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Drug companies face challenges to expanding tiered pricing

02 January 2015 Gaelle Marinoni

Tiered drug pricing—in which pharmaceutical companies charge different prices across markets and market segments—is poised for expansion into the treatment of non-communicable diseases (NCDs). Already applied widely in the pricing of drugs that treat communicable diseases, such as HIV/AIDS and hepatitis C (see figure), it may soon be used in emerging markets to price medicines that treat conditions such as cancer and even rare diseases.

Similar to Apple’s global product pricing model, tiered pricing strategies establish higher prices in affluent, developed markets and lower prices in poorer (even poverty-stricken) markets. On the surface, it appears to be a “win-win,” expanding market penetration for drug companies as well as access to medicines for patients in emerging markets.

However, despite the adoption of sophisticated tiered pricing strategies by drug companies around the world, there is currently only a tenuous correlation between the prices of pharmaceutical products and the local economic conditions of the countries where they are launched. Recent IHS research reveals that drug prices are related to movements in purchasing power parity across different countries, but the correlation is small and generally confined to medicines that treat large patient populations.

The pharmaceutical industry faces a number of challenges to successfully implementing tiered drug pricing for NCDs, including:

  • Opportunistic payer behavior, wherein governments in advanced markets incorporate into their thinking—even if only informally—the prices of drugs in poorer economies during price negotiations.
  • Product leakage, arbitrage, and the diversion of drugs intended for the public sector to private markets where they are sold at a higher price.
  • Accepted practices that encourage homogeneous pricing rules in countries with heterogeneous populations and widely varying income distribution and public health care coverage.

The established economic indicators used for global tiered pricing strategies—GDP and GNI at purchasing power parity—are crude measures of affordability that do not account for intra-country income disparities. In out-of-pocket markets, for example, tiered pricing strategies generally cater to the top 20% of the income pyramid, with little access for lower-income segments.

Going forward, drug companies will have to balance demands from shareholders for return on investment against those from developing countries and nongovernment organizations for affordable access for lower-income patients to drugs that treat serious, life-threatening, often chronic diseases. Because these drugs have large market potential in both developed and emerging markets, a global policy consensus will be required to prevent global price erosion.

Gaelle Marinon, Manager, IHS Life Sciences
Posted 3 January 2015

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