Global Consequences of Local Pricing Decisions
Governments seeking to contain public spending on drugs often set maximum reimbursement based on comparisons with benchmark countries. Drug companies can set their prices above these reference prices in certain markets, but prescribing and sales levels can be negatively affected.
Further, the practice of reference pricing in one market can spark changes across multiple markets – but the impact can be difficult to anticipate. Countries vary in the number of markets they reference, as well as in the specific countries referenced; the algorithms used to determine reference prices, and how frequently they are applied and updated, can also vary greatly. Further complicating strategic planning, a pricing change in one country can set off a chain of responses, beginning with countries that reference the price changer directly, followed by second-order referencing changes, and so on.
The result is a complex web of dynamic relationships among prices across global markets, with changes in small markets potentially generating amplified cross-border impacts on prices, revenues, and margins.
INTERACTIVE: Greece Case Example – Interrelated Impact of Reference Pricing by Country
Click the boxes below to view the countries that Greece references for pricing decisions, as well as the countries that reference Greece. Note: when both the first and middle boxes are selected, the last box will also automatically be selected.
The level of complexity involved has far outpaced the ability of even highly experienced management to fully anticipate the downstream impacts of isolated decisions. Given the level of potential global financial risk, strategic pricing decisions must rely on best-in-class analytical models. “For example,” says Analysis Group Senior Advisor Genia Long, “a global pharmaceutical manufacturer recently looked to create a next-generation international pricing modeling system with linkages to its budget tracking capability. To strengthen the company’s strategic pricing decision capabilities, we developed a modeling platform that forecast the revenue impact of price changes in each of the company’s thousands of SKUs sold, in any country and over a multi-year forecast horizon, as, over time, price changes pass through reference pricing rules.”
Price modeling systems can also help executives gauge and manage financial risk and assess other important initiatives, such as the optimal strategic response to an anticipated cross-border price impact and policy advocacy efforts in local markets. ■