Pharmaceutical companies are missing out on an opportunity to link core market access activities with Environmental, social and Governance (ESG) objectives. That was the statement – in a nutshell – of the blog I wrote last year on Market Access and ESG. Since then, at Inbeeo we have had the privilege of continuing to work with clients on connecting these dots. In this blog, let me share our latest insights, drawing a parallel with another industry, to explore how integrating Global Pricing Policies with ESG objectives can balance business sustainability and equitable access.
We need a better lexicon to inform coherent global pricing strategies
Concepts such as Equity Pricing, Tiered Pricing, and Equity-Based Tiered Pricing have been discussed fervently in recent years. Yet, when you find yourself trying to integrate Global Pricing Policies and ESG objectives, the first step is to standardize terminology and create a clear lexicon with MECE1 concepts.
Here’s a sneak preview of our upcoming White Paper in which we propose to distinguish three pricing principles for pharmaceutical companies:
- Value-Based Pricing: pricing based on the added value of a new medicine to patients, health systems, and society (WHO, 2020; EFPIA, 2023; Moon et al., 2020).
- Cost-Plus Pricing: pricing based on manufacturing–, research & development (R&D)–, regulatory–, and operational costs, plus a fixed profit margin (WHO, 2020).2
- Equity Pricing: pricing based on the principle of affordable access to essential medicines for markets and individuals with lower income levels (MSF, 2001).
We also highlight non-pricing approaches, such as Philanthropic Initiatives, which ensure access to medicines but without a pricing component. These include, for example, not-for-profit provision (e.g., through early or expanded access, compassionate use, or patient support programs), in-kind donations, voluntary licensing, technology transfer and health system partnerships.
Each approach has its pros and cons. One key element is that, in order of appearance, these approaches are decreasingly relevant from a business and R&D sustainability perspective and increasingly relevant from an equitable access to medicines perspective.
It’s OK to mix and match
For pharmaceutical companies, the core challenge is to reconcile commercial sustainability with equitable access—a gap that tiered pricing can address.
- Tiered Pricing: A tool applied across pricing principles to reflect differences in willingness and ability to pay, based on economic, social and/or healthcare capabilities.
Tiered pricing can be applied from a commercial perspective (business and R&D sustainability) as well as from an equitable access perspective (reaching the poor).3 In fact, it offers pharmaceutical companies the opportunity to apply these different pricing principles across different markets:
- Value-Based Pricing in affluent markets that are able to pay for the full value of (sustainable research and development for) innovative products
- Cost-Plus Pricing with a lower profit margin in markets with a lower ability to pay
- Equity Pricing with an even lower or no profit margin can be applied in low- and middle-income (LMIC) markets
- Philanthropic Initiatives can complement these pricing approaches in the poorest markets or market segments.
Each company must find its own balance in applying these different pricing principles, in a way that aligns with their unique DNA in terms of values, portfolio, annual revenue, profit margins and geographical footprint.
A 'buy one, give one' redistribution approach for pharmaceutical companies?
Marie Stella Maris is an example of a company that embodies how businesses can reconcile commercial and equitable access objectives. The company portfolio consists of premium lifestyle products, including bottled water, natural body care and luxury home fragrances.
Its business model is built on a social entrepreneurship framework, using a tiered pricing model. It offers premium products at high-end locations in Europe and channels resulting profits towards improving access to clean drinking water. This is done primarily through its “buy one, give one” approach, combined with donations. For every product sold, a fixed amount is donated to water projects, distributed to not-for-profit organisations through the Marie Stella Maris Foundation. In addition, the brand emphasizes eco-friendly packaging, refill options, and reducing its carbon footprint, which aligns with the broader goal of sustainability, reinforcing its appeal to conscious consumers.
When trying to find their balance, can pharma companies take a page from Marie Stella Maris and integrate access to essential medicines even more into their business model, rather than treating it as a separate Corporate Social Responsibility (CSR) activity?
Just as Marie Stella Maris allocates a portion of its profits to water projects, could pharma companies create a more direct link between their revenue and equitable access to their products in LMICs (whether through in-kind donations and/or health system strengthening initiatives)?
Such an approach could:
- Enhance integration of a company’s core business and its ESG positioning
- Foster brand loyalty and trust through transparent social impact reporting
We need equity-based rules for External Reference Pricing
‘By promoting price harmonization across countries despite vastly different economic conditions, ERP poses a significant challenge.’
The question is whether high-income price regulators (‘consumers’) of pharmaceutical products have the willingness (‘consciousness’) to support a tiered pricing model that allows companies to earn profit in wealthier markets while providing equitable access in LMICs based on ability to pay.
The practice of External Reference Pricing (ERP) suggests they may not. ERP allows national authorities to cap drug prices based on benchmarks from other countries. This practice, widespread among high-income nations, helps control healthcare costs by referencing a chosen ‘basket’ of foreign markets.
For instance, Ireland—with Europe’s second-highest GDP per capita—sets its pharmaceutical prices based on 13 other European countries, whose average GDP per capita is roughly half that of Ireland. This basket includes markets like Greece and Portugal, with a GDP per capita as low as one-third of Ireland’s.
Such a system undermines the tiered pricing approach, which is designed to enhance access to medicines based on ability to pay, while ensuring a sustainable business model. By promoting price harmonization across countries despite vastly different economic conditions, ERP poses a significant challenge to applying tiered- and equity-based pricing.
While confidential discounts serve as a temporary solution, they fail to address the core issue: are high-income countries willing to exclude lower-income countries from their reference baskets (and accept paying higher prices than lower-income markets) and in doing so support global cross-subsidization of R&D and access to innovation?
FOOTNOTES
1 We consultants love to break the world down into pieces that are Mutually Exclusive and Combined Exhaustive (MECE) to ensure clarity and to speed-up decision-making.
2In the United States, Cost-Plus Pricing also refers to more transparant pricing by Pharmacy benefits Managers (PBMs). In our proposed lexicon, Cost-Plus Pricing refers to application by pharmaceutical companies.
3For this reason, it’s not included in the list with the 3 pricing principles (the list would be non-MECE!).
Let’s Discuss
Are you looking to align your Market Access and ESG objectives? Connect with us to discuss how to strategically balance commercial sustainability and equitable access in your market access initiatives.