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2012 and beyond

Europe will be the place to hone the skills needed to thrive in a cost-conscious future

beyond 2012'Grim and getting grimmer' seems to be the general prognosis of most European boardrooms on the prospects for the European pharmaceutical market over the next few years. But as companies start to move their focus to emerging markets, are they missing a trick?

There is no doubt that governments across Europe will focus on cost reduction over the next few years. Most are looking to flatten healthcare expenditure which, given rising demand and medical inflation, implies efficiency improvements in the order of 20 per cent over the next five years. Most countries have targets to reduce pharmaceutical prices.

Greece has already cut pharmaceutical prices by 20 – 30 per cent, with more to come, and Portugal is probably not far behind. Italy, Germany and Spain have all taken actions to reduce pharmaceutical expenditure, particularly on innovative products. It may be unfair, but that is the fact of the matter. For most healthcare administrators, cutting drug prices is still less painful than sacking doctors or nurses.

The European situation could be viewed as a crisis with no prospect of a happy ending, or as a fundamental 're-set' of how pharmaceutical markets will work everywhere. Europe has just arrived there first.

Two trends are not going to go away; increasing use of generics, and a new focus on value. The end game for generics is pretty clear. Markets that currently have low use of generics will either create a market environment that stimulates substitution and price competition, or will engineer year-on-year price reductions to drive down prices post loss of exclusivity. Together with therapeutic referencing and guidelines mandating generics in first line, this will drive generics to represent 70 per cent of the market by volume and 30 per cent by value right across Europe, as is the case in the UK or US today. The only question that remains is whether generics suppliers themselves can survive on ever declining margins.

Shape the debate
The other trend is the increasing wish for governments to link price to the 'value' of a drug, and here the end point is much less clear and government approaches differ. The UK is consulting on value based pricing. Germany is introducing new provisions for medicines contracting. Italy has an advanced programme for national patient registries that could enable a move to performance- or outcome-based contracts. With so much still unclear and under discussion, the industry has a one-time opportunity to shape the debate.

The value challenge can be broken down into three parts. Products that genuinely deliver improved health system efficiencies by decreasing costs, often by reducing admissions or lengths of stay in secondary care, will sell themselves. Products that are deemed cost-effective but require incremental expenditure, or products that will never be cost-effective whatever the measure, but which society recognises patients should have access to, will struggle in an environment of frozen budgets where affordability overrides cost-effectiveness. Increasingly, they do not stand a chance.

Claims will need to be cohort specific, with prices more aligned to payer value and evidence to prove they work in the real world

With explosive growth in chronic disease and diseases of ageing, health systems need innovation, whether they recognise it or not. As the industry finds itself in negotiations with governments across Europe over prices, it must dare to ask for something in return, namely improved measures to ensure the uptake of innovation.

Governments will need to commit to driving uptake of new technologies, ensuring funding is available, and taking tough action on disinvestment elsewhere to create financial headroom. Industry and government will increasingly need to consider ring-fenced funding and joint investment for products that would otherwise be considered unaffordable.

Over the long term, a change of mind-set is required on the parts of both payers and industry. R&D and global marketing teams will need to get used to a new reality where the comparator is not existing best practice, but common standard practice (in most cases this means a generic). Claims will need to be cohort specific, with prices more aligned to payer value and evidence to prove they work in the real world.

European payers will have to recognise the shift from saving lives to improving the quality of existence. Most Western health systems are reaching the point of diminishing returns on improving mortality. The big challenge is how to deal with the burden of degenerative diseases of old age and rising expectations for wellbeing. Quality matters.

Over the next 20 years, the majority of the population will be over the age of 50, a third will be over the age of 60 and roughly 20 per cent will be over 80. A 65-year European man now has a 1 in 100 chance of celebrating his 100th birthday and his grandchildren have a 1 in 2 chance of living to 100. This will fundamentally reshape how healthcare systems work, the nature of provision and affordability.

Western Europe will be at the heart of this transformation. It will have more elderly people with more disposable income to spend on healthcare than any other market.

Maybe the European pharmaceutical marketer is best advised to stay put. In the short term, Europe offers an unparalleled opportunity to hone the skills required to thrive in a cost-conscious environment. Over the long term, wealth and health demographics clearly point to Europe as the place to be.

Jonathan AnscombeMichael ThomasThe Authors
Jonathan Anscombe (left) is partner, EMEA lead, Pharmaceuticals and Healthcare Practice and Michael Thomas is partner, Pharmaceuticals and Healthcare Practice, both at A.T. Kearney




6th October 2011


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