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Unravelling the international reference pricing conundrum: Next threats, next steps
International reference pricing (IRP) is going global. Think about it. Is this a fact, a threat, or a mix of both?
After spending the last few months dissecting the intricacies of IRP in over 40 developed and emerging markets, my answer would be that IRP is indeed going global, and that's a threat for pharmaceutical companies. At the same time, this isn't the only--or the biggest--threat linked to IRP that we have identified. Both transaction-price and emerging-market referencing also feature quite high on the policy-change threat list.
More countries to jump on the IRP bandwagon
IRP is a popular pricing mechanism, especially in Europe where only Italy, Sweden, and the United Kingdom do not use the mechanism. Furthermore, the popularity of IRP is expanding beyond the European borders. In the last two years alone, markets such as Colombia, Egypt, Morocco and Ukraine have implemented the mechanism and Albania will do so next year.
For payers, IRP is an attractive cost-containment tool. It is easier to implement than health technology assessment (HTA) for example, notably in terms of skills required (even if accurate pricing data is sometimes hard to come by.) For countries that do not yet resort to IRP as part of their pricing and reimbursement toolkit, IRP-linked savings can be attractive. Indeed, in the case of Morocco, IRP was first applied to 320 high-cost drugs, and price cuts on these products ranged between 46 and 83%. In addition, IRP-linked savings can be near guaranteed if, as both Colombia and Morocco elected to do, a country opts not to review the price of marketed products if the internationally referenced price is higher than the domestic price.
For now, IRP is mostly based on list prices, but the payers IHS talked to indicated they are keen on using transaction prices (inclusive of discounts) in their IRP calculations. The preference for using transaction prices in IRP calculation is even enshrined in the legislation of some eastern European countries and, were it not for the lack of relevant information, IRP in these countries would already routinely be based on real market prices.
Having said that, our research unveiled that payers are finding ways around the lack of data on transaction prices. Indeed, some have developed preferential relationships with procurement organisations in their reference markets, and have therefore managed to gain access to real market prices that they can use in their IRP calculations. Meanwhile, others are estimating discounts. For example, France applies common-knowledge discounts (e.g., a 16% discount on the German list price) when referencing the price of expensive medicines, i.e. drugs that exceed a specific cost threshold per patient and per year.
Emerging-market referencing on developed-market payers' minds
As part of our research, we also asked developed-market payers whether moving towards referencing emerging markets was an option in their respective countries. While some dismissed it, some considered it an attractive possibility. We modeled such an eventuality by evaluating the impact on drug prices if Greece started referencing European Union accession candidate Turkey using our IHS proprietary pricing database, which is used by a number of governments implementing IRP. For the monoclonal antibody we looked at, if Greece were to reference Turkey, this could lead to double-digit price cuts in Bulgaria, Hungary, Poland, Slovakia and the Czech Republic, with significant associated loss in revenues. However, IHS is of the opinion that the Greek IRP formula and the IRP rules in the countries that reference Greece dampen the impact of such a policy change.
Indeed, European prices would likely be under much greater pressure if the market that was the most open to such a policy change (i.e., starting to reference Turkey) went ahead with it. Of course, we would need to further test this hypothesis before we send alarm bells ringing, and have the said market on a global IRP watch list!
Careful planning is key to success
There is no doubt that IRP is a complex process that can have a considerable impact on achievable drug launch prices, the ability to maintain the launch price across countries and, as a result, aggregate revenues. Within the boundaries of IRP, each decision is strategic for optimal pricing and revenue generation.
Knowing the intricacies of the IRP process within and across markets will support the design of effective launch sequences and optimise revenue generation. To download an extract of our study "International Reference Pricing - Strategic Guidebook to the New Global Pharmaceutical Pricing Paradigm", please click here.
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