Despite the adoption of tiered pricing strategies by pharmaceutical companies around the world, there is only a tenuous correlation between the prices of pharmaceutical products and the local economic conditions of the countries where they are launched, according to a comprehensive new study by IHS, a global source of critical information and insight, headquartered in Englewood, Colo.

The study, Tiered Pricing in the Global Pharmaceutical Industry: Matching Prices with Local Conditions, found some drug prices are related to movements in purchasing power parity across different countries, but the correlation is small and generally confined to medicines that treat large patient populations. The study examined tiered pricing trends and stakeholder perception in 16 countries: Brazil, China, Costa Rica, Colombia, France, Germany, India, Indonesia, Italy, Mexico, Nigeria, Norway, Philippines, Spain, Turkey and Vietnam.

The statistical analysis was reinforced by in-depth interviews with payers and governments, which generally revealed that payers in emerging markets acknowledge that tiered pricing is in place in disease areas such as infectious disease, diabetes and hypertension. However, as emerging markets seek to increase patient access to important therapeutic breakthroughs for critical illnesses such as breast cancer, stroke and multiple sclerosis, the interviews also reveal significant appetite among the payers to see corresponding tiered prices for treatment of these diseases.

The pharmaceutical companies, while also keen to apply tiered pricing to these therapeutic areas, highlight the associated challenges as the patient populations are too small to effectively implement a tiered pricing strategy. Also, the cost of manufacturing of innovative products, particularly in the biotech sector, pushes the floor price already out of the range of many emerging economies.

“Tiered pricing of innovative, new medicines is one of the most contentious issues in the global pharmaceutical industry,” said Gustav Ando, director and study supervisor for IHS Life Sciences. “Pharmaceutical companies often have been caught in a delicate balancing act on what often has been an emotional and damaging topic.”

Pharmaceutical companies have for many years differentiated the prices of their new medicines to ensure that these prices match socio-economic realities in individual markets. There are countless examples of medicines treating HIV/AIDS, hepatitis C and infectious disease in which the prices found in poorer economies are a fraction of the cost in advanced markets.

For many governments and non-government organizations (NGOs), this equity-based pricing does not go far enough, or goes too far. Payers in emerging markets periodically express discontent that the lower prices are not low enough, while advanced markets are increasingly aware of the discounted prices available in poorer economies.

“There is a growing risk that payers in advanced markets will incorporate—even if just informally—the prices in poorer economies in their thinking during price negotiations,” Ando said. “This significantly increases the risks associated with global tiered pricing strategies. And when the tiered pricing strategy goes wrong, the damage to the company’s reputation and revenue streams can be debilitating to its global operations.”

According to the study, a number of factors beyond affordability impacts cross-country pharmaceutical price variations, including company strategy, competitive pressure, market structure, market size and drug price controls.

Under monopolistic conditions, tiered pricing can be more profitable than a global single price point geared toward maximizing revenues in high-income markets. The lower and more affordable prices of drugs in emerging markets still are in excess of marginal costs and continue to contribute to profitability.

Lack of buy-in from payers and governments into the concept of equity-based tiered pricing— the reluctance to purchase medicines at a price linked to affordability—is seen by the industry as the main roadblock to such global pricing strategies. This directly relates to payer use of international reference pricing and/or political opportunism to price medicines.