Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents

35 Pages Posted: 16 Jul 2003

See all articles by Patricia M. Danzon

Patricia M. Danzon

University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER)

Adrian Towse

Office of Health Economics

Date Written: July 2003

Abstract

This paper reviews the economic case for patents and the potential for differential pricing to increase affordability of on-patent drugs in developing countries while preserving incentives for innovation. Differential pricing, based on Ramsey pricing principles, is the second best efficient way of paying for the global joint costs of pharmaceutical R&D. Assuming demand elasticities are related to income, it would also be consistent with standard norms of equity.

To achieve appropriate and sustainable price differences will require either that higher-income countries forego trying to "import" low drug prices from low-income countries, through parallel trade and external referencing, or that such practices become less feasible. The most promising approach that would prevent both parallel trade and external referencing is for payers/purchasers on behalf of developing countries to negotiate contracts with companies that include confidential rebates. With confidential rebates, final transactions prices to purchasers can differ across markets while manufacturers sell to distributors at uniform prices, thus eliminating opportunities for parallel trade and external referencing.

The option of compulsory licensing of patented products to generic manufacturers may be important if they truly have lower production costs or originators charge prices above marginal cost, despite market separation. However, given the risks inherent in compulsory licensing, it seems best to first try the approach of strengthening market separation, to enable originator firms to maintain differential pricing. With assured market separation, originators may offer prices comparable to the prices that a local generic firm would charge, which eliminates the need for compulsory licensing.

Differential pricing could go a long way to improve LDC access to drugs that have a high income market. However, other subsidy mechanisms will be needed to promote R&D for drugs that have no high income market.

Keywords: differential pricing, pharmaceuticals, developing countries, parallel trade, Global Fund

JEL Classification: I1

Suggested Citation

Danzon, Patricia M. and Towse, Adrian, Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents (July 2003). AEI-Brookings Joint Center Working Paper No. 03-7. Available at SSRN: https://ssrn.com/abstract=422821 or http://dx.doi.org/10.2139/ssrn.422821

Patricia M. Danzon (Contact Author)

University of Pennsylvania - Health Care Systems Department ( email )

3641 Locust Walk
Colonial Penn Center
Philadelphia, PA 19104-6358
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Adrian Towse

Office of Health Economics ( email )

12 Whitehall
London, SW1A 2DY
United Kingdom
+44 207 747 1407 (Phone)
+44 207 747 1419 (Fax)

HOME PAGE: http://www.ohe.org

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