Life Sciences Blog

Video: International reference pricing: The new pharma pricing paradigm

IRP, in which drug prices are based on those found in a basket of comparable countries, is leading to steep price cuts—50%-80%—in some countries.

Gustav Ando

Interview Transcript

IRP: Why is it important to the pharma industry?

International reference pricing is perhaps the hottest topic in the pharmaceutical industry right now and perhaps the clearest evidence yet that the industry operates in a global interconnected environment. Now if you believe in chaos theory, its maybe the clearest evidence of the butterfly effect, that an event in one country can have a ripple effect, a knock on effect, almost anywhere around the world. And that effect is unpredictable or very difficult to quantify.

So, in its simplest form, international reference pricing is an attempt by a government to compare the price of an individual pharmaceutical agent to the prices in comparable countries. And that’s sort of a simple benchmark or safeguard really to ensure that the price of the agent isn’t different or substantially different from those comparable countries.

How is IRP evolving?

International reference pricing has evolved quite dramatically over the last couple of years. In particular, what’s happened is that there is a significant increase in the number of countries that adopt IRP as a significant policy. So, that is one area that it’s developed.

What’s also happened is that the shear nature of international reference pricing has changed quite considerably. So, a country uses a basket of countries, or is meant to use a basket of countries, of comparable economies. So, countries that have a similar socio-economic structure and health care system. What’s happened is that counties are increasingly using international reference pricing as an explicit cost containment policy. So, what they’ve started doing is including lower-income countries, even if the country itself is actually a developed market.

So, you have a situation - almost an absurd situation, if you will – where Germany is, for example, when it can adopt international reference pricing, it compares prices to Greece, for example, which has a very different economy and very different outlook, really. So, you have this situation, where lower priced countries are really essentially suffering because what happens is, a pharma company used to be able to launch a drug in these lower priced countries at a lower price. They can’t really do that anymore. They need to protect the value of their asset, because otherwise that price will ripple into bigger and richer economies.

So, what’s happening is that there is a reverse incentive there to actually launch your drug at a higher price in lower-priced economies, which is creating this sort of counter intuitive situation.

Key hotspots in IRP

The world is almost the hotspot for international reference pricing, because really one event or price cut in one country can have that ripple effect through a first wave or a secondary wave or even a third wave around the world, so it’s very difficult to pinpoint particular hotspots. But there are certain areas where the pharmaceutical industry is very worried and concerned that lower-priced countries will have an impact on higher-priced ones.

So, in particular, when you are looking at countries like Korea or certain Middle Eastern countries or New Zealand, there’s a real fear that those kind of prices will seep into, let’s say, Europe in particular. So, those are some of the key hot spots really, and it’s a constantly evolving situation, so every country is looking into international reference pricing, and potentially changing their system if they already have it, so hot spots are kind of emerging all of the time, really.

Key research findings

We monitor this issue on a day-to-day basis, really, and you really need to do that, because it’s such a fast evolving area, and you really need to both the kind of secondary research and primary research as well, to get a good understanding of what it is that’s going on.

So, some of the key findings here are that international reference pricing can lead to price cuts of about 50 to 80 percent in some countries. And that’s just in the country that’s adopting the price cuts for international reference pricing.

Then there is the secondary and potentially third wave effect around the world, again, which can decimate the value of a pharmaceutical agent and really turn it into kind of a downward spiral where it’s really hard to know where it will actually end.

Gustav Ando Director, IHS Life Sciences