The pharmaceutical industry sometimes forgets how payers calculate the value of their products. Payers do not view value solely through the lenses of clinical efficacy, safety, and utility. The case for the value of a COVID-19 vaccine to prevent disease or an antiviral to prevent COVID-related serious complications and hospitalization can readily be made. What about the following, less-obvious scenario? A pharmaceutical offers some (but not high) level of clinical benefits in a common disease state for which no other pharmacologic therapy has been proven to work?

drug pricing

It is surprising how many disorders do not currently have effective, approved treatments. This is particularly true in the orphan disease areas (especially ultra-orphan diseases), in which fewer than 200,000 people have been afflicted by an illness. Often, genetic mutation or deletion is the principal cause. In other cases, like pancreatic cancer, outcomes with known therapies are considered minimally effective. When speaking about a high-prevalence disorder, the same can be said for nonalcoholic steatohepatitis (NASH). At least two therapies are in late-stage trials, but many questions regarding their clinical and quality-of-life outcomes are yet to be answered.

When developing a new pharmaceutical for orphan diseases or more prevalent disorders that do not yet have effective treatments, the calculation of value is not so well defined. In our market research with payers, we find that the first treatment found to have any clinical effectiveness for a disorder is likely to gain some level of coverage. This does not mean it will be favored as a preferred product. One can assume that prior authorization requirements will be the principal way in which access is controlled, particularly when the drug is priced as a specialty pharmaceutical.  

This is why payers are increasingly looking to organizations like the Institute for Clinical and Economic Review (ICER) to help them set pricing standards in the sometimes ambiguous world of pharmaceutical value. The analysts at ICER take a direct approach to the consideration of pharmacoeconomics. They evaluate whether the price proposed by the drug maker is cost effective based on its predicted clinical improvement and potential medical cost offsets, and, perhaps more importantly, at what price would the drug be cost effective?

The standard pharma company method includes gaining payer feedback in several prelaunch phases. This consists of presenting a condensed profile of “Product X,” which highlights the new drug’s benefits (real or aspirational), risks of treatment, and the intended patient population. After digesting this information, payers (usually a mix of medical directors, pharmacy directors, and clinical pharmacists) are offered a wide choice of potential prices, in an effort to better obtain a narrower range of acceptable prices. Subsequent rounds of feedback are obtained regarding rebates necessary to obtain preferred formulary placement and what prior authorization criteria will be utilized to manage patient access.

Rarely, do pharma companies directly ask the payers what price would make financial sense based on the product’s apparent value. It seems an obvious question, and it does sometimes get asked, but not often enough. This leaves payers (and most other stakeholders) with the impression that the price is an actuarial business decision: let’s pick a price point that maximizes revenue. This doesn’t mean the price is indefensible, but it does imply there is little transparency or logic to the pricing.

There are ample examples where initial pricing was drastically changed once the agent was introduced and caused an outcry that affected managed care plan coverage. Despite promising the first medical cure for patients with hepatitis C, the initial price tag for Gilead’s Solvaldi caused an uproar. Cost increases to cancer products like Revlimid, which may be associated with only incremental benefits, have been debated by oncology centers like Memorial Sloan Kettering Cancer Center as well as by Congress. Manufacturers like Amgen cut the price of their PCSK9 cholesterol-lowering agents by 60%, because of payers’ perception that the initial price was not rooted in value (and their subsequent refusal to provide broad formulary access).

Too many specialty drugs today and in the pipeline tomorrow carry price tags that do not align with their claimed value. Biopharmaceutical companies should expend considerably more time and effort incorporating payers’ assumptions and opinions on the value of new medications before setting price, or at least really gauge their reaction to proposed pricing well before launch. This will result in at least some degree of price acceptance at launch or at least the impression that the company cares about the payer perspective.

In a value-based health system, this will matter a great deal. 

SM Health Communications provides writing, consulting, and innovative market research services for the payer markets. Its proprietary P&T Insight™ virtual P&T Committee program is the leading mock P&T Committee product in the field. We’ve participated in many market research projects involving biosimilar development and launch, from the point of view of the biosimilar and the innovator drug manufacturer. For more information, please visit or contact Stanton R. Mehr, President, at

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