What is cost plus pricing strategy?

Does the pharmaceutical industry follow a cost-plus pricing strategy? What are the advantages and disadvantages of cost-plus pricing?

• Answer:

  In many countries, the pharma industry is controlled by a cost-plus pricing model, where the government allows the pharma company to price the drug only a little more than what it costs to produce. The purported reason is to enable the drug to reach the common man & prevent the pharma companies from taking too much profit. However, this trend is shifting away. In many countries such as India such regulations are being eliminated. http://www.thehindubusinessline.com/opinion/is-the-shift-away-from-costplus-drug-pricing-desirable-yes/article4127199.ece The reason is that Drug discovery is a very expensive process and that the costs are not transparent to the outsiders. Pharma companies spend years developing the drug and it can take as long as 6 years & $1 billion. A lot of drugs fail in the pipeline. Pharma companies would want to make all the revenues from the few drugs that succeed as no one would pay them for the failed drugs. However, it is not always easy to identify the cost of failed processes. Thus, cost-plus pricing was always thorny. The move is toward value-based pricing. http://deloitte.wsj.com/cfo/files/2012/09/ValueBasedPricingPharma.pdf. The idea is that the drug companies have to justify the price by the quality of life added by the drug. Ultimately it is the value that matters to the end users.