GENERAL PRINCIPLES

A new therapeutic's price reflects a combination of factors: the price of competing treatment options, the value provided to patients and society, and an assessment of what the market will accept. As a "real" benchmark, the first is easiest to grasp. However, with a breakthrough medicine -- one for a disease with no pre-existing treatment options --- appreciating the latter two factors becomes essential. In these cases, a starting benchmark can be the price of an existing medicine for a disease of comparable severity affecting a similarly sized population. For example, the first biologic treatment for advanced rheumatoid arthritis (TNF-alpha inhibiter), entered the market at roughly the same annual treatment cost (about $12,000) as the previously approved first biologic for multiple sclerosis (beta-interferon).

When comparing a new biotech medicine with existing treatments for the purpose of setting a price, first consider its relative clinical effectiveness. This includes not only the efficacy seen in clinical trials, but also the drug's side effects, its interactions with other medicines or foods, dosing intervals, and other characteristics that influence the patient's compliance.

Then consider the drug's economic value for payers. The new drug must either demonstrate cost savings over competing pharmaceuticals or show that it can reduce overall healthcare costs. Pharmaceutical-specific cost savings are direct and can be calculated simply: compared to an older once-a-day medicine, a new medicine dosed once a week yields cost savings even if each individual dose costs three times as much. Overall healthcare savings are difficult to calculate comprehensively as one must quantitate the value of shorter hospitalizations, fewer emergency room visits, eliminating the need for tests to monitor side-effects such as liver or bone marrow toxicity, and other benefits a drug may offer.

Ideally, real-world studies will demonstrate both clinical and economic value. For example, a once-a-week medicine produces better compliance, better control of the patient's disease, reduced ER visits and hospitalizations, and, thus, lower overall healthcare costs. During the clinical development stages of any new pharmaceutical or biotech medicine, a company should include plans for collecting this type of information to demonstrate the value of the new medicine to potential partners and payers. Sometimes, such pharmacoeconomic studies are included after FDA approval either in Phase IV trials or as part of Phase III trials for additional indications.

Pharmacoeconomic data and information about competing treatments enable the biotech company to "ballpark" the launch price of its new medicine. To finetune the process, a company may hire a consulting firm that anonymously market-tests pricing scenarios for new treatments. These consultants assemble patient and payer groups to ask test groups questions aimed at gauging market response to a new drug; i.e. "What would you think of a new medicine that did X, Y & Z and that was priced at A per dose, or B per month of treatment?" However, there are no exact formulas for introductory pricing. For example, Pfizer launched Zithromax® at a premium compared to similar antibiotics believing that the drug presented major advantages over its competitors. This was not born out by its initial market performance because payers and prescribers (i.e. insurers and physicians, respectively) did not agree. In response, the manufacturer lowered the price of Zithromax®, leading to increased sales volume.

The ultimate "value" of a medicine in both clinical and economic terms is often not well understood until late development or even post-approval. For example, the cholesterol-lowering power of Lipitor® was not appreciated until its Phase III trials, prior to which its development had almost been terminated because it was going to be the fourth or fifth medicine of its type on the market. Lipitor® eventually became the most frequently prescribed branded prescription drug in the US. Also, the market value of Diflucan®, a potent antifungal, increased significantly post-approval when the number of patients with compromised immune systems grew dramatically due to HIV/AIDS and advanced cancer treatment.