Pharmaceutical Pricing in a Global Context

Abstract: This paper first considers optimal pharmaceutical pricing between countries to achieve static and dynamic efficiency. We then empirically analyze determinants of ex-manufacturer prices for originator and generic drugs across countries. We focus on drugs to treat HIV/AIDS, TB and malaria in middle and low income countries (MLICs), with robustness checks to other therapeutic categories and the full income range of countries. We examine the effects of per capita income, income dispersion, competition from originator and generic substitutes, and whether the drugs are sold to retail pharmacies vs. tendered procurement by non-government organisations (NGOs).The cross-national income elasticity of prices is 0.27 across the full income range of countries, but is 0.0 - 0.10 between MLICs, implying that drugs are least affordable relative to income in the lowest income countries. Within-country income inequality contributes to relatively high prices in MLICs. Although generics are priced roughly 30 percent lower than originators on average, the variance is large. Additional generic competitors only weakly affect prices, plausibly because generic quality uncertainty leads to competition on brand rather than price. Tendered procurement that imposes quality standards attracts multi-national generic suppliers and significantly reduces prices of originator and generic drugs, compared to their respective prices to retail pharmacies.