GlaxoSmithKline's flexible pricing agreements with European governments are intended to more appropriately align market incentives, GSK Pharmaceuticals Europe President Andrew Witty said.

GSK announced Sept. 18 that it has reached "at risk" pricing agreements with two European governments that call for an initial price that would be renegotiated up or down as additional safety and efficacy data become available.

During the Financial Times Global Pharmaceutical and Biotechnology conference in London, Witty explained that the new pricing strategy "is a market model which will signal the right messages to the industry....The way the model works at the moment guarantees all of the wrong signals in the system," he said.

"It is slightly counterintuitive today that the more you prove a medicine has value, the more likely you are to have a price cut in current environments in Europe, which in a sense is completely the reverse signal than the market really wants to send," he explained.

The market should really signal "please invest in medicines which we value and will be successful."

The current model encourages manufacturers to push for the highest price possible before launch, when only pre-market safety and efficacy data are available.

"In Europe, we all know that traditionally the launch [price] will never be increased and will only be cut....Of course the logic from the negotiation table is you want the highest price you can possibly get from day one."

"Now at day one you have...the least information available to justify that high price, but nonetheless because you believe that launch price is the peak price you will ever achieve, you try to negotiate a very high price," Witty said.

This confluence of manufacturers' push for high initial prices with minimal available data leads to protracted pricing negotiations that cut into the market exclusivity for products and diminish the market potential of compounds.

"Outside of Germany and the U.K., the average is between one and two years to get the price approved," Witty noted. "If you put that into the context of eight years of surviving patent life post drug development, you are really talking about burning 25% of your potential earning opportunity on the medicine in that negotiation."

For this reason, when considering reimbursement strategies, "you need to be able to trade off not just price, but price, volume and time in this calculation," Witty explained.

GSK's basic pricing strategy would involve an initial pricing discussion, which would arrive at a potentially lower price than would have traditionally been the case, followed by further discussions as additional data become available.

The initial discussion would be around "the value of the new medicine, but there should be agreements for us to go on and evolve that," he said. The pricing could be updated based on new data from outcomes studies, clinical trials and, potentially, population databases, Witty added.

Such information would "shine the light on the true value of the medicine, which over time should then be allowed to vary up or down, depending on what's being proven," he explained.

The GSK exec said the strategy is designed to shift discussions with payers away from "price" towards "value."

"We have seen over the last four or five years quite a strong move towards price, price, cost, cost, cost, with very little emphasis on value, very little emphasis on outcome," he noted. "For the industry to succeed in the future, we need the payers to evolve a more sophisticated view of how to judge value."

With the flexible pricing strategy, "we start to shift the discussion from what frankly is a sterile debate over the price of the medicine on the day it is introduced" to a series of pricing negotiations around the evolving value of the medicine.

Witty acknowledged that firms cannot expect that "every new medicine deserves a premium price over the last, most expensive medicine." However, on the other hand, "there is no way that everybody in Europe can have all medicines at the price of generic ranitidine" (GSK's Zantac ), he asserted.

Speaking during a separate session at the FT conference, McKinsey U.K. Health Care Practice Director Nicolaus Henke said the success of GSK's strategy will depend upon the company's ability to control the pricing risk.

"If you just stay where you are currently, which is essentially to drop the pill over the wall and stop there, your ability to control what actually happens from there is limited and therefore your ability to actually control risk is limited," he said.

Another potential problem is the limited experience coverage committees have in tying outcomes and expense data in pricing analyses.

"We have yet to find where the ability of the [primary care trusts] to link financial expense and outcomes is at a level you want in order to make even discussion possible," Henke said.

For this reason, Henke recommended that firms pursuing "at risk" strategies help coverage committees to develop systems to measure the relationship between spending and outcomes. Doing so would develop trust between industry and coverage committees and also provide "the opportunity to go more at risk," he said.

Conference attendees said a third challenge GSK could face is explaining to patients why prices are being increased when additional efficacy is demonstrated.

However, Pfizer Chief Medical Officer Joseph Feczko suggested that this concern may not be as significant as some fear because "most patients don't see the cost of drugs."

"I am not too sure right now that the cost of drugs does resonate that much with the patients themselves in most European countries. It is more of an issue between industry and governments so I am not too sure what the psychological impact of that would be," he said.

Sanofi-Aventis Managing Director Nigel Brooksby offered another reason why patients should not be concerned about drug prices: "When I look around the U.K. and hear criticism about...the costs of medicines, I think, why are we criticizing this industry?"

"Who owns the pharmaceutical industry? Well of course in the U.K. it is the pension funds, so many of us want the individual pharma companies and the industry in total to perform. Unless that performs and adds value to the company, then the pension funds are not going to have enough funds to pay for our retirements," Brooksby said.

- Andrew Kasper

GSK’s “At Risk” European Pricing Strategy Aims To Align Market Incentives

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