How Pricing Can Be Vital to a Drugmaker's Profitability

Game-changing efficacy and safety will undeniably allow any drugmaker to dominate an indication, but when drugs match up nicely to each other, price can be the key differentiator.

In this clip from The Motley Fool's Industry Focus: Healthcare , host Kristine Harjes and Motley Fool contributor Todd Campbell discuss pricing strategies used by companies to rack up revenue for investors using the hepatitis C brawl between Gilead Sciences (NASDAQ: GILD) and AbbVie (NYSE: ABBV) as an example.

A full transcript follows the video.

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This video was recorded on March 7, 2018.

Kristine Harjes: Our third factor of competition that we wanted to talk about today is price. This one is, I think, slightly less obvious than the others, and in particular it needs to be balanced with the other two, meaning efficacy and safety, because price alone isn't going to cut it if you have a drug like, say, Sovaldi. Sovaldi was able to price itself very high compared to what was on the market because it knocked it out of the park on safety and efficacy. But, as it turns out, that wasn't the end of the story. Eventually it did face competition from other hepatitis C drugs in this next generation wave of more safe and more effective drugs, based on price.

Todd Campbell: Right, AbbVie and Merck , both of them. And you can imagine, Kristine, being in the war room of these C-suites trying to figure this out, because they're looking at this and saying, we know we're going up against Sovaldi and Harvoni, which are incredibly efficacious drugs with solid safety profiles. We think we can match or at least come up similarly to them on those two things. So then, how do we differentiate to make sure that we're able to win the market share away from them? And the next logical choice, then, would be on price. Can I battle on price? Can I undercut them, still make a nice profit for my investors, and capture a bulk of the market share?

Harjes: One strategic way that companies can do this is by negotiating directly with the PBMs to get preferred access to their formularies, which essentially blocks out your competition, if your drug is listed on, say, Express Scripts' preferred formulary and your competition isn't.

Campbell: Right. And that's why the Viekira Pak, which was AbbVie's first hepatitis C drug, when that came out, I think it won approval at the end of 2014, maybe launched in 2015. When they won approval, what they decided to do is, we can't necessarily beat Gilead's drugs on these other things like efficacy and safety. But what we can do is offer a bargain-basement price to Express Scripts, and basically get all of the business that way. And that's exactly what ended up happening. I think Sovaldi was priced at $84,000 for the treatment, I think Harvoni was $94,000, and Viekira Pak's wholesale acquisition cost came in around $83,500, but their net cost was probably much, much lower than that. And of course, that then forces Gilead to have to compete on price and lower their prices. And then when Merck's drug came out, compete again. And then, fast-forward to 2017 with AbbVie's most recent drug that just launched, and I think that drug is priced at less than $30,000 for an eight-week course of treatment.

Harjes: And this is why, when you're looking at Gilead Sciences' results, you see hepatitis C sales falling off a cliff. Not only are they treating patients and curing them, which effectively makes your market smaller and smaller, but this price battle has made margins so tight for all of these companies that the market is not nearly the size that it once was.

Campbell: Right, a smaller market. And then, of course, competing on price to try and maintain market share, driving down the revenue on the unit volume that you are driving out the door. I think, from an investor's standpoint, you're looking at it and you have to recognize that drugs aren't your normal thing. When you're looking at this industry and investing in this industry for the first time, one of the things you have to realize right out of the gate is, this isn't like building a widget and saying, "I'm building a widget and then I'm going to mark it up 15%, and that's going to be my profit margin." 90% of the drugs are going to fail in your clinical trials, so you need to not only price for the cost to produce that drug once it wins approval, but you need to absorb the cost on all your failed drugs, and you need to price it to be able to fund future development of whatever the next innovative treatment is that you're going to launch.

Harjes: And, of course, all the way, you have to be battling the public outcry about drug pricing. So, for sure, this is something that drug makers and doctors, payers, pretty much everybody in this country, is thinking about, is drug pricing.

Kristine Harjes owns shares of Gilead Sciences. Todd Campbell owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short May 2018 $85 calls on Gilead Sciences. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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