Price Disparity: Will It Ever Truly Disappear?

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Geographic price disparity between pharmaceutical products exists due to the variation in national economies and the unique ways that each country determines the price of pharmaceuticals. Price disparity still exists even in areas of “free trade” or in a single combined market of multiple countries, such as the European Union. This has led to parallel trade, where products are purchased in countries with lower prices and sold in those with higher prices. The fact that such disparities can develop seems contrary to the concept of a simple, free market, and it raises the question of whether price disparity will ever truly disappear.

The principle of free trade and tariff-free access to economic goods across borders is a founding principle of the EU and other regional trade agreements. Therefore, the continued existence of legal parallel trade combined with international referencing could lead to the end of price disparity, with prices converging to an average regional price.

Why price disparity is unlikely to disappear
In reality though, the likelihood of a common regional price is extremely low. The first reason has to do with the rules and comparisons used for international price referencing. Unless all countries reference all others within a region and apply the same referencing calculation – a condition far from the current reality – a disparity will always exist. In addition, many countries do not use referencing at all.

We must also keep in mind that the stakeholder willingness-to-pay in each country is different, because of differences in health systems and in basic economic strength. As a result, a common, average price may not be optimal for some countries that have a lower willingness-to-pay.

This makes the unification of reference pricing rules very unlikely, and until the actual rules of international referencing are uniform, the leveling of price as a direct result of reference pricing is unlikely to occur.

In order for parallel trade to exert enough competitive pressure to level prices, the supply of cheaper products must be enough to threaten the market of higher priced goods, which is not the case. The supply within any particular market will always be limited. This in turn limits the amount of product available for parallel trade. So the likelihood of manufacturers being pressured by parallel trade to lower their product price in high-price markets is low, as is the eventual leveling of price by competitive pressure. In fact, maintaining price levels can often optimize revenue in response to parallel-traded competition. As the price differential increases, maintaining price becomes the optimal strategy at higher volumes of parallel import.

Finally, we must remember that the impact of parallel trade on global revenues, as it stands, remains fairly small.

Global factors in price disparity
Monitoring and controlling price and supply is extremely difficult, especially in times of economic hardship. A shift in control from a central global power to local affiliate teams is ever more prevalent. Global and regional managers are relying more and more on individual countries to optimize price and supply in order to maximize global revenues.

Furthermore, attempting to optimize both local and global markets often produces contradictory results. For example, the optimal global strategy may be to launch at a price above the willingness-to-pay of a particular country.

In addition, focusing on optimizing the local market may actually encourage economic development within individual countries, because products would be priced in line with the willingness of each market to pay. More healthcare products could be purchased, and additional resources could be spent elsewhere to further develop a nation. This approach could increase the willingness-to-pay of countries over time and assist developing nations in catching up with developed nations.

A convergence of willingness-to-pay across countries is still possible, with a similar convergence of prices. However, the timescale required for this would be very long, and there is no guarantee that this outcome would be optimal for manufacturers.

Summary
International referencing and parallel trade can be the theoretical mechanisms for ending price disparity. However, practical aspects make this outcome very unlikely in the near future.

This entry was posted in Health Economics & Market Access, Healthcare and tagged by Andrew Xia. Bookmark the permalink.

About Andrew Xia

Andrew Xia joined Covance in 2011. He was previously at IMS Consulting in New York, Pfizer in St. Lous and Heron Evidence Development in the UK. He has lead projects in value communication, pricing, revenue modeling, HE modeling, HTA submissions and innovative market solutions. He is an abstract reviewers and poster / podium judge for ISPO as well as a guest lecturer at the University of Michigan. Andrew graduated with a degree in Economics and Biological Sciences from Northwestern University in Chicago.