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Should Price or Product Be the Determinant in Pharmaceutical Competition?

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Pharmaceutical competition incorporates different tactics in different markets because countries have divergent approaches to regulating healthcare costs. Both price and product have roles in defining the competitive landscape in pharmaceuticals, but one may take precedence over the other, depending on the nature of the market.

How price and product combine to affect competition differs from market to market. 

The importance of having a competitive intelligence strategy cannot be overstated, regardless of the number of markets in which a product competes. Creating such an overarching strategy in a world where markets are regulated differently is not easy, but it is an effective way for pharmaceutical companies to weather turbulence in the markets and keep operations stable. Here are some key considerations.

In the Perfect Competitive Market, Price Dominates

Perfect competition only exists in a theoretical market full of homogeneous products without entry or exit barriers, where competitors’ only market strategy is adjusting prices. In such an environment, the addition of new competitors will cause prices to approach marginal costs over the long term.

Of course, real markets are not like that. Product quality differentiation makes competition a more multi-dimensional process. Maximizing profits depends on the best mix of price and product quality. Drug patents are the most common tool for protecting the enormous R&D expenses that go into pharmaceutical product development because the initial period of market exclusivity makes the R&D investment worthwhile. Price is a dominant influence before drug patent expiry.

Unforeseen Consequences of Regulatory Restrictions

Even though the United States does not directly regulate pharmaceutical product prices, the drug patent and generic competition model has proven to be cost-effective. If a drug is superior to its competitors in a useful way, it can charge a higher price. While it may appear as if price dominates in a market like the one in the US, regulations that weaken competition sometimes cause unforeseen issues.

Suppose a manufacturer lobbies for regulations that weaken competition. The end result could include firms that seek out regulatory niches that protect them from competition with rivals. Moreover, because of insurance coverage and lack of information about therapeutic substitutes for the medications they take, US consumers have trouble influencing markets on their own. Hence, price is not as dominant a factor as it might appear at first.

Potential Wild Card Scenarios

In the United States, three major factors affecting competition in the pharmaceutical market are:

  • Biologics and biosimilars
  • Demand-side imperfections of participants in the market
  • Markets for older drugs

 

The effect of biosimilars is expected to differ from the effects of generics on small-molecule drugs. 

Biosimilars are to biologics what generics are to small-molecule drugs – to an extent. The “similar” in their name tells the story; they are not generic replacements for brand-name biologics, but they are expected to reduce treatment costs just the same. How biosimilars affect competitive pricing is yet to be learned, but they are expected to have lower penetration into the biologics market than generic drugs have had against small-molecule name-brand medications.

In older drug markets, some firms with smaller portfolios have increased prices significantly for essential drugs. How this will play out is uncertain too. Some congressional representatives have urged improving pricing transparency on such drugs and allowing temporary imports of some of these drugs to contain prices.

In Europe, Product Eclipses Price at the Moment

In Europe, things are different in many ways, and regulations vary from country to country, often significantly. Price setting based on estimates of the costs borne by industry (like R&D and manufacturing) was originally adopted in southern European countries including Italy. This is a complicated thing to attempt.

Reference-based pricing applied to therapeutically overlapping products originated in Germany and the Netherlands, and is now applied in many of the EU nations. The long and short of it is that many European national authorities use price caps, ceilings, paybacks, and confidential discounts, and there is a lack of transparency concerning real prices reimbursed for many drugs in Western Europe. As a result, product differentiation, rather than price, is more important for competitive success in the EU at the moment.

Competitive Intelligence Is Indispensable Regardless 

Whether price or product is the main competitive determinant in pharmaceutical competition varies by type of drug and location. Ultimately, this means manufacturers must develop a competitive intelligence strategy that is customized to the location of the market and the market’s particular regulations. If a competitor does not understand the competition and the forces acting on the markets, that competitor is essentially operating blind.

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