Giving Generics a Headache With Pharma Pricing

A rarely discussed area of pricing is called product migration strategy.  Here, price is used to encourage or discourage the use of one product over another product, thus “migrating” demand from one to the other using price. 

We’re supposed to see it applied when higher performance products are introduced.  The new product’s initial price is high to reflect it’s value and the older product’s price is low since it is moving from growth to mature phases of its life cycle.  When the older product enters decline, the price is increased to reflect the remaining users who are still loyal and the new product, now entering a high growth phase is priced lower to encourage adoption.

While we rarely see or hear about it this cleanly, it does happen.  There was a great example of this with a twist in today’s The Wall Street Journal.  In How a Drug Maker Tries to Outwit Generics, Jonathan Rockoff writes about how Cephalon has increased the price of one of their drugs, Provigil by 28% in the past six months (74% in four years).  The narcolepsy drug has a strong following and clearly has pricing power but Cephalon has a broader objective as well.  They’re trying to fend off generics that will be coming when the drug comes off patent in 4 years.

So, their plan is to introduce a higher performance version of Provigil next year and actually price it lower than the older drug.  Crazy?  Nope.  They want to leverage their value now and use price to encourage the adoption of the higher performance drug, virtually eliminating demand for the older Provigil.  Thus, when the market opens up to generics in 2012, demand for the older Provigil will be minimal, leaving the generic manufacturers with a bit of a headach.

In most other markets, it is difficult to exercise pricing power and control with such precision but we should all take a lesson from the managers at Cephalon.  Price can be a very effective control mechanism for markets and competition.  But, you’ve got to have a good understanding of your value and the competitive structure of your markets.  If you can pull it off, it’s a terrific and highly profitable chess game.