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Pricing strategies in generic medicines Posted 01/10/2010

Eighty two per cent of countries impose pricing regulation while 18% opt for free market competition to control prices. Of the countries that regulate prices, 36% set the price of generic medicines at a predetermined percentage below the originator price. For instance, the minimum price difference between originator and generic medicines was 20% in Italy in 2004. In 21% of countries, the generic medicine price is based on the average price of medicines in a selection of countries. Other mechanisms used to set generic medicine prices are a maximum price (19% of countries) and a negotiable price (12% of countries).

Reference pricing establishes a reimbursement level for a group of interchangeable medicines. If a medicine is priced above the reference price (RP), the patient pays the difference. Originator medicines and higher priced generics will tend to lose market share. However, there is no incentive to price below the RP. Furthermore, if the manufacturer of the originator medicine cuts the price to the RP, there will be no incentive for generic competition at all. Seventy four per cent of countries surveyed had a RP system in 2004.

When setting the RP, the majority of countries take into account the prices of existing reference group medicines. If they can attract customers by driving down the RP there is some incentive for generic companies to compete. However competition does not exist in all countries that use this system.

Setting the RP at that of the cheapest medicine in the reference group has contributed to the low level of generic prices in Denmark. Pharmacists are given incentives to substitute and patient demand is stimulated by the low prices. This combination secures economic viability of the generics market in Denmark. However, low prices in Italy and Spain have discouraged manufacturers from entering these markets. The experience of France and Italy shows that RP systems may suffer from reallocation of demand away from the RP group towards originator medicines with a similar therapeutic indication that do not fall under the RP system.

Competition through discounts complicates matters. In general, discounts make for lack of clarity in pricing and are not fair since wholesalers and pharmacists are not rewarded for services rendered but for their ability to negotiate discounts on artificial prices. Therefore France has regulated the size of discount allowed, while The Netherlands and the UK have introduced a claw-back mechanism that aims to recover the discounts the pharmacists receive. This is not an efficient way of regulating the market.

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