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International reference pricing: Connecting the dots

18 October 2013 Gustav Ando

The late CEO of Apple, Steve Jobs, famously quipped that "you can't connect the dots looking forward - you can only connect them looking backwards" - meaning that even the best laid plans can and often will be disrupted or derailed by entirely unforeseen events. By extension, any attempt to measure, quantify or forecast unpredictability becomes almost impossible, or will be undermined by another layer of unpredictability.

More than most industry sectors, the global pharmaceutical market faces this conundrum every day through a complex nest of regulatory, R&D, and competitive uncertainties which can have a profound effect on company performance. One of the most fast-evolving concerns facing the industry is that of international reference pricing (IRP). Whilst IRP has existed in various permutations, in many countries, for many years, the mechanism has truly exploded into action over the last couple of years.

Price cuts, or discounted launch prices, for pharmaceutical products are no longer necessarily confined to the individual markets where they happen - there is a potential global ripple effect which can severely hamper the margins and revenues of the product. Suddenly, price fluctuations in comparatively fringe markets such as Saudi Arabia, South Korea, Colombia and Southeastern Europe can have a devastating impact elsewhere which far outweighs the importance of these countries as individual markets.

Governments around the world which aggressively pursue IRP - mainly mainland European markets, Japan, Canada but increasingly also a whole host of emerging markets - argue that this tool is necessary to ensure that "fair" prices are achieved in each market. If this were true, IRP could or should have resulted in many cases of final pharmaceutical prices being increased, when of course this has rarely been the case - IRP is an explicit cost containment measure, often based on an average calculation of the lowest priced markets among a 'basket' of countries. In an environment where successive government are cutting pharmaceutical costs as a means of balancing the budget in an uncertain economic environment, this has become a potentially powerful, and highly damaging, tool.

Still, the actual impact of IRP has been poorly researched and understood - incredibly, there is no consensus, or even rough estimate, on the amount of savings, if any, that have been secured through its adoption. Some governments have not found IRP to be a worthwhile experience - Italy adopted IRP, then abandoned it because it was deemed ineffective (although it has subsequently returned to a comparatively soft form of IRP). Sweden and Denmark cited concerns over currency fluctuations and general economic factors as their rationale for abandoning IRP in the early 2000s in favour of stronger therapeutic referencing and generics substitution. Last month Sweden again appears to have dismissed the idea of IRP as part of further reforms next year. Similarly, in the UK, despite impending value-based pricing reforms, IRP is off the table.

Clearly, IRP is a highly complex issue which has unpredictable ripple effects which are not the primary concern of the individual governments which adopt them. First and foremost, it creates an artificial price for the drug with an increasingly narrow pricing corridor around the world. This in itself has an unintended, but nonetheless real, impact on poorer economies - pharmaceutical companies are forced into a position where they need to protect the global value of their assets by enforcing first world prices in second and third world economies. This is particularly true since successive governments have deliberately expanded their basket of IRP countries to include countries which are significantly poorer as a means of putting downward pressure on the average lowest price. Over the last few years, Greece suddenly became the most popular country to be included in IRP baskets - despite the fact that few, if any, global economies mirrored the economy in Greece, and accurate and up-to-date pricing data was hard to come by in the country. The Greek government itself protested that the country should not be used for IRP purposes by other countries, since the situation it found itself in was unique.

Still, IRP is a reality, and the global map of pharmaceutical pricing has never been more interlinked. And by extension, ensuring that you are able to connect the dots has never been more critical. At IHS, we have launched a study entitled "International Reference Pricing - Strategic Guidebook to the New Global Pharmaceutical Pricing Paradigm" where we are speaking to payers about their experiences, and precise methodology, on IRP, whilst running scenarios based on real world case studies to understand how best to protect pharmaceutical assets against the waves of IRP. At the upcoming annual European ISPOR conference in a couple of weeks, we will also be presenting findings from a scenario that we have run on linagliptin and vildagliptin if AMNOG-induced IRP had been applied to them in Germany. We will post our research on the blog once we have presented them at ISPOR (if you are attending, we are booth #117 and will have data from our research to talk about).

We may not be able to completely connect the dots looking forward. But by connecting them in the past, and bringing that experience, knowledge and wide range of data concepts into the equation, we can understand what would happen under a certain set of conditions. In the interconnected age of IRP, this has never been more important.

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