OBJECTIVES: The objective of this project was to build a model simulating the external reference pricing (ERP) process, applied to the 28 European Union Member States, Iceland, Norway and Switzerland, to understand the price dynamics of ERP-based systems and predict the consequences of various ERP policy scenarios. METHODS: A discrete-event simulation (DES) modelling approach was adopted. This approach allowed for fixed ERP rules and quick dynamic changes. Three groups of attributes were included in the model: ERP policy attributes, drug attributes and countries’ economic attributes. Occurrences of the following events were simulated:  drug launch and first price setting, pricing decisions using ERP in different countries, exchange rate fluctuations, country’s attributes modification, and drug price changes. Each price evaluation event implied the calculation of a new drug price and the model generated drug price evolution in each country over time. Model inputs were obtained from a literature review and consultation of representatives of competent authorities and international organizations. The model was validated by assessing actual drug prices at launch and over time for 53 randomly selected medicines. This model was developed for the EU Commission. RESULTS: The model could be used to assess the impact of pricing policies. For example, it showed that the price erosion predicted under the effects of ERP only was for most products slower than observed in reality, and thus that price negotiations also importantly contributed to price erosion. It can also be used to compare alternative launch sequences. The simulated price trends over time were consistent with observed trends. CONCLUSIONS: This DES model is the first comprehensive ERP published model across drug life cycle that allows testing various policy scenarios and predict impact of ERP in the real-life. This flexible model may prove useful tool to support decision making from the perspective of authorities or industry.