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Pharmaceuticals, pricing pressure and profitability

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In response to rising costs and reform demands, federal and state legislatures are requiring pharmaceutical (pharma) businesses to provide more cost transparency related to their products through new regulatory compliance demands. The Trump administration, along with several states, including Oregon, California, Nevada, Maryland, New York, Massachusetts and Vermont, have introduced legislation controlling a variety of cost areas, from limits on price increases and restrictions on Medicaid drug spending to requirements on the disclosure of company metrics and expenses. Pharmaceutical companies, including those in the middle market, are challenged with meeting these new compliance demands while focusing on research and development, patient needs and ultimately, the bottom line. Many businesses understand the need for a rigorous pricing oversight; however, increased scrutiny and regulations will make meeting revenue goals more difficult.

Fifteen drug companies have reduced list prices, rolled back planned price increases or committed to price freezes. Likewise, big companies like Pfizer Inc. and Merck & Co., have already pledged to roll back prices on some drugs, although speculation abounds over the companies’ commitment to these actions. Nevertheless, change is quickly happening.

How can middle market pharma businesses meet these growing demands for pricing reform while remaining competitive in the marketplace? John Lanza, life sciences industry practice leader at RSM US LLP, offers some further insights into this topic.

Q: How did we get here?

Lanza: It is the era of consumerism in practically every corner of our economy. Consumers expect accessibility, quality, affordability and convenience on their purchased goods and services, from clothes to car repair. And, in health care, they have the same expectation. Consumers require quality and transparent services at costcompetitive prices. This buying preference trend is now aligning with the prescription drug industry. Legislators are hearing the demands of their constituents and want changes on their behalf.

The pharma industry is changing, too. Hearing the needs of their consumers, some pharma businesses have subscribed to more of a value-based pricing strategy— pricing drugs on the perceived value to the consumer as opposed to historical pricing. There is still much to do around this for pharma companies; however, with a variety of areas to weigh, including assessing reimbursements, contracts, raw materials, marketplace analysis, margins and growth goals, just to name a few.

Q: What can middle market pharma businesses do to address pricing reform demands?

Lanza: Pricing reform is a reality and middle market businesses should anticipate the impact on their overall operations. This includes assessing current production efforts and gaining efficiencies where gaps are identified, analyzing reimbursement structures with federal and state governments and insurance companies, reviewing raw materials and production contracts, shoring up supply chains and evaluating margins. Finding improvements and efficiencies save costs, which can translate to more competitively priced pharma products. Middle market pharma companies must be even more diligent around cost savings and regulatory compliance, often more so than their larger competitors, due to their frequently strapped resources and tighter margins.

Q: How can technology solutions help pharma businesses manage pricing efforts?

Lanza: Technology can be a big game changer for middle market pharma companies in terms of addressing pricing challenges. For instance, some companies are deploying nanotechnology to shrink drug dosages and increase potency duration. The technology involves identifying and controlling individual molecules and atoms to enhance their properties for a variety of advantages, such as higher strength, lighter weight, greater chemical reactivity and more. So rather than recommending the consumer take two pills every four hours, nanotechnology reduces the dosage to one small pill to be taken every eight hours. This can eventually save on material costs, production and packaging, which translates to reduced pricing, as well as heightened convenience for the consumer.

Another developing technology strategy for pharma companies involves marrying a business’ enterprise resource planning (ERP) system with a third-party revenue forecasting solution. Specifically, this strategy looks at a pharma’s gross-to-net data collected via ERP. Revenue analysis is completed by the third party by evaluating returns and allowances, discounts, fees, chargebacks and distributor costs. Anomalies are flagged, and this intelligence helps the company make better decisions around contracts, cash flow and supply timing. This effort can mean reducing a 5 percent gross-to-net ratio to 2 percent, which means improved margins and cost savings, allowing competitive pricing adjustments on products.

CONSUMERISM WILL CONTINUE. THOSE PHARMA COMPANIES COMMITTED TO UNDERSTANDING THE NEEDS OF THE MARKETPLACE AND BEING INNOVATIVE WITH THEIR PRODUCTS, WILL EXCEL.

Q: What’s ahead in 2019?

Lanza: Consumerism will continue. Those pharma companies committed to understanding the needs of the marketplace, and being innovative with their products, will excel. Consider the huge effort in health care around wearable technology. As an example, in the treatment of diabetes, wrist monitors and patches can evaluate glucose levels throughout the day, triggering the patient when insulin is needed. This gives consumers the ease and discreteness of monitoring their health, and automates their medication at the precise time it is needed. Middle market pharma companies working in tandem with these advances will optimally serve their consumers and realize business gains as well.

Meanwhile, drug-pricing pressures will continue and regulatory changes will persist as well. For example, regulations were recently repealed so that now Medicare Advantage plans can require patients, in some instances, to try certain cheaper drugs. If the less expensive drug doesn’t work, then, and only then, will the plan reimburse patients for the more expensive option. This change could mean certain pharma companies that produce the less expensive drugs, some being middle market companies, could be providing the new “first round” medicine for patients. This could affect production demands, supply chains and more.

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