At iHEA 2013, OHE's Adrian Towse participated in a session on implementing differential pricing schemes. He discussed the role of price discrimination strategies, including the use of discounts, access programmes and risk sharing agreements in increasing the number of patients who can benefit from new medications in LMICs. Real life examples illustrated differential pricing schemes between and within countries and provided background for exploring feasibility—particularly about how options relying on confidentiality and negotiation compare with those based on collaborative international agreement about how price differentiation is developed and implemented.

1. Does Price Discrimination Have a Place in
Pharmaceutical Pricing in Developing Countries?
Examples of Differential Pricing Schemes.
Can We Move from Theory to Practice?
Professor Adrian Towse
Office of Health Economics
International Health Economics Association
9th World Congress • Sydney • 7-10 July 2013

2. • This presentation discusses the role of price discrimination
strategies, including the use of discounts, access programs and risk
sharing agreements, in increasing the number of patients who can
benefit from new medications in low and middle income countries.
• The presentation will provide real life examples, such as the UN
Accelerated Access Initiative, the work of the GAVI Alliance on tiered
pricing schemes for vaccines, and case studies from individual
pharmaceutical companies, to illustrate the discussion.
• The examples are intended both to illustrate differential pricing
schemes between countries and differential pricing schemes within
countries.
• Lessons from the examples suggest its feasibility, in particular as to
how options relying on confidentiality and negotiation compare with
those seeking collaborative international agreement about the basis
on which price differentiation is to be made and implemented.
Abstract

3. • Does Price Discrimination Have a Place in
Pharmaceutical Pricing in Developing
Countries?
Yes
• Can We Move from Theory to Practice?
 Only with difficulty ….
The simple version

4. • Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents. Danzon and Towse.
International journal of health care finance and economics, 2003 3(3): 183–205
• Pharmaceutical Pricing in Emerging Markets: Effects of Income, Competition and Procurement.
Danzon, Mulcahy and Towse. NBER Working Paper 17174 June 2011 (with research funding from
Lilly).
• Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context. Danzon, Towse, and
Mestre-Ferrandiz. NBER Working Paper 18593 December 2012 (with research funding from Lilly).
• Drugs and Vaccines for Developing Countries. Towse, Keuffel, Kettler and Ridley. In Danzon, P. and.
Nicholson, S (eds) The Oxford Handbook of the Economics of the Biopharmaceutical Industry.
OUP, 2012
• Global Differential Pricing (research work in progress with OHE and Celgene collaborators, with
research funding from Celgene)
• Differential Pricing for Pharmaceuticals. Yadav. UK Department for International Development,
2010. Available at http://research.dfid.gov.uk/Documents/publications1/prd/diff-pcing-
pharma.pdf
Sources

5. • Pricing and competition in MLICs
 What has changed in the last decade?
 Theory and empirical literature on differential pricing in
MLICs
 Danzon et al. (2011) empirical results and policy
implications
• Examples: AAI, GAVI, other examples
• So what? What are the issues for the future?
Agenda

6. • Multinational companies in partnership have increased funding and effort to develop
new technologies for HIV/AIDS, TB, malaria, and other tropical diseases
• Local drug and vaccine companies in emerging markets, such as India, China and Brazil,
are trying to evolve from generic into R&D based companies.
• Government and philanthropic funding for procurement of some “global” medicines
and vaccines has increased these products’ availability
• The expansion of the middle class and, in some emerging market countries, the
extension of health insurance has motivated manufacturers to view some MLICs as an
important source of future revenue growth.
• Many are exploring innovative marketing and pricing strategies in an attempt to expand
sales and increase availability, including differential pricing.
• Their strategic philosophy is also starting to change. There is increased recognition that
they need to make a substantive contribution to global health. And to make those
contributions sustainable, they require approaches that are both commercially viable
and socially credible.
How has the landscape changed over the past
decade?

7. • Price discrimination between markets is likely to be
welfare enhancing (compared to uniform pricing) if:
 Demand dispersion between markets is large
 Aggregate consumption increases
 No markets drop out as a consequence
• Also likely to increase profits and R&D incentives
• Highly skewed income distributions in many MLICs
mean that conditions for differential pricing within
MLICs to be welfare enhancing are likely to be met
Theory of differential pricing

8. • Danzon and Furukawa (2003, 2008) found that average drug prices
vary roughly in proportion to income across HICs, but for Brazil,
Mexico and Chile drug prices were 2-3 fold higher relative to PCI
• Scherer and Watal (2001) found that for 15 antiretroviral drugs in
18 countries for the period 1995-9 the average price was 85% of
the US list price, and a fifth of prices were above the US level. The
relationship declined over time as companies began offering
discounts that were unrelated to PCI
• Waning et al. (2009) examined prices for 24 generic anti-retroviral
drugs (ARVs) procured July 2002-October 2007, as reported to the
WHO GPRM. They found CHAI eligibility significantly lowered price,
but volume had no consistent effect.
Evidence to date on MLIC prices

9. • Prices to the retail pharmacy channel are from IMS MIDAS
• Prices paid by NGOs are from the WHO’s GPRM database. We
used all GPRM records from 2004 through June 2008, including
23,000 contracts for 115 countries and data on matching drugs
in IMS for a smaller set of countries.
• We looked at two MLIC groups: eleven* matched countries that
are in both IMS and GPRM and a larger group of MLICs in the
same per capita income range as the matched countries (“the
PCI range”).
*Algeria, Brazil, China, Egypt, India, Indonesia, Morocco, the Philippines, South Africa,
and Thailand plus an aggregate “French West Africa” which comprised ten Sub-
Saharan Africa countries (Benin, Burkina Faso, Cameroon, Congo, Cote d’Ivoire, Gabon,
Guinea, Mali, Senegal, and Togo).
Danzon et al. 2011: Empirical analysis of drug
pricing in MLICs: Data Sources (1)

10. • Including other countries in the PCI range increases the
number of observations five-fold, primarily in the GPRM
sample, with no material differences in demographic
characteristics, mean or dispersion of per capita income, or
HIV prevalence.
• Per capita income in these countries ranges from $1,000-
$10,000, with an overall mean of around $4,000.
Danzon et al. 2011: Empirical analysis of drug
pricing in MLICs: Data Sources (2)

12. • Focus on drugs to treat HIV-AIDS, TB and malaria
• Examine role of mean per capita income, income
dispersion, and competition on drug prices.
• Compare originator and generic ex-manufacturer
prices:
 in the retail pharmacy channel used by most consumers
 paid by large NGO purchasers, e.g. Global Fund and the
Clinton Foundation
• Use quasi differences-in-differences model of log
prices
Danzon et al. 2011 empirical analysis of drug
pricing in MLICs: Methods

13. • The cross-national income elasticity of prices is 0.4 across high and
low income countries, but is only 0.15 between MLICs, implying
that drugs are least affordable in the lowest income countries.
• Within countries retail generic prices are roughly 40 percent below
originator retail prices in MLICs. However, the number of
therapeutic and generic competitors only weakly affects prices to
retail pharmacies plausibly because uncertain quality leads to
competition on brand rather than price.
Summary of findings (1)

14. • Tendered procurement attracts multi-national generic suppliers
and significantly reduces prices for originators and generics,
compared to their prices to retail pharmacies by 42 percent and 28
percent.
• These large procurement effects may reflect not only price-
competitive tendering but also greater willingness of originators to
grant discounts to a separate distribution channel that targets
lower income customers and is less prone to price spillovers to
other countries.
• Our results show no volume effects on price for NGO purchases.
This may reflect intentional policies to pay prices sufficiently high
to assure that multiple suppliers, including multinational
originators, continue to bid in this market.
Summary of findings (2)

15. • AAI, begun in 2000, is a partnership between UNAIDS, WHO, UNICEF, UNFPA,
the World Bank and 7 research-based pharma companies: Abbott,
Boehringer Ingelheim, BMS, Merck, Roche, Tibotec (an affiliate of J&J) and
ViiV Healthcare, which combines the HIV medicine operations of GSK, Pfizer.
• All AAI companies have individual programs through which they provide their
own antiretroviral medicines at more affordable prices in developing
countries. Some also have expanded manufacturing capacity to meet product
demand in the developing world. Individual AAI companies are taking other
actions to increase overall availability of ARVs, e.g. the granting voluntary
licenses or non-assert declarations, contract manufacturing with generic
manufacturers and technology transfer agreements.
• Source: http://www.globalhealthprogress.org/programs/aai-accelerating-
access-initiative
• However, many companies offer a three-tier pricing structure with the
middle tier reserved for MICs. This causes tension as there are significant
income differentials within these MICs.
The Accelerating Access Initiative (AAI)

16. Generic competition as a catalyst for price
reductions?
Source: http://utw.msfaccess.org/

17. GAVI – Haemophilus influenzae type b (Hib)
vaccine
Source: GAVI (2011)

18. GAVI – HepB vaccine
Source: GAVI (2011)

19. Source: Yadav (2010)

21. Experience to date of within-country
differential pricing
• To date, only a few big companies have experimented with within-
country differential pricing, including Abbott, AstraZeneca, Bayer,
Boehringer Ingelheim, Daiichi Sanyko, Eisai, Eli Lilly,
GlaxoSmithKline, Merck & Co, Novartis, Novo Nordisk, Pfizer,
Sanofi-Aventis
• Bayer AG implemented an intra-country differential pricing model
along four market segments for the contraceptive Microgynon®,
using four separate distribution channels, differentiated branding
and packaging to prevent product diversion
• Source: Access to Medicine Foundation (2012). Access to Medicine
Index: 2012. Available online:
http://www.accesstomedicineindex.org/index-publications

22. • Collaborative international agreement: “Public” two-tier pricing for
vaccines and drugs / devices for “key” diseases (including
contraception) across countries works well. However, there is
resistance to a “middle tier” from MICs. HICs continue to use
reference pricing to MICs.
• Confidentiality and negotiation: Within country segmentation
requires either a protected procurement channels or ability to target
(e.g. to assess income, use of a discount card). Public hospitals,
targeted insurance programs or other mechanisms might serve as
such a protected channel
• Finding better mechanisms to promote price competition and enable
differential pricing between and within low and middle income
countries remains an important challenge for companies and
policymakers. The static and dynamic welfare benefits could be high.
So what? What are the issues for the future?

23. To enquire about additional information and analyses, please contact
Adrian Towse at atowse@ohe.org
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