Global Price Management Key to Boosting Margins

Global price management will lead the fight-back on margins, writes Arnaud Grunwald.

Price erosion, falling sales and dwindling product pipelines - they are all inflicting pain on boardrooms in the pharma industry.

What a gloomy outlook, you might think. But it is out of this dark cloud that global price management is emerging as a board-level issue that holds the key to boosting margins.It is certainly needed. The industry is having to cope with the pressure from mandatory price cuts, the creation of fewer blockbuster molecules and an increase in low-cost competition. And on top of that, executives are each day dealing with effects of global price transparency and new reimbursement restrictions imposed by governments.

Arnaud Grunwald

Although sales of pharmaceuticals are predicted to reach pre-downturn levels in western Europe by 2016/2017, industry experts are not expecting anything more than modest growth for the following decade. If the experience from regional recessions in Latin America and Japan is anything to go by, the prices of drugs will remain depressed even when economic activity picks up, because those paying will continue with the tough buying policies they adopted during the hard times.

So the pressure on margins is unlikely to let up. In this challenging landscape, global price management (GPM) is finally being seen as the vehicle the industry needs to increase margins throughout the lifecycle of products. By integrating and aligning pricing processes with timely data, real-time models and insights, the door to the best possible decision-making will swing open.

Net margin comes into full view - by product and customer group - through the ability to report data on all elements of the sale and invoicing process. This data can then be modeled to analyse the relative potential impact of different pricing scenarios and ensure centralized control of all strategic pricing decisions. In a world of tight budgets and ever-tighter margins, pharmaceutical providers cannot afford to neglect GPM.

However, some important steps are required before it can take effect.

Board-level backing
The most obvious of these is boardroom-level backing and understanding. That may be harder to achieve than many objective observers might expect, given that a recent poll of 500 senior pharmaceutical executives showed that in nearly 60 per cent of businesses the challenges and economic impacts of global pricing are not well understood.

Customer studies have shown that there are several separate and quantifiable value drivers in which the adoption of integrated GPM processes and tools would have a positive and measurable impact. Yet despite this, most manufacturers have yet to address GPM and the effect of international reference pricing – the benchmarking of a product by reference to its price in other countries. These are not fully seen as strategic investment issues, even though companies recognize that changing price dynamics are creating serious challenges to product launch plans and eroding prices before patents end.

Although pharma companies can see the threats to margins and understand where they are coming from, most do not fully grasp the urgent need for greater centralized oversight of pricing throughout the product lifecycle. An overwhelming 85 per cent of companies polled believe that pricing and margins are only on the executive’s radar in the early stages of a product’s life, whereas the evidence is that changes in markets are leading to continuing and significant profit erosion right through to the end of patent.

The need for good data
Another essential for a broader GPM strategy is good, high quality data from all markets in order to manage the cross-border ramifications of reference pricing. Many companies fall short by failing to ensure consistently good data input as the foundation for their decisions. If a company then has an ineffective price governance process and controls, it will struggle with the long-term profitability of its product portfolio. It is important to have a structured global approach as the basis for all pricing decisions.

Launch sequences also need to be timed perfectly if profits are to be maximized over the longer term, given the growing significance of emerging markets and the development of big molecule products for which the global roll-out can take several years. Changes to reimbursement procedures are lengthening market access cycles and require careful management to keep in step with global launch plans.

In some countries, new products are subject to re-referencing just 12 months after introduction. In fact governments across the world are now referencing more frequently. In Greece, it is up to four times per year and in Portugal, three. All governments use benchmarking from other countries to decide what is paid for pharmaceuticals that are protected by patents and intellectual property rights. For the manufacturers, the response must be to establish a “right first time” pricing approach.

A shift in attitudes
A successful GPM strategy does not simply require a technological overhaul, it must be accompanied by a shift in attitudes within a company - particularly with regard to data quality. Any pricing initiative is only as good as the information on which it is based. The pricing manager in one country must understand the benefits of keeping local price information up to date and wholly accurate. Across the company, the pivotal role of sound pricing and market access data must be understood if intelligent predictive pricing decisions are to be made based on an accurate risk assessment.

The lack of investment and executive focus on global pricing management in general and IRP specifically is reflected in survey responses. When they were asked what frustrated them most about meeting key pricing challenges, 61% of the top global pharmaceutical manufacturers who responded, highlighted the need for a central database to provide timely, accurate pricing information as critical to all stakeholders, regional or local.

A much greater number (82%) pointed to the need for improved governance processes and collaboration in managing frequent price change requests, with the aim of reducing price erosion. What was most desired however (84%), was the need for pervasive and sophisticated analytics and simulation capabilities so as to better understand the potential impact of future pricing events, whether from within the company or through external factors.

What is needed is a solution that encompasses all aspects of data management, approvals, reporting and analytics at every stage in the product lifecycle, ensuring consistency, transparency and collaboration. All this can be effectively combined to offer predictive insights.

But before GPM is adopted, a technology dump may have to take place, ditching old approaches that lack transparency or are based on immensely cumbersome spreadsheets or high-cost home-grown solutions.

By using the right platform and processes, dispersed organizations can work together and not at cross purposes. Closer collaboration between regional affiliates will avoid the potential pitfalls of pricing decisions being made in a data vacuum. Metrics are also available that make it easy to identify the level of price erosion before and after implementation, building confidence and buy-in.

As a part of this coming-together of platform and processes, the up-to-date data and fully documented GPM rules need to be combined in a single calendar of events. This could also include each market’s current referencing rules and timetables, mandatory cuts and launch products. Volume forecasts and exchange rates should also be part of the mix. All this data should be automatically brought together centrally in order to make it accessible in real time for effective manipulation and analysis.

Once the correct data are assembled, modeling becomes far more sophisticated, and everyone who needs to know can understand which strategies are working and which are eroding prices, helping them avoid errors of judgment. The inclusion of a price approvals mechanism within the system eliminates maverick, unauthorized price changes. Regional teams will be able to see the global picture before they make any decisions. The whole organization will also be quicker on its feet when faced with changes in market pricing or government compliance requirements.

The business case for investment in GPM relies on metrics for key drivers in line with a detailed analysis of existing implementations. These include quantifying revenue and margin benefits, the cost of managing the process and qualitative gains.

A global GPM solution, which is a fully integrated part of a well-defined strategy, can enable fully-formed business decisions to be taken - maximizing profitability by protecting the business against avoidable margin loss and ensuring it meets all regulatory demands.

The overall benefits of adopting GPM include better strategy formulation, increased collaboration and alignment between departments, reduced financial and reputational risk and all in all, greater management credibility.

Arnaud Grunwald is senior director global pricing/market access solutions, Model N.