PharmExec Blog

Tiered Pricing Not Always a Win-Win

Tiered pricing, or selling critical medicines to developing countries at a standardized discount price, can improve access in the short term, but arbitrary demographic groupings and misaligned incentives often stack the deck in favor of manufacturers, not patients.

At first blush, a system whereby countries or geographic areas are carved out along socioeconomic lines maximizes profit: prices are set according to consumers’ “willingness or ability to pay,” which can bring previously unaffordable treatments into use. However, a tiered price can work against local competition in a given area, which tends to deliver a lower sustainable price over the long term, according to a critical analysis of tiered pricing done by authors from Medecins Sans Frontieres and Harvard School of Public Health.

Of the case studies examined in the report, Abbott’s price for the HIV treatment lopinavir and ritonavir (LPV/r) remained at $500 in African countries and other “least developed countries” from 2002 to 2007, or until the Clinton HIV/AIDS Initiative announced a generic LPV/r for $470. Abbott then reduced its price to $440, suggesting that manufacturers “do not have strong incentives to reduce tiered prices in the absence of competition, nor are tiered prices immune to competition when it does arise,” according to the report.

In the case of Bristol-Myers Squibb’s antiretroviral (ARV) treatment for HIV, the company created a Category 1 tier including 57 primarily low-income and African countries, but excluding southern African countries, which were lumped into a higher income Category 2. Southern Africa has the highest HIV-prevalence rates in the world, and the impact of a Category 2 placement means that BMS “prices its important second-line drug atazanavir 25% higher, at $547, in southern Africa, compared with $412 in other [Category 1] countries where HIV prevalence is lower, and in a few cases, income is higher,” the report found.

In the case of Lilly’s drug-resistant TB products capreomycin and cycloserine, however, tiered pricing did work to create lower prices than competitive production, but there were special circumstances. For example, TB endemic countries participating in the “preferential price” scheme facilitated by the WHO Green Light Committee beginning in 2002 – a program that also transferred technology to local generics manufacturers in support of local production – did not see a cheaper generic reach the market. In the case of capreomycin, no generic products were WHO pre-qualified for use as of September 2011, and cycloserine had gone up in price by a multiple of four, after Lilly stopped producing the drug. Lilly’s tiered pricing did in fact keep prices at the lowest rates, although demand was low and production capacity was limited.

“Tiered pricing does not necessarily result in the lowest sustainable prices, nor does it reliably lead to price reductions over time,” the report’s authors conclude. “In comparison, when markets are sufficiently large and multiple sources of production exist, robust competition has consistently proven across different therapeutic areas to result in lower prices.” Tiered pricing also leaves “too little decision-making power to governments, which are accountable to their populations under international law for insuring access to medicines.”

Countries that aren’t strong negotiators, and can’t convincingly threaten compulsory licensing, for example, get the short end of the stick with tiered pricing. In 2006, Honduras purchased LPV/r for about six times more than Brazil paid, despite the fact that HIV rates are equivalent in both countries, and Honduras per capita gross national income is roughly 25% of Brazil’s. To create a truly “win-win” situation for manufacturers and patients, governments and manufacturers will need to consider new models that “de-link” medicine prices from R&D costs. How countries contribute to R&D financing as a global public good will influence the new models that help to bring new medicines to the most needy.

This entry was posted in Corporate Responsibility, Emerging Markets, Global, IP, Manufacturing, Market Access, pricing, R&D, Strategy. Bookmark the permalink. Trackbacks are closed, but you can post a comment.

2 Comments

  1. Posted November 23, 2011 at 5:38 pm | Permalink

    More examples of the big taking advantage of the little.

    Yes, I know that profits are there to be made but there is the humanitarian side to it – unless you are one of the profiteers!

  2. Posted December 3, 2011 at 6:01 pm | Permalink

    Great article,the new models that you’ve mentioned are definitely worth implementing.

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