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A guide to drug discovery

Pricing medicines: theory and practice, challenges and opportunities

Nature Reviews Drug Discovery volume 4, pages 121–130 (2005)Cite this article

Key Points

  • The prices of pharmaceutical products are being constantly criticized in the United States, and they are also subject to increasing challenge throughout the rest of the world.

  • However, certain fundamental aspects of drug development and the markets in which drugs are sold are crucial determinants of the prices that are charged by the industry. For example, drug development is risky, with high costs that must be incurred years before any returns can be realized.

  • The process of determining the price for a new pharmaceutical product starts early in development, several years before launch. The pharmaceutical company must estimate the value of the product to its customers as well as the willingness and ability of different consumers to pay for it. The company must also determine a price threshold above which the return on investment in research and development will be sufficient to satisfy its investors.

  • Here, we describe the methodological framework that is used by many manufacturers to set the price of new drugs, highlighting the challenges that are encountered and the complex trade-offs that must be managed, as well as outlining how emerging trends could influence the practice of pricing and value justification in the future.

Abstract

The pricing of medicines has become one of the most hotly debated topics of recent times, with the pharmaceutical industry seemingly being attacked from all quarters. From a company perspective, determining the price for each new product is more crucial than ever, given the present dearth of new drug introductions. But how are pricing strategies developed in practice? What is value-based pricing and how are financial models of return on investment constructed? What are the challenges faced in setting the price for a particular product, and how will scientific and environmental trends provide future pricing challenges or opportunities?

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Figure 1: The balance between the market and company perspectives determines the viable price range.
Figure 2: The components of perceived value.
Figure 3: Pharmaceutical purchase decision-making.
Figure 4: A hypothetical cash-flow curve for a pharmaceutical product.

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Author information

Authors and Affiliations

  1. PriceSpective LLC, 640 Sentry Parkway, Suite 305, Blue Bell, 19422, Pennsylvania, USA

    Nigel Gregson

  2. PriceSpective Ltd, Layston House, Buntingford, SG9 9ET, Hertfordshire, UK

    Keiron Sparrowhawk

  3. RTI Health Solutions, PO Box 12194, Research Triangle Park, North Carolina, 27709-2194, USA

    Josephine Mauskopf & John Paul

Authors
  1. Nigel Gregson
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  2. Keiron Sparrowhawk
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  3. Josephine Mauskopf
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  4. John Paul
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Corresponding author

Correspondence to Nigel Gregson.

Ethics declarations

Competing interests

N.G. and K.S. are owners of PriceSpective, a pricing and reimbursement consultancy providing services to the pharmaceutical industry, and both hold stock options in a major pharmaceutical company. J.M. and J.P. are employed by RTI Health Solutions, a consultancy providing services to the pharmaceutical industry.

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DATABASES

Entrez Gene

COX2

OMIM

Alzheimer disease

atopic eczema

benign prostatic hyperplasia

multiple sclerosis

schizophrenia

type II diabetes

Glossary

NEW MOLECULAR ENTITY

A medication containing an active ingredient that has not been previously approved for marketing in any form.

'ANATOMICAL THERAPEUTIC CHEMICAL' (ATC) CLASSIFICATION SYSTEM

This was set up by the World Health Organization (WHO) as a tool for research into drug use, and divides drugs into different groups according to the organ or system on which they act, and their chemical, pharmacological and therapeutic properties.

NET PRESENT VALUE

(NPV). The difference between the discounted projected revenues and the discounted projected costs over the product lifecycle.

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Gregson, N., Sparrowhawk, K., Mauskopf, J. et al. Pricing medicines: theory and practice, challenges and opportunities. Nat Rev Drug Discov 4, 121–130 (2005). https://doi.org/10.1038/nrd1633

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