Pricing pressures and shrinking margins

Contrary to public perception, drugs form only a small proportion of overall healthcare costs (around 9% in the US – a lower percentage than in most developed countries). However, the high profitability of pharmaceuticals companies makes them a relatively easy target for healthcare providers trying to reduce costs. In Europe and Japan particularly, government funding restrictions mean severe constraints on drug reimbursement prices. While these constraints are by no means new, the situation has worsened considerably for pharmaceuticals manufacturers in recent years. For instance in 2004 the 16% claw back from manufacturers in Germany resulted in an unprecedented 6% decline in German pharmaceuticals sales. Even in the US, where manufacturers are free to set drug prices, the rapidly rising cost of healthcare is likely to result in counter-measures that will hurt the pharmaceuticals industry. Although the Medicare drug benefit is generally seen as being positive for the industry, it does introduce into the market a very powerful single purchaser of drugs, and with that the inevitable negative pressure on prices. In 2006, Medicare will account for an estimated 28% of prescription drug spending, compared to just 2% in 2005.

What impact is the pressure on prices having on pharmaceuticals companies, and what are they doing to combat it? On the one hand, the company that develops a truly innovative drug with proven improvements in safety and efficacy can still, after careful evaluation of the market, demand premium prices and secure an excellent return on investment. On the other hand the reality is that with such breakthrough products being few and far between, even the most innovative pharmaceuticals companies are learning to live in a more cost-conscious environment, with margins under continuous pressure. There is a consequent focus on cost-cutting opportunities in all aspects of the business, from discovery research right up to sales & marketing and general administration.

 

How PwC Can Help You

In the current environment of pricing pressure, it is essential to develop a nuanced pricing policy for each territory in which a product is launched. PwC’s Valuation and Strategy Group can analyse the market dynamics to enable an accurate evaluation of how pricing policy, as part of a wider brand strategy, will drive future revenues. On the cost reduction side, PwC’s Performance Improvement Consulting (PIC) group will provide a practical framework to help clients improve their operating processes to reduce cost, capture lost revenue and improve service levels across the entire Pharmaceutical’s value chain. Professionals in this area assist clients in achieving quantifiable improvements by minimizing inefficiencies, improving decision-making processes and improving control methods.