1.1. More for more, the same for more or less for more – is there still a choice?

Following McCarthy’s four Ps of the marketing mix, i.e. the product, price, place and promotion (also called marketing communication mix) a company pursuing an integrated marketing program needs to decide which pricing strategy it is going to pursue to support the value proposition for its products or services in line with its chosen differentiation and positioning strategy 1 . When introducing a new product with an improved value proposition for the customer, achieving higher customer satisfaction or even customer delight, a company can either price this product higher, the same or even cheaper than the currently marketed products. While a much more or more for more price will increase the company’s profit most directly and is thus the preferred option for each company, a pricing at the same price (the same for more) or even a lower price (less for more) will obviously be preferred scenarios for the customer as these increase the customer’s value proposition for this product most considerably.

While each company can naturally decide on its own pricing strategy the choice between available options may get restricted in the presence of customers with high bargaining power as described by Porter’s competitive forces. 2 In this case a company may have to settle for a “the same for more” or even a “less for more” pricing option 3 if it wants to market its product in such a high bargaining power market at all.

This situation has become especially true for the pharmaceutical industry and its choices for the pricing of proprietary prescription drug products on the German market.

Generic drug products have been forced to settle for a lower price based on the drug compound since more than a decade by now and innovator companies have to accept lowering their prices to the same fixed prices when they loose exclusivity as protecting patents expire for either the drug compound or the specific dosage form or formulation. A similar principle is in place also in most other European countries and companies developing proprietary drug products have no other choice than to accept this cut in their sales prices, if they want to continue selling their products at all. Most drug prescriptions are covered by general health insurance systems and these will then only reimburse the agreed fixed price costs for such generic drugs.

In Great Britain NICE has been evaluating the benefit of treatment costs for new drugs linking clinical outcome to cost efficiency and eligibility for reimbursement by the NHS already for some time using an approach outlined by M. D. Rawlins, President of the National Institute for Health and Clinical Excellence during the plenary session of the AAPS Meeting in Washington D.C.

Figure 1: The evaluation of desireability of new drug and medical treatments⁴

Until the beginning of 2011, companies introducing new drug products under patent protection in Germany still could determine their sales price as they considered appropriate pursuing usually a “more for more” pricing principle in order to improve contribution margins and cover their high development costs.

This policy resulted e.g. in an increase of monthly treatment costs for anti cancer drugs from about 2000 US$ per patient in 1999 to 7000 US$ in 2008.⁵

Obviously this also applied to “me-too” products and other new drug products, which were proprietary but did not really improve treatment of a specific disease as compared to the already existing treatment options. These drug products then generate higher treatment costs as they are sold at a higher price while not providing a real customer surplus. Therefore, the health insurance providers that had to bear these additional costs, as both patients and physicians are traditionally inclined to switch to newer drugs, have objected this policy for some time already due to the significant pressure on the national health systems.

In order to lower expenses and to regain control over steadily increasing demands and decreasing budgets, resulting in huge deficits for the public health insurance providers, the German health legislation has now established a new reimbursement system also for proprietary drugs. The new legislation AMNOG makes it mandatory also for new drug products to demonstrate a substantial benefit in the therapy or an added value versus existing drug products for a treatment or disease to justify a higher price. If this can’t be demonstrated clearly in the submitted dossier the G-BA will fix the price for the new drug product based on existing therapy costs and thus substantially lower than a company might have hoped for.⁶ Therefore, a pharmaceutical company that wants to market a proprietary new drug product on the German market now has to decide whether to accept this lower, fixed price or rather not to launch the product on the German market at all - despite having obtained regulatory approval.

The question obviously is whether a company can accept this lower fixed price, which will decrease its contribution margins and ROI for the development of this drug product substantially. When development costs and overall COGS remain unchanged such a pricing strategy certainly reduces the company’s profitability. Alternatively, companies may prefer not to launch their new drug products in Germany at all anymore as Böhringer and Lilly decided to do for their joint new drug product Trajenta®⁷ or withdraw them from the market again as Novartis did in September 2011, withdrawing its Rasilamlo® from the German market.⁸

Apart from this “less for more” pricing as enforced by the bargaining power of the buyers, a company might also want to pursue a lower pricing strategy for a new drug product to achieve entry into new markets and to increase its overall market share at an international level. Especially when targeting markets in developing countries or the emerging market countries of China, India, Brazil, etc. it needs to do so with lower prices even for highly innovative new drug products. Neither patients nor health care providers in these countries can afford the new medication at the prices they are sold at in Europe or the USA. Reducing its profit from sales in these countries might be compensated by an increased market share and overall increased sales volumes helping the company to spread fixed production costs and marketing costs over a large production output. It can thus utilise economies of scale⁹ and at the same time drive down the experience curve faster improving its production efficiency and benefitting from cost savings.¹⁰ Though this strategy has worked in the past a company today has to be very careful when selling the same drug product at a lower price in other markets. There is a considerable risk that re-imports of the same drug product from cheaper markets will occur at a reduced price back into the high price markets, which will then significantly harm also the revenues and profits in the high price markets.

¹ Kotler; Principles of Marketing; p 36: four Ps of marketing
² Jones; Theory of Strategic Management; p 43: Porter’s Five Forces Model
³ Kotler; Principles of Marketing; p 239: possible value propositions
⁴ Source: Rawlins; Medicine in 2026; 2011
⁵ Rawlins; Medicine in 2026; 2011
⁶ Amnog; 2010
⁷ Staton Thanks to German pricing Lilly, BI forego Trajenta Launch; 2011
⁸ Sucker-Sekt; Novartis nimmt Rasilamlo vom Markt; 2012
⁹ Jones; Theory of Strategic Management; p 44: economies of scale
¹⁰ Jones; Theory of Strategic Management; p 111:experience curve