The purpose of this presentation is to introduce you to the varied issues and structures that influence the way pharmaceutical products are priced in today’s complex health care market.  Awareness of the different mechanisms behind the costs of prescription drugs and medical services will help you determine the pricing strategy of your product/services to be competitive in today’s challenging/evolving health care environment.

1. Pharmaceutical/
Biotech Pricing
Strategies
“Price planning for today and
tomorrow”
Presented By André Harrell

2. Purpose
• The purpose of this presentation is to introduce you to the varied issues
and structures that influence the way pharmaceutical products are
priced in today’s complex health care market.
• Awareness of the different mechanisms behind the costs of
prescription drugs and medical services will help you determine the
pricing strategy of your product/services to be competitive in today’s
challenging/evolving health care environment.

3. Today’s Situation
The price of prescription drugs receives much attention from both the
press and policy makers as prescription drug spending continues to
grow. In the face of increasing drug expenditures, large purchasers
attempt to control their drug costs, in part, by negotiating lower prices
with manufacturers. Some purchasers deal directly with manufacturers
while others have representatives that act on their behalf. For example,
Pharmacy Benefit Managers (PBMs) negotiate drug prices for many
HMOs and insurers. Group Purchasing Organizations (GPOs) represent
thousands of the nation’s hospitals.

4. Contents
• Understand the varied terms associated with pharmaceutical drug
pricing
• What factors should influence discounts and rebates in purchasing
decisions
• Outline the different pricing systems used for varied market segments
• What are the factors impacting the way pharmaceutical products are
priced in today’s marketplace
• Provide pricing strategies

5. Price Variation
• Manufacturers offer discounts on brand-name drugs based on both the
drug’s market performance and the purchaser’s ability to influence
market share by systematically favoring one brand-name drug over
another.
• Hospitals, clinics, and HMOs that purchase drugs directly from
manufacturers and influence the prescribing practices of doctors
frequently pay less for the same product than retail pharmacies.

6. Price Variation
Manufactures
Direct Purchasers
(HMO/Hospitals)
Medicaid Pharmacy
Wholesalers
Direct Purchasers
(HMO/Hospitals)
Insurers and PBMs
Cash
$34 Avg
$34 Avg
$52
$30 to $44
$24
r
e
b
a
t
e
r
e
b
a
t
e

7. Discount versus Rebate
• Discount generally refers to a lower purchase price negotiated with the
manufacturer.
• Rebate refers to a specified amount the manufacturer pays the
purchaser based on the volume of drugs purchased over a given
period; rebate size grows and shrinks depending on sales/market share
performance.
Important to Know:
• In the past several health plans entered risk contracts with pharmaceutical
companies to limit their exposure to higher pharmaceutical cost.
Manufacturers’ discounts on brand-name drugs take a variety of forms:

8. Market-Share Based Pricing
Many purchasers, including PBMs, receive rebates and discounts from
manufacturers in exchange for being listed on a formulary.
Manufactures
Pharmacy
Wholesalers
Insurers and PBMs
r
e
b
a
t
e
Consider offering
performance
discounts to
plans that can
significantly drive
market share.
The more influence
the purchaser yields
in its ability to favor
one brand-name
drug over a
competing drug, or
to move market
share, the higher the
discounts and
rebates can be.
Important to Know:
• Benefit designs and other processes can drive market share by influencing physicians’ prescribing
and consumers’ purchasing practices.
• The leverage purchasers bring to pricing negotiations is based largely on their ability to drive the
market share of a particular drug.
Insurers and PBMs obtain both a retail discount and a rebate
From the manufacturer (illustrative example)

9. Pricing Terms
Varied pricing structures are used in the pharmaceutical marketplace, creating an alphabet soup of pricing terminology.
Average Wholesale Price (AWP): is the price assigned to a drug and is
listed in the Red Book, First DataBank or Medispan. AWP operates as a
suggested list price and is typically not what is paid as buyers may
negotiate lower prices through the inclusion of discounts, rebates or free
goods.The AWP is referred to as the “sticker price” because it is a starting
point for negotiations – not the actual price that large purchasers normally
pay. Naturally, the buyers are looking for discounts below the AWP in
exchange for higher market share. Medicare officials have been highly
critical of using the AWP, arguing that it grossly overpays physicians for
services because it is based on inflated price reports generated by the
pharmaceutical industry.

10. Pricing Terms
• Wholesale Acquisition Cost (WAC): The cost at which wholesalers and
wholesale chains purchase drug products from the manufacturer. The
price is defined as the “list price established by manufacturers for sales
to wholesalers.
• Average Manufacturer’s Price (AMP): The average price paid to a
manufacturer by wholesalers for drugs distributed to retail pharmacies
or wholesale chains. Does not include prices associated with direct sales
to HMOs, hospitals, or federal purchasers.
• Average Sales Price (ASP): ASP is the weighted average of all non-
federal sales to wholesalers and is net of chargebacks, discounts,
rebates, and other benefits tied to the purchase of the drug product,
whether it is paid to the wholesaler or the retailer.

11. Pricing Terms
Non-Federal Average Manufacturer Price (NFAMP): The average price wholesalers pay to
manufacturers for drugs distributed to nonfederal purchasers. NFAMP is not publicly available.
Estimated Acquisition Cost (EAC): The State Medicaid Agency’s best estimate of the price generally
paid by pharmacies for a drug. This figure is meant to represent a calculation across all pharmacies of
Actual Acquisition Cost.
Maximum Allowed Cost (MAC): For generic drugs, about three-fourths are reimbursed using limits
known as maximum allowable cost (MAC). These limits are established by PBMs, based on the lowest
estimated acquisition cost for any of the generic equivalents of a given drug.
Retail or Usual and Customary: (U & C) Price: The pharmacy’s selling price to individual consumers.
The price includes the cost of the drug and the pharmacy’s mark-up. The mark-up includes allowances
for business operating costs, e.g. rent, utilities, employee wages/benefits, etc., and dispensing services.

12. Pricing Terms
Dispensing Fee: A fixed dollar amount, above the cost of the drug itself,
in the range of $2.50, that PBMs offer retail pharmacies for dispensing
drugs.
Best price (BP): is defined as the lowest price available from the
manufacturer to any wholesaler, retailer, provider, health maintenance
organization, nonprofit entity, or governmental entity within the United
States.
Federal Upper Limit (FUL): The Maximum Allowable Cost used in price
calculations in the Medicaid program. It is also referred to as the “HCFA
MAC.”

13. Pricing Process

14. Price Pressures
Pricing pressures from private and government purchasers have resulted in a downward trend in
drug prices in recent years. This trend will likely continue as a result of Medicare’s Drug Discount
Cards, followed by the Medicare Prescription Drug Benefit which began begin in 2006.
0
1
2
3
4
5
6
2009 2010 2011 2012 2013
5.7
4.4
5.4 5.2
3.3
%
change
Percent Change in Prescription Drug Prices: 2009-2013*

15. Federal Gov & Drug Pricing
The Federal Supply Schedule
The federal government is among the largest purchasers of prescription
drugs. Government exerts its influence on drug prices by:
• Using the Federal Supply Schedule (FSS) of prices for other federal
drug purchasers.
• Requiring manufacturers to provide rebates to states for Medicaid
drug purchases.
• Other federal purchasers of prescription drugs include the
Department of Veterans Affairs, the Department of Defense, the Public
Health Service and the Coast Guard.
Note: Brand name drugs must be priced on the FSS at least 24% lower than the NFAMP.

16. Federal Gov & Drug Pricing
The Department of Defense (DoD)
The Department of Defense (DoD) purchases some pharmaceuticals
through the FSS, but negotiates independent contracts for the majority of
its drug purchases:
• The Defense Supply Center in Philadelphia (DSCP) is the single entity
which negotiates DoD’s distribution and pricing agreements with over
200 drug manufacturers
• Negotiated prices for drugs are approximately 24% to 70% below the
AWP
Fast Fact
In 1997, military pharmacies dispensed approximately 55 million prescriptions at a cost of
approximately $1 billion.

17. Federal Gov & Drug Pricing
Medicaid Rebate Program
• The Medicaid Rebate program is another way the government
controls drug costs.
• Basic rebates are calculated as a rebate equal to at least 15.1% of the
average price they earn on sales to retail pharmacies for brand-name
drugs.
• In order to participate in Medicaid manufacturers must participate in
the FSS pricing.
The rebate for brand name drugs is the greater of 15.1 percent of the Average Manufacturer Price per
unit or the difference between the AMP and the manufacturer’s “Best Price.” Rebate = 15.1% of (AMP) or
(AMP – BP).

18. What are “Price Pressures”
Keep in mind that when doing the research on where you should price
your product as always, your customer may demand a “Best Price”
contract. Remember this decision will create a ripple effect, Medicaid will
also demand that “Best Price and Medicaid could constitute about 15%
of your overall business:
CASH
11%
MEDICAID
15%
3RD PARTY
74%
CASH
MEDICAID
3RD PARTY
Important to Know
Remember, in addition
to cost, the clinical value
of your products weighs
very heavily in your
customer’s decision-
making process. In
other words, highly
valued products can
help you drive more
favorable contractual
arrangements.

19. Pricing For
Medical Services
“Price planning for today and
tomorrow”

20. Introduction
As a manufacture HOW you price your product is extremely critical, as
drug pricing is clearly a primary concern of your customers. The “Bible”
for pricing is the International Classification of Diseases, 9th Revision
Clinical-Modification (ICD-9-CM)
• The ICD-9-CM identifies the diagnosis for a patient's condition.
• The ICD-9CM included more than 10,000 numeric codes, with as
many as five digits apiece.
• All five-digit codes are subsets of four-digit codes, which are subsets
of three-digit codes.
The information represented by these codes is the basis for hospital payment by Medicare, many
national health statistics, and other uses.

21. Limitations of ICD-9-CM
• To limit the number of codes in the system, the ICD-9CM lumps
certain disease entities, which can obscure important differences.
• Codes do not indicate whether a procedure or a disease relates to
the left or right side of the body, which can impede research.
• Different codes can be used to describe the same condition; for
example, a code for a symptom such as angina can also be used to
refer to the disease process of myocardial ischemia or to the
anatomic abnormality of coronary arteriosclerosis.
Fast Fact
According to studies of coding accuracy, diagnosis and procedure codes that are recorded are
generally inaccurate. One study showed that even at the three-digit level, more than 25% of
principal diagnosis codes assigned were different from those assigned by expert reviewers.

22. Procedure Coding System
HCPCS is the standard coding system for services provided in the
outpatient setting.
• Current Procedural Terminology (CPT) Codes: describe medical or
psychiatric procedures performed by physicians and other health providers.
• The J Code: is a type of code that hospitals and physician offices use to identify
injectable drugs (e.g. Herceptin, Rituxan, Avastin) they have administered to a patient.
• The Q Code: is a type of code that hospital outpatient departments use to identify
chemotherapy infusions.
Fast Fact
Since the early 1970s, Centers for Medicare & Medicaid Services (formerly known as HCFA) has
asked the American Medical Association (AMA) to work with physicians of every specialty to
determine appropriate definitions for the codes and to try to determine accurate reimbursement
amounts for each code.

23. Medicare Pay Systems: Hospitals
Several different type of payment systems are used to reimburse hospitals for inpatient and
outpatient care to the Medicare population.
• The Outpatient Prospective Payment System (OPPS):
The Balanced Budget Act of 1997 created the outpatient prospective payment system.
• Diagnosis Related Groups (DRGs):
A classification system that groups patients according to diagnosis, type of treatment, age,
and other relevant criteria.
• APCs (Ambulatory Payment Classifications): An outpatient payment system
developed by Medicare as a universal capped reimbursement program to control
outpatient costs.
• Medicare Disproportionate Share (DSH) Adjustment:
An additional Medicare payment to hospitals which treat a high percentage of low-income
patients.

24. Buyers
As a manufacture you have the ability to charge different prices to
different buyers, including:
• Managed care institutions
• Hospitals
• Wholesalers
• Pharmacy chains
The size of the negotiated discount depends on the market power of the
buyer.

25. MC and Hospital Discounts
Managed care institutions (and large hospitals) tend to negotiate larger
discounts from drug manufacturers than large pharmacies and wholesalers.
This is mainly due to the use of formularies by MCOs and hospitals.
Often, these institutions negotiate a lower price from a manufacturer in
return for including the manufacturer’s drug on the formulary. The drug is
obtained from a wholesaler at the discounted price and the manufacturer
reimburses the wholesaler for the cost of the discount. This is known as the
charge back system.

26. Pharmacy Chain Discounts
• Unlike MCOs and hospitals, wholesalers and pharmacies do not have
the ability to substitute one brand drug for another all the time.
• Drug companies have less economic incentive to grant discounts to
pharmacies and wholesalers, unlike the case with hospitals, managed
care facilities, and health plans.
Generic drug manufacturers are likely to have less market power
than manufacturers of brand-name drugs. That’s because buyers can
substitute one manufacturer’s generic drug with one from another
generic drug manufacturer. Large generic drug manufacturers can
negotiate better rates since they can bundle generics for a variety of
therapeutic areas.

27. Establishing Favorable Contracts
Philosophy
A goal of any negotiation is to seek a win-win agreement that benefits
both your company and the customer. But ultimately, your goal is to
increase profitability for your company.
To achieve this, you need to consider the 3 Cs of contracting!
Critical Mass • Size and utilization volume
• Regional/national leadership and spillover effect
• Market dominance
• Affiliations
Control • Benefit design
• Prescription influence programs/interventions
• Demonstrated ability to influence market share
Cooperation • Agreement to terms and conditions
• Commitment to partnership
• “Push” and “pull-through” programs

28. Establishing Favorable Contracts
Know When to Walk Away…
You may consider walking away when:
• The price demanded by the account will impact your best price.
• The account has no demonstrated ability to increase your product's market share or increase
your competitor's market share.
Example: 100 Antihypertensive Scripts (hypothetical)
Scenario
No Contract: Product A $100/script x 20% share = $2,000
Contract Discount: Product A $85/script x 20% share = $1,700
Result: Contract discount yields a loss of $300
Break Even
To break even on contract discount, the customer must have the ability to grow share by at least
4 points: Product A $85/script x 24% share = $2,040. If not, you must walk away.
Reduced Market share:
Without a contract discount, you could conceivably lose share by 3 points to yield the same
results with a discount: Product A $100/script x 17% share = $1,700. But does your customer
can drive your share down further? If so, you may consider contracting. If not, you could walk
away.

29. Pull-Through Programs
Setting prices and creating contracts favorable to your business will maximize
revenues.
Example pull through activities include:
• Call planning on high volume users of non-formulary products by clinical
HCP’s
• Newsletters to members/physicians/pharmacies
• Letters, report cards, or incentives to physicians
• Protocols, algorithms, conversion programming
• Web Ex’s, Teleconferences, CE’s, CME’s
• Electronic messaging pharmacy
• KOL programs

30. Recommendations
• Always base your final pricing on the customers/purchaser's ability to
increase the volume use of your product/service, which can be done
through benefit designs and other processes that influence the end
users use of your product.
• Examine your price variability (e.g., discounts, rebates) based on both
volume and the purchaser’s ability to influence market share by
systematically favoring your brand-name product over another.
• If your final pricing structure has incentives tied to it such as “Rebates”
the size of the rebate should be tied to a percentage increase in
volume, In other words, you should price your products at a fair level in
exchange for an increase in sales volume/market share.

31. Final
Before establishing pricing for your new or existing
product/service ensure that you understand the important features
of the government programs you reside. By learning about the
important features of these government programs, you will be
better able to develop, position and implement
innovative/effective pricing in the competitive landscape of
pharmaceutical/biotech sales. You’ll also be able to present
yourself as a “VALUE” and knowledgeable resource to your
customers, which will separate you from the competition.

32. THANK YOU!
André Harrell
AH2 MANAGEMENT