Equitable Pricing of Newer Essential Medicines for Developing Countries: Evidence for the Potential of Different Mechanisms
(2003; 83 pages)


This report on medicine pricing was commissioned by the World Health Organization (WHO) and the United Kingdom’s (UK) Department for International Development (DFID) and aims to analyse the existing and potential impact of a variety of equitable pricing mechanisms. The study was carried out in support of the wider process of developing feasible policy options to increase access to essential medicines.

The terms "differential pricing", or "equitable pricing" can be defined as pricing based on ability to pay. As it relates to the policy goal of maximizing health impact through affordability of medicines, a more accurate term might be "equity pricing", where countries apply a price structure or pricing policy according to some principle of fairness or equity. In practice this may mean proportionality with income per capita, human development index or similar indicators.

The report focuses on the voluntary mechanisms - bulk purchasing and competitive tendering; voluntary tiered pricing agreements; and voluntary licensing - and on how to more effectively capture advantages from these mechanisms. Evidence for the potential impact of other mechanisms, including compulsory licensing; delay in patent protection, as allowed by the Doha Declaration; systematic, government imposed patent waivers; and price controls has also been analysed..

Equitable pricing is economically feasible due to the fact that variable costs comprise only approximately 15% of the total costs of producing a pharmaceutical product. It is also potentially feasible due to the fact that poor countries contribute so little to overall sales of the pharmaceutical industry; therefore, equitable pricing need not financially damage pharmaceutical companies. On the contrary, equitable pricing should theoretically be desirable to global companies since they would maximize their profits on products that are sold in both low and high-income markets.

However, market segmentation is a crucial pre-condition to the willingness of firms to engage in voluntary equitable pricing. Price and product leakage must be tackled jointly, by addressing the primary determinants of leakage: the incentives to leak product and engage in reference pricing and the feasibility of this leakage. Effective segmentation requires the co-operation of all stakeholders, including developed and developing country governments and the pharmaceutical industry.

Two trends account for the need for equitable pricing mechanisms to reach further in order to meet public health needs. On the one hand, the burden of disease in poor countries is large and growing. On the other hand, finance to meet this demand is limited. This gap between need and resources is occurring in the context of a changing intellectual property environment and the switch from chemistry-based to biology-based research and development (R&D). These changes are likely to decrease the levels of competition for new, patented products, and thus inhibit the degree of price reductions seen in recent years, attributable to generic copies of patented drugs...Bulk purchasing and competitive tendering are effective in reducing prices in many different environments, and in combination with many other equitable pricing mechanisms. This study concludes that their potential to achieve more affordable prices has not yet been fully realized. Many governments need to improve their procurement practices at country level and regional level, and demand pooling could take on larger proportions, especially with the advent of new major funding mechanisms such as the Global Fund for AIDS, Tuberculosis and Malaria.

Voluntary tiered pricing agreements have thus far been limited in terms of disease scope and impact on access. Improvements, in terms of increasing the bargaining power of the purchasers, could be made to the structure of these agreements. However, there are numerous other concerns with these agreements, such as lack of transparency, anti-competitive tendency, and high transaction costs relative to benefits gained...

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