Pharma pricing is the frontrunner on the industry’s watchlist. Particularly, the hospital market is becoming increasingly relevant to pharma firms for two reasons: First, the majority of future blockbuster drugs and advanced therapies, such as ground-breaking oncology agents or gene therapies, are administered in a clinical setting. For example, the hospital market powerhouses Novartis and Bristol-Myers Squibb have 22 clinical trials for CAR-T therapies in their research pipelines.
Second, many firms are trying to expand their future product portfolio with targeted oncology therapies. One example is the former infectious disease specialist Gilead that currently conducts 12 clinical studies on CAR-T therapies. Despite the significant importance of the clinic market, firms often approach discounting in the hospital- and hospital outpatient sector in an unsystematic way. Clear business rules and processes are often missing completely.
This lack of guidance results in a vast number of differing conditions and contract agreements across accounts – independent of the customer’s revenue or strategic importance. Although the benefits of concise clinical discount principles are well-known, many pharmaceutical companies struggle to define and implement them. The main cause for this is a high degree of complexity in three relevant fields:
The complexity of clinical contexts cannot be denied. While the definition of clinical discount strategies is highly product- and indication-specific and depends on various contingency factors, seven key levers have proven to be crucial for successful clinical discount strategies.
Firms need to consider the products’ reimbursement situations when deciding on discounts. As drug reimbursement is sector-specific, net-prices need to be defined for the inpatient and hospital outpatient sectors separately. The pharma firms’ discount strategies need to account for the varying business models and earnings situations of the customers.
Always put yourself in the shoes of the hospital pharmacist or buying group before making a discount decision. The hospital buying center makes purchasing decisions based on its profitability. Thus, the customer contribution margin is the most important metric. Firms are well-advised to choose their net-prices according to the impact on the customer contribution margins.
Firms tend to grant lower net-prices via upfront discounts independent of sales volume since they are easy to sell. Customers often perceive them as “quick-wins” and gladly take those deals. However, larger accounts need to receive benefits for higher product sales to maintain good client relations. Firms need to focus on using discount schemes dependent on sales volume to incentivize sales.
The clinic market is very transparent – hospital pharmacists and buying groups frequently exchange information on net-prices. All customers are aware if product discounts strongly differ for them. If the differences are too high, customers feel treated unfairly which hinders the formation of long-term client relations. Conversely, customers appreciate uniform conditions that are easy to understand and apply to all peers. Thus, firms have to define one discount scheme for all customers per treatment sector.
Discount decisions are highly irreversible. Once certain discounts were granted, it is hard to reduce them in the following negotiations. Thus, firms need to be bold in contract negotiations and fully leverage their bargaining position. Especially in negotiations with large buying groups, firms tend to “undersell” their products and grant excessive discounts since they are unaware of the true value proposition of their product. Clear targets should be defined before each negotiation. If those targets are not met, negotiators are well-advised to walk-away from bad deals instead of granting excessive discounts.
Contracting agreements and value-added services can be useful bargaining chips in net-price negotiations. Instead of irreversible discounts, contracting and service options can be used to spark payer interest. If those contract arrangements meet the current needs of hospital pharmacists, they are powerful tools to attractively position clinic products. Those tools comprise for example pay-for performance contracts, contracts that ensure a steady drug supply, or cost coverage arrangements for drug wastage.
Cross-functional processes, interfaces, and capabilities need to enable the strategic principles. For example, the negotiation skills of the hospital pricing managers need to be built up to avoid excessive discounts. Also, their incentive system needs to include metrics that incentivize the achievement of pre-defined net-price targets instead of only incentivizing sales volume (at the expense of high net-prices). Also, the newly defined pricing rules need to be incorporated in the existing key account management approach.