Reports

Bottom-Up Pricing Estimate for P-quad

How much would biologic drugs cost under P-quad pricing? Two approaches to estimating fully loaded costs plus a profit (10% and 20% examined) suggest net discounts from current prices would be at least 65% to 75%
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Originally published on 03/12/2021 Drug Pricing Lab

If the price of biologic drugs were based on cost of production plus a fixed profit of 10% to 20% ("Production Plus Profit Pricing", or P-quad) after their FDA 12-year market exclusivity, the discount from the net price would still be substantial.

Bach and Trusheim have proposed this policy, with P-quad prices based on "fully loaded" company-reported manufacturing costs (so as to include capital costs and depreciation), reported distribution expenses, and a profit substantial enough to make continued investment in production and distribution appealing for the firm.

In order to facilitate a model of P-quad's budgetary impact, we estimated the prices that the P-quad reporting-based method would generate using two approaches. Then for modeling purposes we converted these prices into discounts from current net prices and selected one of the most conservative results--a 65% to 75% discount range from the net price--for the budgetary model.

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Key Takeaways

Using COGS from company financial statements, the average discount from net price ranged from 74% to 76%

Using a 'bottom-up' approach, the average discount from net price ranged from 80% to 92%

The discount range of 65% to 75% used for modeling budgetary impact of P-quad pricing was selected to be conservative and therefore undershoot the potential savings from the P-quad policy approach. That European prices through tender offers at times achieve 80%+ discounts from alower starting point, European biologic prices provides further reassurance that firms can be profitable at prices much lower than our modeled discount.

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The Drug Pricing Lab engaged Milliman to conduct an independent analysis of the Production Plus Profit Pricing (P-quad) policy proposal. The Milliman analysis estimates the projected spending on U.S. biologic and biosimilar drugs under a referent scenario where there is no biosimilar entry or competition, the existing ‘status quo’ scenario under the current biosimilar environment, and the Drug Pricing Lab’s P-quad policy proposal. 

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