Differential pricing is a strategy for marketing drugs in India that has often been discussed, but rarely implemented until recently. The term refers to selling patented drugs in India (or other lower-income countries) at lower prices than in developed Western countries.
The rationale for this strategy is the different incomes of buyers in different countries. For example, a prescription that costs a hundred dollars a month ($1,200/year) may be affordable for many Westerners. However, the per capita GDP in India is only about US$1,000 (converted at direct exchange rates, not using purchasing power parity). Therefore, a prescription costing a similar amount is out of reach for the vast majority of Indians. By lowering prices to levels more adapted to the local cost of living, a firm can theoretically increase sales by becoming accessible to a broader market.
In the past, this strategy has generally not been adopted by major pharmaceutical firms in India, except for those treating certain diseases like HIV/AIDS and malaria. For other drugs, many firms set up foundations that distributed necessary medicines directly to needy patients, free of charge. However, Merck & Co. changed this in April 2008 when it launched Januvia (sitagliptin), an anti-diabetic drug, in India at one-fifth its American price. Since then, Merck has also launched new vaccines in India with differential pricing.
At the time, it was unclear whether this practice would spread. However, on February 13, 2009, GlaxoSmithKline CEO Andrew Witty promised that the company would slash the prices of its patented products in Least Developed Countries (LDCs) to at most 25% of their prices in developed countries. Although India is not one of the LDCs, Witty also said that in India, GSK would be more flexible with prices in general. Therefore, differential pricing seems to be an emerging trend.
Obviously, selling drugs at lower prices in lower-income countries gives illegal traders the chance to make money by re-exporting the cheaper drugs to developed countries (“parallel import”). This has been a major obstacle to the adoption of differential pricing strategies. However, there are many available countermeasures, such as physically differentiating the product for the Indian market (i.e., with differently-colored pills) so that re-export can be caught. Better management of distributors is another countermeasure, including incentives like selling to distributors at full price and discounting only after the distributors have proved the drugs were not re-exported. If such measures are implemented, pharmaceutical firms may be able to make differential pricing pay off by reducing the risk of parallel import.
Since the affordability of drugs is a highly politicized issue in India and internationally, differential pricing strategies may also help ward off future price intervention by the government. The Indian government frequently proposes to cap or negotiate down the prices of foreign patented drugs.