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SP0005 An economist’s long-term perspective on pricing of drugs
  1. B. Jonsson
  1. Stockholm School of Economics, Stockholm, Sweden


Pricing of dugs can be divided into three phases. The first phase is the time of introduction of a new drug. If it is similar to other drugs in the market it will be “clustered” and the price is determined by the price of the other product(s) in the market. If it is sufficiently different, the producer has a degree of freedom in pricing and the decision-making is focused around assessments of value, i.e. “value based pricing”. A problem with this concept is that value is linked to the use of the product, not only the product itself, and can thus vary dependent on which patients or indications it is used for. Pricing is thus often a trade off between price and size of the market.

The second phase is the period of patent protection when new competitors with similar effectiveness enter the market. During this period the price remains rather constant, as new entrances to the market compete with differentiation of the product rather than the price. There are very few examples of “penetration pricing strategies”, where a new entrant launches at a much lower price. New entrants to the market usually mean that the market growth, and payers are often complaining that there is no price competition on the market. International price comparisons are some times used to make adjustments to the prices of individual drugs on the market. The market for biologicals used for treatment of RA is a good example of this type of market.

The third phase is when the patent expires for first product in the new class of drugs. Before the establishment of a single market for pharmaceuticals in Europe, the price as well as the market share good be maintained even after patent expiration, due to national price regulations. However, today the price reduction when the patent is lost often is both large and fast, similar to what have been seen in the US for a long time. Price reduction of 90% or more within a few months is not unusual.

Will the same happen when biosimilars will be available for the best selling biological drugs used for treatment of RA, Ms and cancer? It is still not possible to answer this question with certainty, but there are indications that we will see significant price reductions also for these drugs, even if the production process is more complex and the regulatory requirements more demanding than for traditional generics.

Pricing of drugs is important first of all as an incentive for pharmaceutical innovation. While traditional price controls have been eliminated in most markets, the link between pricing and reimbursement is the key element for the future since third party payment dominates for new drugs. The introduction of many new orphan drugs and targeted therapies for small group of patients are new feature in the market, which create new challenges for pharmaceutical pricing in the future.

Disclosure of Interest None Declared

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