Pfizer’s Lipitor, which my doctor will prescribe for me one of these days, is going off patent and facing generic competition. This leads typically to intense price competition and collapsing sales for the brand name. But Pfizer is trying to stave that off by offering deals such as a $4 co-pay rather than the $10 co-pay required with most generics. The mystery is why they are doing all this.
All the special discounts have the same impact as a price cut and the deals actually involve a price cut anyway. So, what’s in it for Pfizer?
The only rationale I can think of is that there is something weird going on at the insurance company level. That is, consumers are getting deep discounts and want to stick to their favored brand name product. So that consumers can consume what they want, the insurance companies will be forced to pay for the drug at the back end. But this does not hold water either because the insurance companies can simply stipulate that only generics be prescribed. hence, they have to be offered a deal to tick with Lipitor.
So, still the Pfizer strategy does not make sense because it replicates the Bertrand competition solution with funkier pricing schemes but no real advantage….
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November 30, 2011 at 9:22 am
Iljitsch van Beijnum
Maybe there is a significant scale advantage in producing a lot of this drug and Pfizer wants to keep taking advantage of that. By immediately going to a low price they may be able to keep the competition out so even though their margin will be low the volume will remain high, which could be a better deal than to wait until margins AND volume erode as competition starts happening.
November 30, 2011 at 9:42 am
twicker
Iljitsch’s idea may be true. There’s also the fact that most insurance plans are tiered, so that the price to the consumer cannot be above a certain amount unless the insurance company changes its policies for *all* holders of a certain type of policy (e.g., here in NC and using BCBSNC as an example insurance company, it would be for *all* BlueOptions members in all participating companies; I happen to have this one). Thus, the upper bound for Pfizer would be $46 per prescription, if I were to receive it (the upper tier is a $50 copay); for another policy (see website for BlueAdvantage, one of their self-insurance programs), it might be $61 (that one has a $65 top tier). If the insurance company is having to pay $300 of that prescription (e.g., the overall prescription cost is $365), Pfizer’s making money hand-over-fist using this strategy, given that they long since recovered all the development and startup costs of the drug (remember that, while insurance companies have profit margins of around 6%-8%, drug companies have earnings in the 18%-20% range (see Pfizer’s here: http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=pfe ), so, no, this money isn’t “needed” for developing new drugs; even accounting for that, they’re making money hand-over-fist).
So – this is highly rational behavior for Pfizer, and extremely damaging to all those of us who don’t work for Pfizer. Better to pay the $10 and support the generic makers.
(Disclaimer: as a consultant, I’ve worked for both brand and generic manufacturers; I don’t presently work for either. I’ve never worked for Pfizer.)
November 30, 2011 at 4:41 pm
Brittany
It must be a temporary move. The $4 copay keeps everybody from switching to generic drugs today, then Pfizer raises the copay to $10-11 later. Pfizer is in the news today, so it is ‘focal’ and now is the time people think to switch. They won’t be in the news in a few months, so people will be less likely to switch after the price increase.
So why not lower price to $10 today? Maybe they need to combat people who automatically switch when they hear of the new generic drug, so they need to get their attention with a story of $4 copays? Behaviorists can answer anything!
November 30, 2011 at 8:58 pm
Anonymous
By lowering the price they delay generic drug companies from bringing their own version into production. There is actually a major problem now with at least one drug per week running out of stock as the generic market tries to figure out what to make. I just ran into thsi with a very common drug going out of stock from 1 November to 1 January for no reason anyone can understand. Ask a pharmacist, this is becoming a major problem in the deregulated marketplace. And the generic companies constantly changing their wares makes for a greater possibility of poor quality.
December 1, 2011 at 9:57 am
John B. Chilton
In the simplest Bertrand model with equal marginal costs (meaning, also, no capacity constraints) the undercutting argument is driven by the fact that if I undercut you, I take all the sales whereas if I match you I’m selling at virtually the same price but getting a lower share of the market.
Prizer is locking up some of the Lipitor market through these contracts with buyers. I could undercut, but I wouldn’t take their customers. I’d just be moving along the residual demand curve.
This is where I’d start my exploration of what’s going on. But it does raise the question — what’s in it for those on the other side of Pfizer’s contracts? Why not wait and allow the race to the bottom?
My other conjecture is that Pfizer sees benefits to its name from keeping the widely used Lipitor out there in the public eye. It therefore sees a benefit of jumping ahead to the end where it undercuts the generics and deters them from ever making unrecoverable sunk costs. That compared to the usual strategy in the pharmacy market where the name brand is a differentiated product and sets a price above the generics.
December 7, 2011 at 7:08 am
MSBadgerWildcat
As an operations guy, I think there is a relative simple explanation. Pfizer has a significant sunk investment in people/plant/equipment that needs to stay “fed” to remain efficient. The large volume of Lipitor manufactured in Pfizer facilities helps to cover the infrastructure, depreciation, and other costs for the rest of their portfolio. If the Lipitor volume was drastically reduced, the impact to the margins for the remaining products would be dire.
December 7, 2011 at 8:27 am
Anonymous
Pfizer cant lower the actual “price” of Lipitor, or it will face government penalties and the like. So they go with the co-pay offset approach to compete with generics. Also, Pfizer has been paying rebates to insurance companies for preferred Tier status for Lipitor, and given the volume sold this amounts to big $$$ for the insurance company and could outweigh the “savings” they would get from pushing generics so they are ok with the Pfizer approach.
From a drug shortage standpoint, this is squarely on the generic manufacturers. Because they charge a lower price, they need to make it up in volume. Problem is they underestimate their production capacity of the difficulty in making some of these medications. When this happens they can’t supply the market and because the brand manufacturer has ramped down production it creates a supply shortage.
December 7, 2011 at 11:17 am
Anonymous
The answer is actually pretty simple, any money Pfizer keeps is better than allowing the generic companies take the sales even if the dollars are at a lower margin. The fact not brought up by anyone yet is that there is a 6 month exclusive period where a specific generic manufacturer has exclusive rights to sell the generic. Typically the price only falls about 15 – 20% of where the brand drug was priced. It is after this 6 month period that many generic manufacturers can compete and the prices race to pennies. There is a lot of margin in this 6 month window so instead of bowing out, Pfizer is playing and working to keep some of their volume through this 6 month period, it is after all their product.