Patented medicines: how to determine and curb prices?

Profit from sales of medicines is incentivizing pharma companies to further invest in research and innovation, which is undoubtedly in the public interest. Profit is evidently linked to prices. Prices of patented medicines are exponentially rising around the world. As a result, there is an increase in public expenditure and the diminution of access to medicines across all income groups of countries. Hence there is a conflict between two public interests: innovation on one hand and affordability on the other.

In this situation, some regulators regard excessive prices as problematic and demand regulatory scrutiny. Canada has recently acknowledged the issue and has opened public consultations. Other regulators have noticed that pharmaceutical companies apply different prices in different countries and wish their own jurisdiction to be placed at the lower end of the scale, which is also understandable.

At this point, determination of drug prices or of state health insurance reimbursement caps remains the exclusive prerogative of national regulators. With the exception of External reference pricing (EPR) practice, no international conventions or fixed standards are in place. This leads to great price differences among countries.

This article aims to present good examples of national legal frameworks that regulate prices of patented medicines (II.). Beforehand, we present international guidelines and supra-national law on pricing systems of medicines (I.).

  1. International guidelines and supra-national law
  1. World Health Organization (WHO)

The WHO qualifies a course of treatment that costs the equivalent of one day’s salary of the lowest-paid government worker as generally affordable; treatments that cost more than this are classed as unaffordable[1].

The WHO Guideline on Country Pharmaceutical Pricing Policies instructs that medicine prices can be reduced by:

  • Eliminating duties and taxes on medicines;
  • Regulating mark-ups to avoid excessive add-on costs in the supply chain;
  • Using external reference pricing;
  • Using cost-plus pricing, i.e. a method for setting retail prices of medicines by taking into account production cost of a medicine together with allowances for promotional expenses, manufacturer’s profit margins, and charges and profit margins in the supply chain;
  • Promoting the use of quality-assured generic medicines.
  1. Organisation for Economic Co-operation and Development (OECD)

The OECD enlists the following pharmaceutical pricing techniques, in use in the OECD countries:

  • External price benchmarking or International reference pricing (IRP);
  • Internal reference pricing;
  • Generic price linkage;
  • Pharmaceutical-economic assessment (cost-effectiveness analysis);
  • Profit control as an indirect price control;
  • Price-volume agreements;
  • Procurement and tendering.
  1. European Union (EU)

The law of the European Union (EU) does not contain rules on the price determination of medicinal products. However, the Transparency Directive aims to ensure the transparency of measures adopted by the EU Member States when regulating the sector – in order not to create obstacles to the Internal Market.

In March 2017, the European Parliament (EP) adopted a report on EU options for improving access to medicines and called on the European Commission to propose a new directive on the transparency of price-setting procedures. The EP believes that a price of a medicine should cover “the cost of the development and production of that medicine, and should be adequate for the specific economic situation of the country in which it is marketed, as well as being in line with the therapeutic added value it brings to patients, while ensuring patient access, sustainable healthcare and reward for innovation.” Nevertheless, in the EP’s view, such a price shall never prevent a sustainable access to medicines.

  1. National reference legislation

The big majority of countries regulate the prices of branded medicines in their respective jurisdictions, while some (namely the US) let the market fix the price. The countries that possess a legislative framework choose different ways of determining the price. However, very few give a legal definition of “excessive price”.

We recommend studying the following good models of national legislation:

  1. Pakistan confers to the government the power to fix the maximum retail price (MPR) of medicines. In addition, the Federal Government can specify a percentage of the manufacturers’ profit that shall be used for research purposes. The mechanism of determining the MPR is set up by an order of the Drug Regulatory Authority. Accordingly, the MPR shall be based on the average price of the branded product in India, Bangladesh or be equal to the lowest price of either the price in other developing countries or foreign indexes, e.g. the UK Monthly Index of Medical Supplies. The MRP is calculated on the basis of landed cost plus a 35% mark-up. The respect of the MPR is sanctioned by the penal provisions of the Pakistani law. All sales and imports above the fixed maximum price can lead to sanctions incl. imprisonment and/or fines.

The Nepalese law contains similar provisions. As in Pakistan, it governs basic questions of competence, while letting more precise regulations of the prices of patented medicines govern the criteria for determining the maximum prices of medicines. The regulations of Montenegro are also a good example because they list criteria for determination of the maximum wholesale price of medicines:

(1) Wholesale price of a medicine comparable to referent countries;

(2) Average wholesale price of a medicine comparable to referent countries;

(3) Ratio between wholesale price of a medicine in the Republic of Montenegro and average comparable wholesale price in referent countries;

(4) Existing wholesale price;

(5) Indicators of pharmaceutical – economic study;

(6) Wholesale trade costs.

  1. Finland prescribes that the wholesale price of a medicinal product must be the same for all pharmacies and subsidiary pharmacies in the country. The price must be based on the nationally applied wholesale price and on the margin calculated on the basis of the wholesale price, plus value added tax. The price of a medicine must also take into account all discounts, rebates and other benefits granted to pharmacies and subsidiary pharmacies.

In a situation where a pharmacy must exchange a prescribed medicine for a comparable publicly available medicinal product, its price shall be (A) the lowest or (B) the price of which differs from the lowest price:

(i)  By no more than 1.50 euros when the product costs less than 40 euros; or

(ii) By no more than 2.00 euros when the product costs 40 euros or more.

  1. Iceland imposes pricing restrictions solely on prescription medicines. The maximum price is defined by the medicinal pricing committee (the “committee”). Iceland has introduced the automatic regulatory mechanism by obliging the committee to monitor the wholesale and retail prices of medicines in the Member States of the European Economic Area. Moreover, in order to better reflect different views of stakeholders, the relevant representative of the retail pharmacy organization shall be present at the meeting when the maximum price of medicines is defined. Among the other prerogatives, the committee is empowered to impose a price freeze. Finally, in a situation where the manufacturer wishes to sell medicines at a lower price than the fixed maximum price, he/she needs to inform the committee. This might be a useful technique to keep the committee informed about possibilities to further limit prices, e.g. for similar products of other manufacturers.
  1. South Africa has instituted the medicines’ pricing committee. More detailed South African regulations of the prices of patented medicines have set up a pricing system. As the price is determined by the manufacturer of medicine, he/she needs to communicate to the executive, e.g. details as to the comparative efficacy, safety, and cost-effectiveness; details of sources of revenue and expenditure for research and development; the costs of manufacturing, selling or marketing. This information provides a broad and good basis for determining a fair and appropriate price.

Unlike other jurisdictions, South Africa lays down criteria for considering the price of a medicine unreasonable. In order to define it as such, the executive needs to take account of the:

(1) Single exit price at which the medicine is being sold in the relevant market;

(2) Single exit prices at which other medicines in the same therapeutic class are being sold in the relevant market;

(3) Prices at which the medicine and other medicines in the same therapeutic class are being sold in other countries;

(4) Changes in the CPI, the PPI and the relevant rates of foreign exchange;

(5) Purchasing power parity with reference to the Republic and any other country in which the medicine is sold;

(6) Relative availability within the Republic of medicines in the same therapeutic class as the medicine and the safety and efficacy of the medicine relative to other medicines in the same therapeutic class;

(7) Nature of any indication in respect of which the medicine has been registered in the Republic;

(8) Size of the market for the medicine in the Republic relative to that in other countries;

(9) Any relevant information provided by the Council for Medical Schemes;

(10) Size of the obstacle, represented by the single exit price, to access to the medicine relative to the public interest in having widespread and general access to the medicine;

(11) Such other factors which are relevant to the pricing, or the costs of manufacture or sale, of the medicine.

  1. The Philippines has adopted a specific legislation to ensure universal accessibility of cheap and quality medicines. The executive recommends to the President the maximum retail price of medicines while taking into account – among others – the supply available in the market and:

(ii) Any change in the amortization cost of machinery brought about by any change in the exchange rate of the peso to the foreign currency with which the machinery was bought through credit facilities;

(iii) Any change in the cost of labor brought about by a change in minimum wage; or

(iv) Any change in the cost of transporting or distributing the medicines to the area of destination.

Moreover, the government has the power to implement any other measures that might effectively reduce the cost of medicines, such as competitive bidding, price volume negotiations, and other appropriate mechanisms that influence supply, demand, and expenditures on medicines.

For the sale of medicines above the maximum price, fines of up to EUR 100,000 are foreseen. Similarly, illegal price manipulations are sanctioned with the same amount.

In relation to the intellectual property law, unlike other legislation, the Philippines specifically excludes from the meaning of an inventive step in the sector of medicines any invention that would come from the mere discovery of:

“A new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance, or the mere use of a known process unless such known process results in a new product that employs at least one new reactant.

  1. Switzerland has amended its legislation in February 2017 following a lawsuit of pharma companies objecting to price cuts of medicines. The amended article governs the criteria of defining an affordable patented medicine. Such a price is composed of the comparison with external prices and the therapeutic examination of the efficacy and prices of other medicines curing the same disease. In addition, an innovation bonus can be considered if the medicine provides a major therapeutic progress.
  1. As another way to curb prices, India and Belgium have introduced a compulsory license for regulations of the prices of patented medicines issued on public health ground to ensure greater affordability of medicines. Lawsuits are underway in India to challenge these compulsory licenses.

Further regulations of the prices of patented medicines can be found by search engines (Legislation: health law/patent law + pharmaceuticals + medicines + drugs + prices) and on the following link:

This howtoregulate article on “Regulations of the Prices of Patented Medicines” has been written by Ajda Mihelčič, M.A.S., on behalf of the Regulatory Institute, Brussels.

[1]              Treatment with the originator brand product would cost the lowest-paid government worker over 10 days’ wages in over half of the countries studied by the WHO; in Armenia and Kenya, the equivalent of over a month’s salary would be needed to purchase this treatment. Nowhere did treatment with a branded product cost less than 2 days’ wages.

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