OBJECTIVES: External reference pricing (ERP) is one of most common cost-containment tools used to reduce prices for in-patent pharmaceuticals in the European Union Member States (MS). The objective of this project was to provide an overview of ERP systems, both on processes and potential issues related to ERP systems in 31 European countries (28 EU MS, Iceland, Norway and Switzerland) (performed for the EU Commission). METHODS: A systematic structured literature review and consultation of representatives of competent authorities and international organizations were conducted to identify and characterize the use of ERP, to describe its impacts on the prices of pharmaceuticals and to discuss possible cross-country coordination issues in EU MS. RESULTS: All selected countries apply ERP except the UK and Sweden and 23 countries use ERP as main systematic criterion. ERP is based on legislated pricing rules with different levels of accuracy in the majority of European countries using ERP. ERP is applied either to all marketed drugs or to specific categories of medicines, mainly used for publicly reimbursed medicines. The number of reference countries included in the basket varies from 1 to 31. There is a great variation in calculation methods used to compute the price; 15 countries use average price, 7 countries use the lowest price, and 7 countries use other calculation methods. Among reported limitations of ERP application are reliable sources of price information, price heterogeneity, exchange rate volatility, and hidden discounts. Spill-over effects on other countries and downward price convergence have often been argued leading to pricing strategies from pharmaceutical companies. CONCLUSIONS: While ERP is widely used in Europe, processes and available price information vary from one country to another that may limit ERP application. Moreover, ERP spill-over effect is a major concern of pharmaceutical firms leading to implementation of the so-called “launch sequence strategies”.