Professor Adrian Towse, OHE - Presentation at ISPOR 19th Annual European Congress, November 1, 2016

1. Professor Adrian Towse
Director of the Office of Health Economics, London
Visiting Professor, London School of Economics
Presentation at ISPOR 19th Annual
European Congress
November 1, 2016
Differential Pricing of Medicines in
Europe: Implications for Access, Innovation, and
Affordability
Putting Theory into Practice

2. Challenges of introducing differential pricing for drugs in Europe
Putting Theory into Practice
• We have a practical problem of
inequitable access in Europe
• Variants of differential pricing we could
use
• Barriers to use
• Are we prisoners of two cults?
• “Law of one price”
• “Transparency is always good”
• Options for the way forward

3. Challenges of introducing differential pricing for drugs in Europe
Belgian Presidency Report 2010
Source: http://www.efpia.eu/topics/industry-economy/access-to-medicines

4. LARGE VARIATION IN UPTAKE BETWEEN RICHER AND
POORER COUNTRIES IN EUROPE EVEN FOR DRUGS THAT
HAVE DRAMATICALLY CHANGED OUTCOME (EXAMPLE: CML)
0
100
200
300
400
500
600
700
Lower
GDP/capita
tier
Mid
GDP/capita
tier
Upper
GDP/capita
tier
Lower
GDP/capita
tier
Mid
GDP/capita
tier
Upper
GDP/capita
tier
2005 2014
DDDpercase
imatinib dasatinib nilotinib
Source. IMS
MiDAS
Reproduced with permission from Jönsson B et al. 2016.
Comparator report on patient access to cancer medicines in
Europe revisited. IHE Report 2016:4, IHE: Lund

5. Challenges of introducing differential pricing for drugs in Europe
Putting Theory into Practice
• We have a practical problem of
inequitable access in Europe
• Variants of differential pricing we
could use
• Barriers to use
• Are we prisoners of two cults?
• “Law of one price”
• “Transparency is always good”
• Options for the way forward

6. Challenges of introducing differential pricing for drugs in Europe
Theory of Differential Pricing
Five different pricing rules for pharmaceuticals:
1. “Ramsey Prices”: pricing in inverse relation to the demand
elasticity in each country or MS [Ramsey (1927); Jack and Lanjouw
(2005)]
2. Value Based Differential Pricing (VBDP): the use of an
incremental cost-effectiveness ratio threshold based on
populations “willingness-to-pay” for health gains
[Danzon, Towse and Mestre-Ferrandiz (2013)]
3. Adaptation of the Peak Load Pricing model [Boiteux (1949);
Schweitzer and Comanor (2011)]
4. Two-part pricing structure of consumer co-payment and
payer top-up payment. [Garber, Jones and Romer (2006); Jena and
Philipson (2008); Lakdawalla and Sood (2013)]
5. Patent buyout, HIF, prizes [Kremer, 1998; Hay, (2005); Banerjee, Hollis,
and Pogge (2010); Wilson and Palriwala, (2011)]

7. Challenges of introducing differential pricing for drugs in Europe
Theory of Differential Pricing
Five different pricing rules for pharmaceuticals:
1. “Ramsey Prices”: pricing in inverse relation to the demand
elasticity in each country or MS [Ramsey (1927); Jack and Lanjouw
(2005)]
2. Value Based Differential Pricing (VBDP): the use of an
incremental cost-effectiveness ratio threshold based on
populations “willingness-to-pay” for health gains
[Danzon, Towse and Mestre-Ferrandiz (2013)]
3. Adaptation of the Peak Load Pricing model [Boiteux (1949);
Schweitzer and Comanor (2011)]
4. Two-part pricing structure of consumer co-payment and
payer top-up payment. [Garber, Jones and Romer (2006); Jena and
Philipson (2008); Lakdawalla and Sood (2013)]
5. Patent buyout, HIF, prizes [Kremer, 1998; Hay, (2005); Banerjee, Hollis,
and Pogge (2010); Wilson and Palriwala, (2011)]

8. Challenges of introducing differential pricing for drugs in Europe
Putting Theory into Practice
• We have a practical problem of
inequitable access in Europe
• Variants of differential pricing we could
use
• Barriers to use
• Are we prisoners of two cults?
• “Law of one price”
• “Transparency is always good”
• Options for the way forward

9. Challenges of introducing differential pricing for drugs in Europe
Member State use of IRP
Source: Toumi, Mondher, Cécile Rémuzat, Anne-Lise Vataire, and Duccio Urbinati. 2013. External Reference Pricing of Medicinal Products: Simulation-
Based Considerations for Cross-Country Coordination.

10. Challenges of introducing differential pricing for drugs in Europe
Barriers for implementation of optimal
differential pricing rules
1. International Reference Pricing (IRP): the use of
other countries’ prices of a new medicine as
reference for setting the local price for that new
medicine
2. Parallel Trade (PT): physical arbitrage of
medicines from low-priced (low-income)
countries to high priced (high-income) ones.
3. Political feasibility and organisational challenges

11. Challenges of introducing differential pricing for drugs in Europe
EU Commission Access to Medicine initiative
• From the countries’ perspective, the main
problems cited were: lack of marketing
authorisation, shortages of supply, no effective
availability, unaffordable prices and marketing
delays.
• Economic operators cited the following key
factors: low profitability at allowed
prices/margins, local language requirements,
price spillovers through international
reference pricing, and/or risk of parallel
trade. (European Commission 2014)

12. Challenges of introducing differential pricing for drugs in Europe
Putting Theory into Practice
• We have a practical problem of
inequitable access in Europe
• Variants of differential pricing we could
use
• Barriers to use
• Are we prisoners of two cults?
• “Law of one price”
• “Transparency is always good”
• Options for the way forward

13. Challenges of introducing differential pricing for drugs in Europe
Cult 1:“The law of one price”,
• The “law of one price” implies that
different prices arise from lack of
competition, lack of arbitrage, non-trade
barriers:
• But this doesn’t work for R&D intensive
industries with sunk global costs
• The objective is to reward R&D costs
efficiently – by minimising distortions to use

14. Challenges of introducing differential pricing for drugs in Europe
Cult 2: “Transparency is always good”
• Transparency can be a means to an end:
• More efficient use of health care resources
• Reduction in the risk of “agency capture”
• Reduction in the risk of corruption
• Some people see it as a “good” in its own right
• But there are circumstances in which it reduces efficiency
because it links markets together that it is not efficient to
link
• We want to be efficient in achieving our equity and health
objectives, and we may have transparency as a “good”
also in our objectives. But we have to trade

15. Challenges of introducing differential pricing for drugs in Europe
Why the EU enthusiasm for IRP and PT?
• Avoid “special cases” in Treaty change
• Single price convergence is a bigger goal
• Competition is a good thing. By implication, parallel trade in
drugs will help achieve a single (low) price for a drug within the
EU good for consumers.
• True in the case of off-patent generic medicines. In reality
almost all parallel trade is in on-patent products.
• Important to help EU member states at a time of austerity and
to support social solidarity
• Visible damage is small (shortages, lack of access)
• Don’t believe R&D is under threat from EU pricing
• But there is increasing recognition that access in low income EU
member states is being hit

16. Challenges of introducing differential pricing for drugs in Europe
Putting Theory into Practice
• We have a practical problem of
inequitable access in Europe
• Variants of differential pricing we could
use
• Barriers to use
• Are we prisoners of two cults?
• “Law of one price”
• “Transparency is always good”
• Options for the way forward

17. Challenges of introducing differential pricing for drugs in Europe
Implementing differential pricing in Europe
Options for differential pricing
in the EU
Degree of centralisation
Europe wide agreement on Ramsey
pricing, or VBDP
Maximum
Two-tier Europe (a form of peak load
pricing)
Medium
Increased confidentiality leading to
Ramsey pricing or VBDP
Minimum
Source: Towse, A., Pistollato, M., Mestre-Ferrandiz, J., Khan, Z., Kaura, S. and Garrison, L., 2015.
European Union Pharmaceutical Markets: A Case for Differential Pricing? International Journal of the
Economics of Business, 22(2), pp.263-275.

18. Challenges of introducing differential pricing for drugs in Europe
Feasibility of the options (1)
• The maximum centralised option seems unlikely
to be implementable. Hard to see how the
institutional change required could be agreed.
• The alternative voluntary arrangement to agree
a transparent set of prices, cost-effectiveness
thresholds, is also likely to be very difficult
• The medium centralisation option of two
reference pools of “high” and “low” income
countries could be implemented by voluntary
agreement, or by a series of unilateral moves
creating two de facto pools of countries.

19. Challenges of introducing differential pricing for drugs in Europe
Feasibility of the options (2)
• The minimum centralisation option is
politically feasible
• It would allow price differences to be
agreed at member state level which
could remain confidential
• This would limit the ability of countries
who did not accept the principle of
differential pricing to undermine low
prices obtained by others.

20. Challenges of introducing differential pricing for drugs in Europe
Conclusion and policy implications
• Low per capita income markets in Europe suffer from
shortages of supply, unaffordable prices and marketing
delays
• If current patient access issues in the EU could be
addressed, overall welfare would increase, providing
returns to R&D were not reduced in the higher income
countries.
• Two feasible solutions:
• Establishment of a two-tier Europe, a block of lower per capita
income countries with parallel trade and IRP only allowed within and
not between blocks (equivalent to a form of peak load pricing with
“peak” and “off peak” users).
• Confidential discounts applied by the Member States, perhaps linked
to the use of voluntary contractual agreements. Such an
arrangement could be used to implement Ramsey pricing or VBDP

21. Challenges of introducing differential pricing for drugs in Europe
References (1)
• Banerjee A, Hollis A, Pogge T. 2010. The health impact fund: incentives for improving access to
medicines. Lancet 375:166–169
• Boiteux, Marcel P. 1949. “La tarification des demandes en pointe: Application de la theorie
• Danzon, Patricia M., Adrian K. Towse, and Jorge Mestre-Ferrandiz. 2013. “Value-Based Differential
Pricing: Efficient Prices for Drugs in a Global Context.” Health Economics
• Garber, Alan M, Charles I. Jones, and Paul Michael Romer. 2006. “Insurance and Incentives for Medical
Innovation.” Forum for Health Economics & Policy 9 (2): 1–27.
http://econpapers.repec.org/article/bpjfhecpo/v_3abiomedical_5fresearch_3ay_3a2006_3an_3a4.htm.
• Hay Joel W. 2005.“Application of Cost Effectiveness and Cost Benefit Analysis to Pharmaceuticals.”
Chapter 14 in Santoro M, Gorrie T, eds. The Grand Bargain: Ethics and the Pharmaceutical Industry In
the 21st Century. Cambridge University Press, New York NY, 2005:225-248
• Jack, William, and Jean O. Lanjouw. 2005. “Financing Pharmaceutical Innovation: How Much Should
Poor Countries Contribute?” The World Bank Economic Review 19 (1): 45–67.
http://wber.oxfordjournals.org/content/19/1/45.short.
• Jena, Anupam B., and Tomas J. Philipson. 2008. “Cost-Effectiveness Analysis and Innovation.” Journal of
Health Economics 27 (5): 1224–36. doi:10.1016/j.jhealeco.2008.05.010.
• Jönsson B, Hofmarcher T, Lindgren P and Wilking N. 2016. Comparator report on patient access to
cancer medicines in Europe revisited. IHE Report 2016:4, IHE: Lund
• Kaló, Zoltán. 2014. “Differential Pricing Across Europe - Addressing Central-Eastern European Country
Needs.” presented at the ISPOR 17th Annual European Congress, Amsterdam, November 10.

22. Challenges of introducing differential pricing for drugs in Europe
References (2)
• Kaló, Zoltán, Lieven Annemans, and Louis P Garrison. 2013. “Differential Pricing of New Pharmaceuticals
in Lower Income European Countries.” Expert Review of Pharmacoeconomics & Outcomes Research 13
(6): 735–41. doi:10.1586/14737167.2013.847367.
• Kremer M, “Patent Buyouts: A Mechanism for Encouraging Innovation.” Quarterly Journal of Economics,
1998, November: 1137–7
• Lakdawalla, Darius, and Neeraj Sood. 2013. “Health Insurance as a Two-Part Pricing Contract.” Journal
of Public Economics 102 (C): 1–12. https://ideas.repec.org/a/eee/pubeco/v102y2013icp1-12.html.
• Ramsey, F.P. 1927. “A Contribution to the Theory of Taxation.” The Economic Journal 37 (145): 47–60.
http://darp.lse.ac.uk/papersdb/Ramsey_(EJ_27).pdf.
• Schweitzer, Stuart O., and William S. Comanor. 2011. “Prices of Pharmaceuticals in Poor Countries Are
Much Lower than in Wealthy Countries.” Health Affairs (Project Hope) 30 (8): 1553–61.
doi:10.1377/hlthaff.2009.0923.
• Toumi, Mondher, Cécile Rémuzat, Anne-Lise Vataire, and Duccio Urbinati. 2013. External Reference
Pricing of Medicinal Products: Simulation-Based Considerations for Cross-Country Coordination.
• Towse, A., Pistollato, M., Mestre-Ferrandiz, J., Khan, Z., Kaura, S. and Garrison, L., 2015. European
Union Pharmaceutical Markets: A Case for Differential Pricing? International Journal of the Economics of
Business, 22(2), pp.263-275.
• Wilson Paul and Amrita Palriwala. 2011. Prizes for Global Health Technologies. The Results for
Development Institute (R4D).
http://resultsfordevelopment.org/sites/resultsfordevelopment.org/files/resources/R4D-PrizesReport.pdf