Price-volume strategies and differential pricing

Strategic levers for driving growth in Asia

By Anthony Morton-Small, Senior Principal IMSCG and Derek Dieu, Senior Consultant IMSCG

The most pressing question facing pharmaceutical manufacturers in Asia is not whether there is growth potential, but rather how to capture growth opportunities. More specifically, how can pharmaceutical companies best leverage their portfolio and capabilities to benefit from Asia’s strong growth trajectory? As we have seen in a previous article, “Understanding the paradox of Asia’s pharma market to ensure success,” grasping a market’s awareness, accessibility, and affordability levels while also identifying the respective drivers and barriers are critical first steps. Strategies for specific markets/ points during the patient journey Awareness Origination Steps in the Patient Journey

However, the ability to link these market factors to patient behaviors and tendencies is an important next step in building strategies that proactively respond to key market trends (Figure 1). For example, programs that work toward increasing awareness and accessibility are most often employed in markets who struggle with high levels of under-presenting and under-diagnosed populations. For these markets, the top priority for any strategic plan is to open doors to treatments that have historically been closed or non-existent.

Awareness/Presentation Diagnosis Referral Treatment

Accessibility

Affordability

Strategies to increase awareness Strategies to expand accessibility Strategies to increase affordability

Fulfillment Of particular interest for many MNCs (e.g. pricein Asia, however, is the need to volume strategies) Adherence address opportunities and barriers related to affordability, often resulting in to under-treatment and under-compliance GRAPH 1 Source: IMSCG Analysis among patient groups. Clearly, there are significant volume, value and market share gains that can be realized when a full understanding of the challenges across the patient journey is used to drive the ultimate strategy.

Of course, given the heterogeneity of Asia’s pharmaceutical markets, the rapidly evolving nature of its healthcare systems, as well as the self-medicating and self-pay tendencies of Asian patient populations, choosing an optimal strategy to address affordability is anything but straight-forward. “Pharmaceutical markets in Asia are difficult to understand, let alone operate in,” says Anthony Morton-Small, Senior Principal at IMS Consulting Group. “For example, despite pockets of reimbursement, Asia is still predominantly self-pay by definition. When you factor in issues such as lower levels of GDP per capita, widespread income inequality/Gini coefficient, and the fact that many households rely on pooled finances to pay for a family member’s healthcare, building an optimal pricing strategy becomes a complicated project.” Indeed, a recent Reuters report noted that many leading MNCs, including Bayer, Abbott, Roche, and Johnson & Johnson, have cited tiered or differential pricing as a key factor behind their current success in emerging markets. In that same report, Roche CFO Alan Hippe notes that that the Swiss company “expects strong growth in emerging markets over the coming years… largely because of the company’s successful use of tiered pricing and innovative drug access models.” 1 According to Morton-Small, strategies that effectively address the affordability barriers of a market are often referred to as ‘price-volume strategies.’ “Price-volume strategies involve optimizing pricing to match the affordability levels and price 1

http://newsandinsight.thomsonreuters.com/Legal/News/2013/01_January/Analysis__Big_pharma_emerging_mkts_tactics_shift_as_growth_slows/

elasticity of a target market,” explains Morton-Small. “The goal is revenue optimization, or yielding a disproportionate gain in sales volume by taking advantage of peaks in demand among patients otherwise unable or unwilling to pay for treatment, and pricing accordingly.” A Range of Options. A Multitude of Opportunities Price-volume strategies may take a number of forms, with the primary distinction being selective price adjustments, which are available to specific market segments, and non-selective or “across-the-board” adjustments, which are available to the entire market (Figures 2 & 3). While across-the-board strategies (such as GlaxoSmithKline’s blanket price cuts to products in Indonesia, the Philippines, and Vietnam) may be the easiest to implement, list price reductions are irreversible and referenceable, and often require global approval. More subtle options, though, do exist, says Dr. Srikanth Rajagopal, Principal at IMS Consulting Group. “We’ve seen pharmaceutical companies succeed through innovative measures such as patient discount cards, patient access programs, and differential pricing that takes into account the affordability levels of target populations,” he explains. “We’ve also seen companies launch cheaper, alternative forms of their product, offer ‘buy-one-get-one-free’ discounts to encourage patient compliance, or discount a smaller pack of the product to lower the entry barrier. Finally, we’ve seen companies target multiple segments of the population by launching a second brand ahead of imminent loss of exclusivity, while maintaining the price of the originator. In short, lowering price may not be the only, the most effective, lever in addressing the affordability barriers of Asia’s individual markets.“

Example of price-volume strategies Price-Volume Strategies

Non-selective pricing

Selective pricing By identifiable patient segment

By product distinction

By perceived value

1

Blanket price cut/discount

Examples a

Upfront price discount

b First-dollar patient discount program

2

Payer-specific discount

Discount in exchange for favorable reimbursement

3

Income-based patient discount (Patient Assistance Program)

Patient assistance programs for high cost biologics

4

Volume-based patient discount

Patient discount program with graduated discount

5

Form-specific discount

Launch of an alternative form (e.g. metered dose inhaler) at a discount

6

Strength-specific discount

Discounting maintenance strength to encourage adherence

7

Pack specific discount

Discounting smaller pack to reduce entry barrier

8

Second brand

Launch second brand pre-LoE

FIGURE 2 Source: IMSCG Analysis

CASE STUDY OF GSK’s SERETIDE AND NOVARTIS’ GLIVEC Company

GSK

Novartis

Country

Indonesia

Thailand

Product

Seretide

Glivec

Therapy Area

Asthma/COPD

Oncology

Price-Volume Strategy

Blanket Price Cuts & Strength-Specific Discount

Patient Assistance Program

Selective / Non-Selective

Non-Selective

Selective

Proactive/ Re-active

Proactive

Reactive (compulsory license pressure)

Target Population

All

UC

Description of Price Adjustment

30-60% discount (larger discounts for higher dose products)

Glivec provided free for all patients under Thailand’s Univeral Coverage plan (UC)

FIGURE 3 Source: IMSCG Analysis

Companies wanting to make the best use of existing tools will no doubt recognize that some strategies—being the first to lower a price in cash, self-pay markets, for example—are inherently proactive, whereas others, such as dropping a price in reaction to a competitor’s price cut or governmental mandate, are reactive. While proactive and reactive price cuts both improve market accessibility to low/middle income segments, proactive price cuts provide manufacturers with a first-to-act advantage, as well as greater control over the discounted amount. “All of these are viable solutions, but none can be implemented without a thorough understanding of the prevailing market conditions,” affirms Su Yong Chung, Senior Principal at IMS Consulting Group. “It all comes down to adopting the most appropriate

Sources of Growth Potential

affordability barrier in self-pay market • Limited

cheaper alternatives

• Low

affordability barrier or reimbursed market

• Cheaper

High

• Significant

Market expansion is the primary source of value growth

High potential for market expansion and share gain from competition

Neither expands market access nor gain competitor share

Little opportunity for market expansion; success depends on share gain

Low Low

alternatives available

• Low

High

Ability to gain competitor share price sensitivity

• High

• Significant

product differentiation in clinical benefits

• Competition

based price not clinical benefits

FIGURE 4 Source: IMSCG Analysis

IMPACT OF SELECTIVE AND NON-SELECTIVE PRICE CUTS Non-Selective Price Strategy

$0.8 $0.7

Price Cut

6.0 5.0 4.0

$0.6 $0.5

3.0

$0.4 $0.3

2.0

USD, Millions

$0.9

Seretide (GSK) and Symbicort (AZ) in Indonesia

Selective Price Strategy $14.0

Standard Units, Millions

$1.0 USD, Millions

“Simply put,” says Dr. Rajagopal, “the ultimate success of a price-volume strategy depends on its ability to expand the market and/or gain competitor market share. Of course, a strategy only generates profit if the subsequent gain in sales volume offsets the loss in value due to the reduced price.”

price sensitivity

$12.0 $10.0 $8.0

Glivec (Novartis) in Thailand

400 350

PAP for UC

300 250 200

$6.0

Standard Units, Thousands

Moving from Theory to Action Price-volume strategies drive growth by helping manufacturers expand the market, gain competitor share, or a combination of the two (Figure 4). Volume growth via market expansion occurs when, through a price adjustment, a product is made available to customers who previously could not afford it, or were historically unwilling to pay. Price adjustments may also be used to either increase or defend market share (price-volume strategies are often used to limit the decline in market share of a mature product or product facing loss of exclusivity).

Price-Volume Return on Investment (ROI) Framework

Ability to expand market

strategy to increase affordability—a process that must bridge the gap between market understanding and the available strategic options while considering the manufacturer’s specific portfolio and internal capabilities. For instance, in specialty care areas such as oncology, strategies that provide sources of funding for patients may be more effective than simply lowering the price.”

150

$4.0

100 $0.2 While sacrificing value sales initially to 1.0 $2.0 $0.1 generate volume is a risk, an expanded 50 $0.0 0.0 patient and physician base can be a $0.0 0 2010 2011 2012 worthwhile reward and long-term 2007 2008 2009 2010 2011 Seretide (Volume) Symbicort (Volume) investment. Consider Novartis’s approach Gilvec (Value) Gilvec (Volume) Seretide (Value) Symbicort (Value) to the Glivec® International Patient Assistance Program (GIPAP) that was FIGURE 5 Source: IMS MIDAS, Q1’07-Q2’12- Standard Units; USD value at constant exchange rate launched in Thailand in 2003 for patients with chronic myeloid leukemia. Faced with the threat of compulsory licensure from the Thai government, Novartis reached a compromise by adjusting GIPAP to cover all patients under Thailand’s Universal Coverage program (over 70% of the population). As a result, Novartis generated good will and strengthened its relationships with physicians, ultimately expanding accessibility without lowering the list price (Figure 5).

Whereas the GIPAP in Thailand addressed affordability barriers without adjusting price, GlaxoSmithKline (GSK) took a different approach to managing Augmentin®, a mature antibiotic, in Indonesia and the Philippines. In response to generic competition, impending government price cuts, and decreased sales in the Philippines, GSK cut the price for the Augmentin range by up to 50% in 2008. Early results were promising; within a year, Augmentin revenue had rebounded to pre-price cut levels. By the third year, GSK had expanded the overall amoxicillin market, while continuing to see an increase in Augmentin’s value share.

General Risks

Price Related Risks

Price Referencing

Risks from Pricing LOW Parallel Trade

These include formal / informal referencing & legal vs. illegal parallel trade

Counterfeiting

Indirect Risks from Pricing HIGH Patent Protection

Public Relations

These may be partly motivated by pricing differentials but other factors may also be at play

FIGURE 6 Source: IMSCG Analysis IMS MIDAS

Examples of Success Variables in Asia Success Variables* Acute/Chronic Market Specific

Differential pricing, or pricing based on the affordability levels of a market, is another often-utilized price-volume strategy in Asia. Sanofi Aventis’ management of Altace®/ramipril (a blood pressure medication) is a prime example. As the first to launch the drug in that country, Sanofi chose to sacrifice initial value gain by adopting a price point close to 10% of its U.S. price. The result? Sanofi ultimately captured an impressive 40% in value share for the highly genericized molecule.

PRICE-VOLUME RISK CONSIDERATIONS

Specialty/Primary

Competitive Intensity Strategy Specific

Similar results were achieved in Indonesia in 2010 for Seretide®, GSK’s asthma and chronic obstructive pulmonary disease (COPD) inhaled medication (Figure 5). Prior to across-the-board price cuts, which ranged from 30-60% (reducing the range of price points for different Seretide packs to a single, everyday low price), the value sales of Seretide and AstraZeneca’s Symbicort®, a similar product, were tracking identically. The price cuts for Seretide initially saw its value sales drop and Symbicort’s increase. However, over the course of the next two years, Seretide enjoyed over 50% volume growth, generating enough ofa profit to offset the initial value loss. In fact, by the second year, Seretide overtook Symbicort in value share and continues to lead in terms of both value and volume sales. Interestingly, the Seretide price adjustment appears to have expanded the entire market for combination inhalers in Indonesia.

Description Is the product for an acute symptom or for a chronic condition? Is the product a’ specialty care (high cost) or primary care (low cost) product? Is the product in a highly competitive TA?

Selective/ Non-Selective

Is the pricing strategy targeted for a particular segment across all segments?

Proactive / Reactive

Is the pricing strategy a result of pricing pressure, a proactive means of increasing access?

Nonetheless, pharmaceutical companies hoping to expand accessibility in FIGURE 7 Source: IMSCG Analysis emerging markets will not always be able to achieve their goal solely by adjusting price. This was the case with Xeloda®, an oral chemotherapy treatment marketed by Roche in the Chinese market. “Even at treatment costs that were less than half of those in the US, Xeloda was still priced above the reach of most of the middle-income segment in China,” observes Amkidit Afable, IMSCG’s Pricing and Market Access expert in Asia. Clearly, says Afable, a one-size-fits-all approach does not work in Asia. “Price-volume strategies provide the opportunity to align a product with each market’s specific affordability levels, and to subsequently drive accessibility and improve market share,” he says. “It’s a careful balancing act. And it can be risky, resulting in companies either adopting conservative strategies or actively managing the risks associated with innovative strategies during the deployment stage.” If the relative price of a product is too low, manufacturers run the risk of international reference pricing (IRP), both formal and informal, as well as legal and illegal parallel trade. If a product is priced too high, manufacturers may be exposed to counterfeiting, government-led patent disputes (compulsory licensing), or negative public perceptions (Figure 6). Given both the risks and the potential upside associated with each price-volume strategy, the next question is: what strategy provides the highest potential for success? *Note: Representative, not exhaustive

Choosing the Right Strategy The challenge facing pharmaceutical manufacturers is a familiar conundrum: while the optimal strategy can often only be identified in hindsight, proactively matching a strategy to prevailing market conditions is not as straightforward. To hedge against such uncertainty, a diligent review of case studies can provide critical benchmarks and strategic frameworks and uncover unique success variables (Figure 7). “Assessing numerous price-volume strategy case studies across Asia has allowed us to test hypotheses and identify some of the patterns and variables that affect success,” says Chung. “For example, blanket price cuts may work well for acute-care antibiotics in the Philippines, but not for chronic, diabetic medication in the same country. Similarly, highly competitive markets may be sensitive to blanket price cuts, but not patient discount cards.” Identifying these variables through case studies and primary research is a necessary step in isolating the situations and market conditions that respond best to a particular price-volume strategy. As with the development of all growth strategies, past learnings are most useful when paired with a deep understanding of the current drivers and barriers unique to a market (Figure 8).

Framework for identifying the optimal Price-Volume Strategy

Country 1 Strategic Options:

Situation 1

Country 2 Situation 2

Country 4

Country 3 Situation 3

Situation 4

Situation 5

List price cut Rebate Discount (i.e. Discount cards) 2nd Brand / co-marketing Performance-based Financial-based Others

Go

Wait & Watch

GRAPH 8 Source: IMSCG Analysis

Deployment considerations for GSK’s Price Cut in Indonesia Product • Augmentin • Zinnat • Zantac • Seretide • Avodart • Lamictal • Actifed • Tykerb

Patient Journey

Patient Journey

• Origination • Awareness/ Presentation • Diagnosis • Referral • Treatment • Fulfillment • Adherance

• Awareness • Accessibility • Affordability

P-V Strategy*

Deployment Considerations*

• Blanket Price Cut

• Geographic Coverage

• Payer-Specific Discount

• Distribution Network

• Income-based Patient Discount • Volume-based Patient Discount • Form-Specific Discount • Second Brand

• Sales Force Sizing • Segmentation and Targeting • Marketing Campaigns • KPI/Performance Metrics • Initiative Roll-Out • Pricing Risks

“The availability of case studies and current assessments has proven crucial GRAPH 9 Source: IMSCG Analysis and Market Research, IMS MIDAS to evaluating strategies across market situations and determining clear go or no-go decisions,” confirms Rajagopal. “Such an approach does not guarantee success, but it does provide critical and reliable guidance for selecting a strategy and predicting its likely results.” Making it Real Finally, while specific implementation concerns are unique for each strategy, deployment plans should consider industry best practices, potential capability gaps, and key risks that require mitigation. “The importance of reviewing deployment considerations early-on in the process cannot be understated,” says Rajagopal. “To succeed, price-volume strategies require a concerted effort from all parts of the business and a close alignment with the overall brand strategy. For example, a successful patient discount card program requires data-tracking capabilities, as well as a coherent marketing message, while blanket price cuts are unlikely to succeed without sufficient sales force coverage to capitalize on higher affordability levels. These are capabilities that must be in place prior to the launch of an initiative; not doing so limits its real potential.” The success of GSK’s price cuts in Indonesia is a prime example (Figures 3 & 9). While lowering the price for a number of its products undoubtedly increased affordability levels, the coordinated augmentation of sales force and distribution capabilities were critical companion strategies. In fact, in preparation for the price cuts, GSK astutely increased its sales force headcount and geographical coverage in Indonesia by over 50%.

*Note: Representative, not exhaustive

A properly formulated and implemented price-volume strategy can have a significant impact on both the long- and short-term success of the business. “The right price-volume strategy has the potential to defend against generic entry, reinvigorate a mature brand, steal competitor share, and expand accessibilityin previously untapped segments of the population,“ says Morton-Small. “Applying and implementing intelligent strategies should leverage market landscape insights, pilot experience, and analog case studies that help identify patterns and success variables by geography, situation, and brand/therapy area. Ultimately, success requires not just an accurate understanding of the market and the right framework, but also a diligent and thoughtful implementation plan that addresses both current challenges and future opportunities.” IMS has a strong track record of advising clients on pricing and market access decisions in Asia Pacific. To learn more, please contact us at the IMS Consulting Group.

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