ELECTRONICALLY REPRINTED FROM APRIL 14, 2006
HealthReference Pricing For DrugsBy Chuck Farkas and Preston Henske
If an existing drug reduces cholesterol by ceutical industry as well, reaching $30 bil- investment trade-offs.
lion to $35 billion in lost profits over the
One likely consequence will be a shift in
next three to four years, according to analy-
research toward diseases not currently treat-
sis by Bain & Company. In effect, reference
ed by multiple drug therapies. The reason is
Massachusetts state legislator or, increas-
prices on drugs still under patent protection.
That certain drugs are interchangeable in
That power will change the pharmaceutical
And in the testing phase, reference pric-
terms of their health benefits is the idea
behind "reference pricing," in which offi-
Pfizer (nyse: PFE - news - people )
therapeutic comparisons during clinical tri-
cials judge the therapeutic effectiveness of
als—to cite significant improvements in
Lipitor, a statin that can help reduce choles-
burse based on the least expensive option.
terol levels. Lipitor quickly gained a market
The concept started taking hold in Europe
and has driven down pharmaceutical prices
between 2003 and 2005, as statin drug sales
rose dramatically, Lipitor's share of the
companies will need new strategies to cope
Reference pricing is also likely to shape
with the shift toward reference pricing. So
life for U.S. consumers and profits for phar-
far, pharma companies are looking at three
diminished patent price protections.
mandates universal health care coverage by
vastatin, the generic equivalent of Merck's
screen their research pipelines differently.
requiring all of its residents to have med-
A once tried-and-true path for drug indus-
ical insurance. Although the Massachusetts
another cholesterol-lowering medication.
plan has yet to define what an "affordable"
health care plan is, the principles of refer-
fourth to market was given the green light
ence pricing all point to what the future
rates. As a result, its customers were faced
Lipitor if they didn't switch to its less cost-
sonably expect to earn some kind of return
money for governments and patients. Those
who want the more expensive brands can
pay the difference between the cost of those
ine the value of such "me too" innovation.
drugs and the lower reimbursement, but that
Drugs that are not first or second to market
earnings could turn into an avalanche, forc-
efficacy for a targeted set of patients—or
Hence, they are shifting even more atten-
a drug called Prasugrel to reduce the risk of
entiation. This will drive up overall devel-
blood clots, recently decided to spend as
remain unmet. Some of the big underserved
much as $400 million to run trials against
money-losing marginal "successes."
Bristol-Meyers Squibb's similar drug,
Although Massachusetts still has a lot of
disease, multiple sclerosis, diabetes and
ground to cover to make its mandate a prac-
oncology. But others aren't as well known,
tical reality and a national model, bringing
before Plavix comes off patent and generic
worthy societal goal. So is creating better
drugs kick in. But Lilly is placing a large
in the development process are considering
bet that its drug will distance itself far
additional investments to show clear differ-
enough from Plavix in clinical trials to sur-
vive the onslaught of generics. That kind of
"new and improved" doesn't get too far. The
Chuck Farkas is a Bain & Company
pressure is on to demonstrate rigorous and
partner based in Boston and head of Bain'sNorth American health care practice.
For instance, Eli Lilly and Co. (nyse: Preston Henske is a Bain partner based in
LLY - news - people ), which is developing
offer little likelihood of therapeutic differ-
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