Pricing Strategy for a New Pharmaceutical Drug
Economics Perspective Pharmaceutical industry is unique in the economy since it is a manufacturing industry but is fundamentally based in research and development. The US pharmaceutical industry is an international leader in drug innovation. US produced more new molecular entities, both chemical and biological, compared to Europe and Japan. The United States also leads, by far, Europe and Japan in the number for new Patents filed for pharmaceuticals.
The United States accounts for almost half of the global pharmaceutical market, with $300 billion in annual sales (2006) followed by the EU and Japan. Economics behind a new drug price Like every other manufacturing companies, pharmaceutical companies aim to manufacture products that must be sold for a profit in order for the company to survive and grow. The difference lies in the product they sell affecting their consumers’ health and life directly. This makes the business risky. Without a new discover of a ‘blockbuster’ drug every few years, the drug company survival is at risk.
For instance, only one out of every ten thousand discovered compounds actually becomes an approved drug for sale. Much expense is incurred in the early phases of development of compounds that will not become approved drugs. In addition, it takes about 7 to 10 years and an average cost of 500 million dollars to develop each new drug. This money is spent before the FDA approves the drug, and if the drug is not approved, the company loses the money. These expenses must be covered by the revenue from compounds that successfully become approved drugs.
Moreover, only 3 out of every 20 approved drugs bring in sufficient revenue to cover their developmental costs, and only 1 out of every 3 approved drugs generates enough money to cover the development costs of previous failures. Below we go in the different aspects of the spending involved in the drug company’s lifecycle. Research and Development Numerous studies (IMS Health and CAM Group) indicate that the R;D spending in US for pharmaceutical companies is about 13-15% of sales [1].
R;D for development of new drugs typically involves: The discovery of a new compound (natural or synthetic) that affects a medical condition. The first phase of development involves research into the biological and chemical properties of this compound to determine its effects–how it is absorbed, distributed, and eliminated in the body–as well as its safety. These early studies occur in the laboratory using cells on plates (tissue cultures) and animals.
If the new compound is safe and effective in animals, the next phase is testing in a small number of healthy human volunteers to confirm the information from the animal studies and to gain further information on the effects of the compound. Finally, the new compound is tested in humans who have the condition for which it will be used. Once the compound is proven to be safe and effective for the condition, the company applies to the Food and Drug Administration (FDA) for a license to manufacture and sell this drug. The FDA tightly regulates the testing of new compounds in humans and has strict criteria for the approval of drugs.
