Price differentiation and transparency in the global pharmaceutical marketplace

Abstract

Pharmaceutical manufacturers have increased the availability of their products and sometimes increased their own financial returns by charging lower prices outside of the US and by discounting to lower-income patients in the US. Examples include discounted HIV-AIDS drugs in developing countries and pharmaceutical manufacturers’ discount cards in the US. Representatives of some international organisations argue that the price reductions are insufficient to make the medications widely available to lower-income patients.

The WHO advocates both differential pricing and price transparency. While its efforts are well meaning, this paper identifies six concerns about its methods of comparing the price of a given molecule across manufacturers and across countries. More significantly, the WHO efforts to increase transparency are likely to lead to less price differentiation and less access to innovative pharmaceuticals. An important reason why manufacturers are reluctant to charge lower prices in lower-income countries is that they fear that such low prices will undermine the prices they charge to higher-income consumers. International organisations should not facilitate transparency but should dissuade governments from making price comparisons and basing their prices on those of lower-income countries. Furthermore, they should endeavour to keep low-priced and free drugs in the hands of the low-income consumers for which they were intended.

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Fig. 1

Notes

  1. 1.

    The typical rationales for patents are that they promote innovation, encourage inventors to disclose their inventions to others, and that inventors are entitled to their discoveries.

  2. 2.

    DiMasi et al.[12] found that the out-of-pocket cost per new drug is $US403 million (2000 value). After accounting for the compound’s share of failures and the opportunity cost of investing in R&D rather than earning a risk-free rate of return, the estimate is $US802 million. For an estimate of rates of return for pharmaceutical manufacturers, see Grabowski et al.[13]

  3. 3.

    It would be profitable for manufacturers to differentiate between patients in a given country, but because of the role of the government as a monopsony buyer, manufacturers are often unable to do so.

  4. 4.

    Demand for drugs is assumed to be more price elastic for patients with lower incomes. Furthermore, the cost of manufacturing is assumed to be lower than the poor consumer’s willingness to pay. If the cost of manufacturing exceeds the poor consumer’s willingness to pay, then it might be best to choose different products or subsidise treatment.

  5. 5.

    In the US, the top half of all earners paid 96% of federal income taxes in 2001.[15]

  6. 6.

    Manufacturers also express concerns about the lack of infrastructure in many developing countries. If HIV/AIDS patients do not adhere to a rigid schedule for taking their medicines, then they can spread drug resistance. A well known call by 133 Harvard faculty members advocates ‘directly observed therapy’ in which a community health worker visits each patient and observes him or her taking the antiretroviral medication.[2]

  7. 7.

    Furthermore, the manufacturer often prefers that the consumer not be informed of the differential pricing structure, so that higher-paying consumers do not search for arbitrage opportunities. For an analysis of the impact of the Internet on differential pricing, see Ridley and Schulman.[17]

  8. 8.

    For a survey of other policies by international organisations that would enhance patient health in developing countries, see Kremer[2].

  9. 9.

    Currently, parallel trade has little impact on drug costs in the US. Instead, state governments control drug costs using mechanisms such as prior authorisation, drug category exclusions and increased patient charges. Soumerai[31] describes the risks and benefits of such cost controls.

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Acknowledgements

Clay Ackerly, Ernst Berndt, Jeffrey Moe, participants at the International Federation of Pharmaceutical Manufacturers and Associations Assembly, and anonymous referees provided helpful comments. This study was supported by a grant to Duke University from Pfizer Inc. The views expressed here are those of the author. The author has no other conflicts of interest directly relevant to this manuscript.

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Correspondence to Dr David B. Ridley.

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Ridley, D.B. Price differentiation and transparency in the global pharmaceutical marketplace. Pharmacoeconomics 23, 651–658 (2005). https://doi.org/10.2165/00019053-200523070-00002

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Keywords

  • Lower Price
  • Market Power
  • Reference Price
  • Differential Price
  • Innovative Drug