Written by Myung Soo Kim, PhD, Research Analyst, Kineticos

My colleague, Mark Osterman, recently wrote an article discussing the evolution of pharmaceutical companies’ commercial division and the changing sales model. While pushing sales is important, given the recent controversy surrounding drug price hikes (such as with Marathon’s DMD drug, Emflaza), I feel it is also important to stress the growing necessity, if not obligation, for pharma companies to be more transparent regarding their pricing – possibly as a part of their commercial sales model.

The overwhelming majority of patients/consumers do not understand the reasoning or justification for drug pricing, they only see the total cost (usually before insurance deductions and company assistance programs) and may feel shocked and outraged – how can a drug company, who purports to be in the business of helping people, price their drug at such a high price? Especially for orphan diseases, where drug prices may be substantially greater than for non-orphan disease drugs, patients simply do not understand pharmaceutical companies’ pricing and see it only as greed (as opposed to viewing it as investors looking to make a return on their investments). As a whole, pharmaceutical companies and the industry in general does an inadequate job of explaining their pricing to customers.

To improve public perception and minimize hostility and pushback against pricing, pharma companies may want to begin with explaining to patients the proven (through expensive clinical trials) quality of life improvements obtained with their drug, possibly through first-hand accounts by pre-existing patients. This is a soft, friendly approach that may appeal to patients and their families/friends.

Next, and perhaps more importantly, it is my opinion that there should be increased transparency regarding the costs and risks of drug development (and potential sales) – perhaps not by an/each individual pharma company, but by an entity such as BIO, which represents the biopharma industry as a whole. Particularly for drugs used to treat orphan diseases, this may be received highly positively by patients as they begin to understand the drug development process and the burden placed on US pharma companies to prove the efficacy and safety of their drug for each therapeutic area.

Helping patients to understand their role (as US citizens/residents) in bringing safe and efficacious drugs to the world would help them feel like they are a part of the process and potentially gain their support, rather than their current feelings of being uninformed and taken advantage of.

Furthermore, for drugs already on the market but not approved for a specific orphan designation (e.g. Emflaza), revealing to the public the highly rigorous and strict requirements and costs to prove a drug’s efficacy in each disease area may help them understand the pricing. Enlightening the public with regards to the high burden placed on the US to subsidize the world’s pharmaceutical industry by proving the efficacy and particularly the safety of drugs, the low probability of success and high costs of such trials along with the extraneous recruiting challenges and additional regulatory risks, etc. would go a long way in improving the public’s perception of drug developers.

As an example, for orphan disease drugs, the average cost for just a Phase 3 clinical trial is ~$100M1, whereas the probability of success (from Phase 1 to Approval) is ~25%2 and the average expected 5-year revenue projections for an orphan disease drug is ~$1.3B1. Given, not all orphan disease drugs have to begin with a Phase 1 clinical trial, but the numbers show that the ROI (~2:1 for 5 years of sales, assuming the average total clinical development cost of an orphan drug to be ~$150M with a ~25% success rate) is not as high as the public may currently believe it to be.

Comparing the amount spent by the biopharma industry compared to the healthcare industry as a whole (~10%) may help patients realize that pharma companies are not the only ones driving up healthcare costs, and possibly stimulate efficiencies and price cuts in other areas of the healthcare industry. Also, comparing the cost of therapy vs. the cost of not treating the disease could help patients see the value of the high priced medicines they are prescribed to take.

If pharmaceutical companies want to maintain their status as an investible business, I believe that explaining pricing to consumers is becoming increasingly necessary. Without transparency, there is risk for significant pushback against high pricing, which may drive down sales and thus scare away potential investors, ultimately resulting in fewer drug approvals and fewer patients receiving the treatment they need. Furthermore, I believe the pharma industry has an ethical obligation to be more transparent and educate the public regarding their pricing. Unlike other businesses, pharma companies are ultimately trying to improve patients’ lives, and reassuring patients that they are not being taken advantage of is an important aspect which should not and cannot be ignored.

Sources: 1) EvaluatePharma Orphan Drug Report 2015; 2) BIO Industry Analysis: Clinical Development Success Rates 2006 – 2015

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Myung Soo Kim, Ph.D., Research Analyst, is currently responsible for supporting the delivery of customized management consulting solutions to clients across the life science ecosystem. Additionally, Dr. Kim is the lead author on several Kineticos research reports.

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