing and
reimbursement. While the precise requirements of each decision-maker will vary,
submission dossiers should seek to:
123
Describe the product fully;
demonstrate how the product will be used in therapy (description of the clinical
condition being treated and the role of the product in its treatment);
provide evidence of clinical safety, efficacy and effectiveness;
provide relevant economic and quality of life data;
present economic evaluations of the impact on healthcare systems and wider

societal impacts (clinical outcomes and cost/resource impact supported by
models);
provide independent evidence to support arguments.
In short, and in the words of the Academy for Managed Care Pharmacy, submissions
should contain all possible clinical and economic information necessary to assess the
overall clinical utility and value that a product brings to a specific patient population
and healthcare system.
In most cases, when a product enters the market it displaces other treatment strategies
or other aspects of healthcare provision. As a result, every decision is based upon the
concept of displacement (i.e. decision-makers will look to see what is likely to be
displaced by the product, either by way of other products or by way of costs). It is,
therefore, critical that companies ensure that dossiers compare products to the
treatment strategies and interventions (drug or otherwise) that are likely to be
displaced.
In order to maximize the opportunity to communicate product value in submission

dossiers, pharmaceutical companies must commit time and resources to working in
partnership with decision-makers in advance of submissions. Companies should seek to
notify decision-makers of the status of products in development and of their intent to
submit for assessment well in advance of submissions, clearly indicating intended
timelines. Meetings should then be scheduled with decision-makers in order to cement
124
an understanding of specific submission requirements. This process will ensure that the
information contained within dossiers is:
Delivered to the standards and format required by each decision-maker;
appropriate in scope;
of high quality, clear and verifiable;
relevant to the priorities of the decision-maker. For example, data must be relevant
to the healthcare system and population under the jurisdiction of the decisionmaker;
delivered in a timely manner;
transparent, for example complex economic models/data must be fully described,

easy to use and investigate, and all assumptions fully detailed.
Following the submission of evidence, pharmaceutical companies must ensure that they
are equipped to provide appropriate support to decisions makers. For example,
companies must be prepared to provide further information quickly upon request and
lines of contact, detailing personnel equipped to provide additional information, should
be made clear.
Identifying key decision makers

While pricing and reimbursement decisions are often made on a national level,
independent assessments for pricing and reimbursement purposes will often be
undertaken below this level. In France for example, the countrys largest healthcare
institution, the Assistance Publique - Hopitaux de Paris (AP-HP), will put products
through its own reimbursement criteria. Therefore, as part of an effective strategy,
companies must identify and understand the needs and priorities of the decision-makers
down to the lowest level in each market (i.e. to the level of local hospital formulary,
local general practice formulary or private practice formulary).
125
While formal submission dossiers may not be required for each healthcare provider,
companies must be positioned to provide multiple packages (e.g. economic models,
analysis of impact of healthcare setting) that communicate product value and support
formulary inclusion. Critically, each initiative must be tailored to the specific needs and
priorities of each audience. In best practice, understanding the needs and perspectives
of each decision-maker will have been undertaken in the early stages of the product
lifecycle, and development subsequently steered to take into account key issues.
Failure to secure reimbursement

In an ideal scenario, having compiled and submitted a strong dossier, a company will
achieve the desired reimbursement status prior to, or shortly after product launch.
However, in practice, companies often find themselves in a position in which they are
forced to launch products with only partial, or in the worst case, no reimbursement. In
cases such as these, companies can seek to implement strategies to improve the
reimbursement coverage for products.
Broadly, companies have three available options:
Work with decision-makers to address issues underlying the reimbursement

decision;
apply pressure on decision-makers through lobbying activities;
broker compromise agreements with healthcare payors.
In most cases, companies will implement a combination of the above.
Working with decision makers

Upon failure to achieve a desired reimbursement status, companies should seek
dialogue with decision-makers to identify the specific issues underlying their decisions.
It may be the case that decision-makers require additional evidence or that there are
misconceptions relating to the original submission. Having identified the drivers of the
126
decision, companies will be positioned to either undertake studies to present new data
that will promote a review of the products reimbursement status or clarify and educate
decision-makers with respect to the data originally submitted.
Applying pressure through lobbying

The ability to lobby decision-makers effectively is becoming an increasingly important
competence for pharmaceutical companies. In the US, for example, a number of issues
such as the potential for legislative action to control drug costs have prompted
companies to boost their lobbying capabilities in recent years.
In a number of cases, lobbying campaigns have been critical in improving the

reimbursement status of products and pharmaceutical companies must be prepared to
carry out such campaigns in cases where products are assigned a reimbursement status
that fails to reflect their value. The development of internal lobbying and policy
functions is an essential step in building lobbying capability.
Brokering deals
One strategy that has emerged in recent years is to seek compromise agreements with
healthcare payors. In such agreements, healthcare payors and companies agree to an
initial price or reimbursement rate for a product following launch and a set of preagreed conditions, that can trigger a reduction in the price or reimbursement rate at a
later date. Agreements are structured to manage financial risk to both the healthcare
system and the pharmaceutical company. Examples of such agreements include:
linking price/ reimbursement reductions to sales. The healthcare payor agrees to

reimburse a product at a higher rate until the product achieves a pre-agreed sales
target, after which the price or reimbursement rate is reduced by a predetermined
amount;
linking price/ reimbursement reductions to time after launch. The healthcare payor
agrees to a high initial price/reimbursement rate for a pre-agreed period of time,
127
after which the price or reimbursement rate is reduced by a predetermined amount

regardless of sales;
linking pricing/ reimbursement to specific performance criteria. The payor agrees to

a high price/ reimbursement rate as long as particular performance criteria are met.
For example, if the cost effectiveness of a product drops below a certain threshold,
the price or reimbursement rate will be reduced. These reductions may be based on
a sliding scale.
Historically, the most common agreements to have emerged from pricing and
reimbursement negotiations link the price or reimbursement rate of a product to its
sales performance. However, more recently there have been examples of departures
from this deal structure. An agreement between the French government and Pfizer and
Pharmacia over the pricing of the arthritis drug Celebrex (April 2001) involved linking
price cuts to formulary access, while an agreement in the UK for the multiple sclerosis
drug beta interferon (July 2000) established a risk-sharing arrangement between
manufacturer and payer. More is said about innovative broker agreements in the
following section.
Patent protected phase pricing considerations

Following the successful launch of a drug, the competitive environment can regularly
change following the launch, expansion or patent expiry of competitor products. In
response, pharmaceutical companies must be able to identify the pricing implications
associated with on-patent lifecyle events and respond appropriately. A number of novel
approaches to pricing and reimbursement have emerged that deal with reactions by
payors to initial prices a launch.
Case study: the respiratory market

The respiratory market provides a good illustration of pricing strategies facing
incumbent and new entrant players across the product lifecycle. The impact of new
128
drug classes, formulations and patent expiries have a significant impact on the market
and the successes and relative failures within the market provide excellent insight into
how pricing strategies evolve over the lifecycle of products and entire product classes.
According to IMS Health, respiratory agents generated global sales of $24.1 billion in
2006, a year-on-year increase of 10.4% in constant dollars. As shown in Figure 6.15,
the leading products in 2006 were GlaxoSmithKlines Advair/ Seretide and Mercks
Singulair. The major growth drivers in the market for asthma and chronic obstructive
pulmonary disease were the anticholinergic, Spiriva, and the leukotriene receptor
antagonist, Singulair.
Figure 6.15: Leading respiratory drugs by global sales, 2006
7
Global sales, 2006 ($ billion)
90%
80%
5
70%
60%
3.6
50%
3
40%
1.7
30%
1.3
1.2
1.2
20%
10%
Year-on-year growth, 2005-06
100%
6.2
0%
Advair/
Seretide
Singulair
Spiriva
2006 sales
Pulmicort
Flovent/
Flixotide
Symbicort
2005-06 growth
Business Insights
Lifecycle management is critical in the asthma/ COPD market in order to maintain

pricing. Improving the accuracy or efficacy of drug delivery or patient compliance can
earn price premiums at launch.
129
Combination products are becoming increasingly common. However, despite

improving compliance and therefore efficacy and safety they are priced close to parity
or at a discount to the constituent drugs. Proven clinical benefit through improved
compliance is often difficult to substantiate. However, the parity pricing can help lead
to early use in the treatment pathway, as recommended by NICE in the UK.
One strategy, employed by Singulair, is to launch in a niche market for extreme

symptoms or patients with poorly controlled symptoms. This presents the opportunity
to launch at premium initially and then to expand indications into other areas/ patient
groups. However, Singulair failed to measure up as a premium product in the wider
market, where its premium pricing restricted its uptake, instead being prescribed as a
last option.
The patented inhaler compliments have helped to keep patients and subscribers loyal,
resulting in very little generic competition. Generic entrants would have to encourage
inhaler change as well as drug change. When patents do begin to expire, generic
entrants will increase, particularly for combination products that are prescribed more
frequently by primary care physicians. As average prices begin to fall, new entrants
may find it more difficult to launch at current price premium levels.
The Montreal Protocol and other environmental regulations have led to a phasing out
of CFC propellants for generic metered-dose inhalers to be replaced with HFA
propellants. As a result, the HFA propellants now offer patent protection against
generic competition even following the loss of US patents for leading inhaled steroids,
fluticasone, flunisolide and beclomethasone. Other lifecycle management strategies
have been the switching of patients to dry powder inhalers (DPI) and the increased use
of combination products in the primary care setting.
Advair is set to lose patent protection in the US in 2011, which will have a significant
impact on single-ingredient inhaled steroids and B2 stimulants. These classes will face
130
competition from generic combination drugs that are comparably priced or even
cheaper while offering a dual mode of action.
Advair launched at a premium over Flovent by demonstrating superiority. Symbicort

may also be able to charge a premium over Advair as a result of its variable dosing
claims, which mitigate against the risk of excessive dosing. However, without a
significant body of data demonstrating superior efficacy, asthma drugs are not able to
justify price premiums to evaluation bodies such as NICE in the UK, who consider the
market to have a generally low level of unmet need.
In contrast to the treatment of asthma, the COPD still offers premium pricing
opportunities for drugs addressing the largely unmet need for inexpensive and effective
treatment option. Boehringer Ingelheims Spiriva has become the first choice drug for
many physicians while retaining a premium price.
The dominant players in the respiratory market, Sanofi-Aventis and GlaxoSmithKline,

are able to assert a great deal of negotiating power over payers and distributors, this
providing them with a competitive advantage over the markets smaller players. This
may further protect pricing as the market becomes fragmented through generic
competition.
Innovative pricing strategies

A number of innovative pricing strategies have emerged across different
pharmaceutical markets where prices and reimbursement levels are linked to
performance-based and financial-based contracts. Performance-based contracts link
risk to the quality of the products performance. Reimbursement or subsequent refunds
to payers are linked directly to the success or failure of a drug to meet its clinically
claimed outcomes. In Italy, Bayers Nexavar (sarofenib) is reimbursed at an initial 50%
discount for the first two-months of treatment, with full reimbursement then offered for
responding patients. In Canada, Sanofi-Aventis only received formulary reimbursement
for Taxotere (docetaxel) following a six month period of patient progression
131
monitoring that would have resulted in a fill refund to regional payers if it had been
unsuccessful.
Financial-based contracts link risk to utilization guarantees. The basis of the agreement
is on price and/ or expenditure caps which can operate at the overall healthcare budget
or individual product spend level. In the US, a number of cancer therapies operate
under price or product expenditure caps in order to maintain market access. The price
of Genentechs Avastin (bevacizumab) is capped at $55,000 a year for all approved
FDA indications for patients below a given income level. Bristol-Myers Squibbs
Erbitux (cetuximab) is provided at zero cost to low-income patients who have reached
a $10,000 monthly price cap.
Patent expiry phase pricing considerations

Following the loss of patent protection, the branded drug faces significant downward
pricing pressure from the introduction of generic competition. However, a brands
optimal retaliatory strategy differs by market, but both upward amd downward price
adjustments have been successfully applied in the past.
Recent legislative and approval breakthroughs in the market for biosimilars have raised
pricing concerns in key biotechnology product classes. However, with the market for
biosimilars still in its infancy, the impact on prices of patent expiries in the
biotechnology industry are still relatively unproven.
Price changes
A branded manufacturer has a limited number of options with regard to pricing at
patent expiry, it can either increase its price, decrease it, or maintain it at a constant
level. However, there are a number of ways in which each of these pricing strategies
could be implemented.
132
Where limited generic competition is anticipated, or where high levels of brand loyalty
is expected to retain a segment of the customer base post patent expiry, there is a strong
case for maintaining or even raising the price in order to sustain sales value. Also,
increasing the price prior to generic entry can result in generic prices being set at a
higher level upon entry. In most cases though, significant price increases will not be
possible in Europe, due to strict governmental pharmaceutical price controls.
Implementing a price decrease at or prior to patent expiry allows brands to compete on

a price basis with generics, and may enable the company to maintain its relationships
with wholesalers and pharmacists by offering a known and trusted product and service
while going some way to matching the generics manufacturers on price.
US patent expiry
Brand companies that cut their prices in the face of generic competition are often faced
with a corresponding decrease in price of the generic. The rise of Indian generics
players, with extremely low cost bases has increased the level of price competition seen
in the US generics market, particularly within the commodity generics sector, where
this is unlikely to be an attractive strategy for the branded company.
As patients in the US vary in their level of cost sensitivity, depending on the nature of
their insurance coverage, branded companies have the potential to retain a segment of
the market that is not cost-sensitive, and it can therefore pay to maintain the price of
the brand post-patent expiry (in price inelastic segments of the market, there may even
be the potential to increase the revenue generated, by reducing the discounts offered by
the pharmaceutical company to pharmacists and wholesalers) in order to follow a
maximize value strategy. For instance, patients covered by a fee-for-service/ indemnity
plan, who pay high monthly premiums but enjoy full medical coverage are unlikely to
be motivated to switch from the branded to generic version. Meanwhile, patients
enrolled in HMO plans are likely to be subject to restrictive formularies with tiered
patient co-payments, with financial incentives to use the generic. As the proportion of
patients enrolled in indemnity plans decline, and these plans increasingly adopt the
133
pharmaceutical cost containment methods used in managed care, the potential of the
branded industry to profit from this strategy may be reduced.
European patent expiry

There are effectively three ways a manufacturer can reduce the price of its product:
cut list price cutting the official list price for a product may not be an attractive
strategy, as it risks parallel importing into other European markets, can reduce the
price of the brand in non-patent expired markets that use external reference price
systems, and reduces the price for all parties, even those that might otherwise pay
the higher price. In some markets though, it may be necessary to drop the price if
the brand is to retain reimbursement status;
selective price cuts companies can offer packages for wholesalers to reward high
volume users. Such a strategy can be particularly effective in the hospital
environment, where companies can sell off-patent products as part of a bundle with
their newer brands;
discounts/rebates a manufacturer may prefer to give a rebate than drop their price.
This gives wholesalers and pharmacists an incentive to dispense the companys
product by improving their profit margins on sale of the brand.
In the UK mandated price cuts under the PPRS have in the past offered flexibility as to
which drugs in a companys portfolio the cuts could to be applied to. The result is that
older, off-patent brands had their prices disproportionately reduced, and perhaps
benefited from reduced levels of generic erosion, while prices of newer brands were
maintained at higher levels than would otherwise have been possible. This popular
brand equalization strategy will be removed with the introduction of a revised UK
PPRS in 2005, which specifies that price modulation will not be allowed to include
price reductions made on products with SPC or patent expiry occurring between 1st
July 2004 and 1st January 2006. Nor will companies be allowed to include sales where
additional discounts result in branded products being dispensed against prescriptions
written generically.
134
Case study: generic simvastatin

Patent protection for Mercks Zocor (simvastatin) expired in the US in June 2006.
Generic versions of Zocor were made available the day after patent expiry, with Teva
and Ranbaxy launching versions of Zocors various approved strengths. These first
generics were launched with 180-day market exclusivity periods, afforded to them
though successfully challenging Zocor patents, as listed in the FDAs Orange Book.
The exclusivity period enables first generics to launch with prices offering only a small
discount to the branded version, thereby earning significant returns before second an
third generics are launched reducing prices to half that of the brand or lower.
In response to impending generic competition and market share erosion, Merck took
the unusual step of heavily discounting the price of branded Zocor to certain health
insurers in the US in order to compete for market share. Insurers that reached a deal
with Merck, including United Healthcare and Wellpoint, offered lower patient
copayments to the branded version of simvastatin than for the generic. Branded drug
manufacturers tend to maintain the price of the branded product following patent
expiry in order to capture smaller volume share at a higher price, while some even
increase price to exploit residual brand loyalty.
An additional strategy employed by Merck for maximizing simvastatin revenues post

patent expiry was to allow Dr Reddy to launch an authorized generic version in Zocor
in return for a share in returns. In the US, authorized generics are a contentious issue,
with many arguing that they are anti-competitive. Their impact on the market as a
whole is to increase generic competition in advance of the 180-day exclusivity period,
resulting in lower generic prices and the impact those prices have on branded drug
sales.
The wide-ranging impact of low priced generics on the wider therapeutic class of drugs
is also illustrated by generic Zocor and its impact on the statin drug class. Days after
the introduction of generic simvastatin, General Motors, one of the largest providers of
healthcare in the US, began encouraging its beneficiaries to switch from all brand name
135
statins to generic simvastatin in order to reduce costs. This would have a significant
effect on the sales of other leading statins, such as Pfizers Lipitor (atorvastatin). Costeffectiveness evaluation across a class of drugs can result in quite different
recommendations once a key drug goes off-patent and its price is reduced significantly.
By way of a response, Pfizer released economic analysis directly comparing Lipitor
with Zocor. The Incremental Decrease in Endpoints Through Aggressive Lipid
Lowering (IDEAL) pharmacoeconomic data showed that patients on Lipitor had
greater reductions in heart attacks, strokes and cardiovascular procedures suggesting
that savings from the use of generic statins may be largely offset by higher patient care
and other indirect costs.
Biosimilar pricing
Following approval by the EMEA in 2006, Sandozs Omnitrope was initially launched
in Germany at small discount of 20% to the reference product. This reflects the
difference between biosimilars and small molecule generics, whereby significant
marketing and promotion is required to convince physicians. As a result, biosimilars
will be initially marketed as a new brand. A second human growth hormone (HGH)
biosimilar, Biopartners/ LG Life Sciences Valtropin will be forced to match
Omnitropes price and positioning, thereby resulting in an increasingly competitive
market space. The price response of established HGH players and the overall
acceptance of payers and physicians will ultimately determine the success of the trailblazing biosimilars.
The first biosimilar products are unlikely to reach the US market before 2010. With the
high costs associated with development, manufacturing and promotion, a 20-25% price
reduction is the most that can be expected. However, in price insensitive markets, such
as endocrinology, this price decrease is unlikely to attract a significant market share
unless accompanied by brand-level marketing and promotion efforts. Price cuts without
clinical data and promotion would need to be more significant, in the region of 50%.
By way of an example, the first biosimilar to be introduced in the Indian market, Dr
Reddys G-CSF branded generic, Grafeel, was launched in 2001 with a 60% discount
136
over the market incumbent. Over the proceeding four years, the drug was able to build
a 45% market share, despite a reactionary reduction in the price of Roches market
leading brand, Neupogen.
Continued lifecycle development of existing brands is also likely to restrict the overall
uptake of biosimilar products.
Implementing lifecycle pricing strategies

Lifecycle pricing strategies address the pricing challenges found within three distinct
phases of the product lifecycle. In the launch phase companies must be able to
coordinate across local markets in order to ensure maximum price and coverage. It is
the role of corporate headquarters to generate a dynamic, multidimensional view of a
products global price in order to limit the impact of external reference pricing and
parallel trade.
In the patent protected phase of the product lifecycle, companies are largely tasked
with reacting to given market events. The involvement of pricing and reimbursement
expertise in key competitive positioning and promotion strategies is critical to ensure
prices are optimized following changes in the competitive and regulatory environment.
Highly innovative products often require innovative reimbursement strategies to
protect premium prices.
In the patent expiry phase of the product lifecycle, companies must prepare well in
advance for the entrance of low-priced generic competition. The best generic defense
strategies involve line extension, reformulation and second-generation product
switching strategies in order to transfer patient loyalty to a new patent-protected drug.
Once generics arrive, companies must determine an appropriate pricing response,
which depend on the degree of patient loyalty involved and the technical difficulty
involved with producing generic products, For example, those operating in the
137
biotechnology field are likely to face competition from the launch of biosimilars, but
similar to the launch of a me too branded product rather than a low priced generic.
Sales
Figure 6.16: Lifecycle pricing strategies
Launch
phase
Patent
protected
phase
Patent
expiry
phase
Time
Business Insights
138
CHAPTER 7
Appendix
139
Chapter 7
Appendix
Glossary
ANDA
Abbreviated New Drug Application, a shortened version of a new

drug application (NDA) submitted instead of an NDA for
approval of a new formulation of an existing drug or
investigational drugs that are similar to already approved drugs
including generics
BIO
Biotechnology Industry Organization, an industry organization

representing the interests of biotechnology companies
Bungyo
the separation of the prescribing and dispensing functions in

Japan
GDP
Gross Domestic Product, a measure a national wealth
HMO
Health Maintenance Organization, a private health insurance in

the US combining a range of coverages in a group basis
MCO
Managed Care Organization, a health care plan designed to

provide medical services through groups of doctors, hospital and
specialty providers
Medicaid
a statutory insurance scheme made available by the US

government to people below a certain income who are unable to
afford private health insurance
Medicare
a federal insurance scheme made available by US states for

people over the age of 65
MHW
Ministry of Health and Welfare, the government department

overseeing national healthcare expenditure in Japan
140
NHI
National Health Insurance, the national healthcare reimbursement

body in Japan
NICE
National Institute of Clinical Excellence, a Special Health

Authority
covering
England
and
Wales
producing
and
disseminating clinical guidelines, both for medicines and medical

technologies
Parallel imports
the transportation of a pharmaceutical product from its original

market, where it was sold directly by its manufacturer or
marketing partner, to a different market for resale by the importer
Pharmacoeconomics the application of economic principles to the use of drug

therapies, allocating a monetary value or qualitative measurement
to alternative treatments and their outcomes in order to achieve
the most efficient allocation of limited healthcare resources
PhRMA
Pharmaceutical Research and Manufacturers of America, an

industry organization representing the interests of pharmaceutical
companies
Yakkasa
the difference between the reimbursement price and purchase

price for Japanese pharmaceutical products
141
Sources
A wide range of sources for pharmaceutical pricing and reimbursement information
have been used in the compilation of this report. Significant desk and library research
has been conducted to develop comprehensive pricing and reimbursement profiles for
the leading pharmaceutical markets. A number of specific sources have been used in
developing and shaping the analyses presented in this report, including:
European Pharmaceutical Pricing: Optimising Launch Sequence to Maximise Product

Value. Ken Fyvie & Gavin Crouch. Critical Eye. Dec 2003 Feb 2004
Industry Profile 2007. PhRMA. www.phrma.org
International pricing strategy for pharmaceuticals. Inpharmation. 2007
Medicaid Enrollment and Spending Trends, 2007. The Kaiser Commission on

Medicaid and the uninsured. The Henry J. Kaiser Family Foundation
NHI Drug Price System. Japan Pharmaceutical Manufacturers Association (JPMA).

2007
OECD Health Data 2007. www.oecd.org
Overview of pharmaceutical pricing and reimbursement regulation in Europe. Panos

Kanavos. LSE Health and Social Care. Feb 2001
Pharmaceutical Pricing & Reimbursement, 2007. Cambridge Pharma Consultancy.

IMS Health
142
Pricing Climate Heats Up in US and Europe. Neil Turner. Pharmaceutical Executive.

July 2004
Recent Medicaid Prescription Drug Laws and Strategies, 2001-2007. National

Conference of State Legislatures
The Pricing Ecosystem. Pharmaceutical Executive. November 2004
143

Pharma Pricing and Reimbursement

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Pharma Pricing and Reimbursement

Transféré par

Droits d'auteur :

Formats disponibles

HEALTHCARE

Pharmaceutical Pricing and

Delphi Pharma provides strategic, financial and marketbased solutions to clients,

Copyright 2007 Business Insights Ltd

An introduction to price optimization

Pricing and reimbursement in North America

Pricing and reimbursement in Europe

Pricing and reimbursement in Japan and the rest of the world

Global pricing strategies

Lifecycle pricing strategies

Delivering a return on investment

Healthcare cost containment

Key issues impacting on pricing

Global versus lifecycle pricing

Pricing and reimbursement in

Recent developments in the US

Future pricing scenarios in the US

Canadian pricing regulations

Pricing and reimbursement in

European pricing regulations

French pricing regulations

Recent developments in France

German pricing regulations

Recent developments in Germany

Italian pricing regulations

Recent developments in Italy

Spanish pricing regulations

Recent developments in Spain

Recent developments in the UK

Future pricing scenarios in Europe

Pricing and reimbursement in

Japanese pricing regulations

Recent developments in Japan

Future pricing scenarios in Japan

Australian pricing regulations

Recent developments in Australia

Chinese pricing regulations

Recent developments in China

Global pricing strategies

Implementing global pricing strategies

Lifecycle pricing strategies

Launch phase pricing considerations

Patent protected phase pricing considerations

Patent expiry phase pricing considerations

Implementing lifecycle pricing strategies

Declining trend in number of NDA and NME approvals, 1997-2006

Number of NDA and NME approvals by the FDA, 1990-2006

Price optimization is also significantly affected by a number of related disciplines,

Pricing and reimbursement in North America

Medicare Part D benefits were introduced by the Medicare Prescription Drug,

According to CMS, nearly 24 million individuals were enrolled in Medicare Part D

Pricing and reimbursement in Europe

The major European pharmaceutical markets operate a variety of different

Historically, European regulatory authorities have taken different approaches to

Pricing and reimbursement in Japan and the rest of the

The Japanese healthcare system is characterized by high pharmaceutical

Global pricing strategies

Local optimization involves adapting pricing strategies to fit national-level, and in

Lifecycle pricing strategies

It is imperative that pharmaceutical companies ensure that evidence demonstrating

Following the successful launch of a drug, the competitive environment can

Optimizing global product prices and securing the broadest possible

While the pharmaceutical industry faces pressure to maintain revenue and

In 2007, the Organization for Economic Co-operation and Development (OECD)