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Turbulent times for the pharma industry

In a storm of cuts and healthcare reforms, where will pharma find safe harbour?
turbulent times

When Jonathan Swift wrote 'necessity is the mother of invention', Benjamin Franklin commented: 'necessity never made a good bargain'. The financial crisis in Europe has made it a necessity for governments to make unpopular and difficult choices about its elaborate, but increasingly unsustainable, systems of social security.  Healthcare reforms may not have been possible without the crisis, but solutions found in extremis are often painful and ill-adapted for the long term.

Still, it is a fact that most European governments are undertaking healthcare reforms. These range from systemic change to simple cost-saving measures, but all include measures that directly and negatively impact the pharmaceutical industry. This first in a series of three articles (with the others in the July and September 2012 editions), outlines the current scenario faced by the industry.

Crunch year: 2009
Between 2008 and the financial crisis in 2009, European countries saw an unprecedented rise in government spending on social protection.  While GDP shrank across Europe, absolute social protection spending increased by 6.3 per cent.  This was partially due to a rise in unemployment, but structural factors, such as the ageing population, played a large role. Average spending on social protection reached almost 30 per cent of GDP, with France topping the list at over 33 per cent.

This double blow plunged most economies into deficit, or worsened existing deficits in many cases; only seven European countries had surpluses in the year prior to the crisis. Three years on, there is yet to be a real recovery and a double-dip recession looks increasingly likely in 2012 as European growth hovers around zero.  Nor has there been a decline in unemployment (still over 10 per cent) and the 'baby-boom' generation continues to swell the ranks of the retired. Confronted with year-on-year deficits and slow, or no, growth, European governments have no choice but to cut spending.

Cuts where?
When considering cuts, a look at the components of government spending makes it clear that there are no easy answers. Outside of social protection, state employees enjoy secure contracts and strong unions resist reform. Security and defence account for 25 per cent of spending but are slow to change and plagued by chronic under-funding.  Education is a large expense, but teachers' unions are strong and parents and students resist change. In these cases, cuts primarily affect jobs, which is difficult to justify in a recession.

Within social protection, pensions constitute 37 per cent of spend, yet pensioners vote and are more vulnerable to cuts. Family, disability and unemployment benefits are each less than 8 per cent of spend, but these groups also have valid needs and are vulnerable to spending cuts.  In all cases, reform is unpopular and political.

This leaves healthcare as the second-largest element, at 29 per cent of spending (8.4 per cent of GDP). Healthcare, with its associations with wellbeing and prosperity, would seem to be among the functions spared the financial axe. Yet, relatively speaking, healthcare unions are weaker, doctors are better off than teachers (so able to afford austerity) and a significant percentage of healthcare provision comes from private enterprise. Following this logic, governments announce healthcare reform, and focus on the most obvious element of all: drug spending that ends up in the pockets of for-profit pharmaceutical companies. 

Today, pharma executives and Greek pensioners share at least one thing in common: they are being asked to make do with less for the foreseeable future. Fortunately for the executives, they can do something about it. And the first step towards action is to understand the reform context.

Trends
To anticipate reform and manage impact, the reform countries must first be clustered and drivers and outcomes examined to understand the real trends. Country context predicts likely measures governments will adopt, as well as their success and the impact on the industry or individual company. The second article will classify the reform measures, which range from one-off price cuts to systemic change, and consider the consequences they have on the countries that adopt them.

In a first cluster sit the countries in true crisis, where governments have tumbled, bailouts have been given and the 'troika' of the European Commission, European Central Bank and International Monetary Fund (EC,ECB,IMF), if not already present, has planes circling overhead. These are the 'high-debt, high-deficit' countries, which also have high long-term unemployment rates, poorly competitive economies and often low, or no, growth. Faced with a real risk of default and/or departure from the Eurozone, reforms in these markets are reactionary and painful, but not always well-reasoned. 

A second group of markets consists of those undertaking deep reform without necessarily being in crisis. Chronic deficits are an issue for most countries and grim projections of future collapse prompted some governments to reform even prior to the crisis. Others have used it to make difficult decisions in anticipation of an ageing population and rising healthcare demand. Generally, the steps being taken by these markets are comprehensive and reasoned. 

A third group, perhaps most worryingly, consists of 'denial countries', which have undertaken little real reform to date. Many of these markets resemble the first group in indebtedness and deficit-driven spending. They also share the larger problems that need addressing urgently, most notably ageing populations and expensive healthcare systems. Yet reform in these markets is limited and often focused on price cuts or spending freezes, rather than changes to make the system sustainable. Fortunately, there are fewer and fewer such markets.

Reactionary
Proactive
Denial
Greece
Germany
Austria
Ireland
Poland
Belgium
Portugal
Sweden
France
Spain
Netherlands

Italy
United Kingdom


The table above groups some of the larger European markets according to these descriptions.

First, the good news: there are markets where the situation is globally satisfactory. These countries have faced a limited impact from the financial crisis, their growth prospects are positive and their healthcare systems are funded for the foreseeable future. Denmark, Finland, Norway and Switzerland fall into this category.  Of course, these markets evolve for their own reasons, but change is measured and predictable.

The issues within 'reactionary' reform markets are predictable; public unrest, provider resistance and political fallout. Moreover, reform in a system as complex as healthcare produces unintended, and sometimes opposite, consequences. 

Reductions in off-patent drug prices in Ireland resulted in generic drugs being more expensive than originals. Shifting high-cost drugs to hospital budgets inflated the unpaid debt owed to industry, as funding has lagged in markets like Spain. Delisting has resulted in prescribing shifts to higher-cost drugs in several markets.  In many cases, initial reforms were not bold enough, leading to two or three revisions. This was the case in Greece with generic pricing and pharmacy margins. It was also the case in Ireland with generic prices and patient out-of-pocket fees.

Overall, the rapid, multi-pronged and often chaotic nature of reforms in the reactionary markets has made it difficult to determine what is being applied and even more difficult to know what is actually working to curb spending. In these markets, close monitoring and an active government affairs department is vital.

Proactive route still painful
The markets where major change has been proactively undertaken should be monitored carefully to understand the real impact. Germany tops this list and most companies have an 'AMNOG watch' under way to review and interpret each new assessment and pronouncement from the different bodies involved. To date, more than 20 drugs have been evaluated, but the real interest is to understand the impact on negotiated discounts and the transparency of the final price.

Poland also merits attention, as the reforms adopted there after long debate may become models for the CEE countries that are only now coming to grips with the unsustainability of their healthcare systems. Of course, Poland also illustrates that even long debate can result in poorly-designed initiatives; the country recently had its policy of allowing cheaper drugs similar to those on the market to be imported via the 'special needs' exception struck down by the European Court of Justice.

Reform in the UK has been a wait-and-see exercise so far due to the coalition government having other priorities, but the recent passage of the health and social care bill marks the true start of the march towards value-based pricing and GP consortia.

Denial: not a strategy
Pharmaceutical executives should prepare for more and more severe reform in several big markets:

  • France, because it continues to run a strong deficit, has not done enough structural reform and will not be in a position to do so until well after the May presidential elections
  • Spain, because the economy continues to shrink and the Royal Decree of September 2011 did not  address the cost of innovative medicines not subject to generic competition
  • Italy, because necessary reforms are not contained in the recently passed 'Grow Italy' law (which promoted generic use and pharmacy liberalisation)
  • Belgium, as it too has a strong deficit and an almost 100 per cent debt-to-GDP ratio, yet finally has a new government that appears ready to take action.

These reforms will impact business near-term and companies must engage with governments, directly or through trade associations, to ensure their voice is heard before decisions are made.

Whether reforms are pragmatic or profound, they should not come as a surprise. Evidence of the need for reform is available from the countries themselves and from the recommendations of national, European and global institutions.  It may be tempting to say 'we've seen this before', as many of the causative factors sound familiar. Yet the economy does matter and companies will have to adapt their business models simply to maintain relative market position. In a transforming market, the winners are those which anticipate reform trends and turn adversity to advantage.

Clustering markets according to their economic situations can help predict where and how healthcare reforms will appear. Subsequent articles will examine and classify different reform measures and then identify the strategies that companies should pursue to succeed.

Steven Flostrand
The Author
Steven Flostrand
is a principal at IMS Consulting Group

15th May 2012

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