Knock on effects

The tempestuous relationship between the pharma industry and governments will only become more difficult to manage as European authorities grapple with rapidly rising healthcare expenditures.

Already, across most of Europe, pharma has suffered at the hands of pricing and reimbursement polices. Drug budgets make an easy target and provide quick cost-savings for governments as opposed to more contentious solutions, such as reducing physicians' pay, or re-organising hospitals. In the UK, with an anticipated new strike from the UK Office of Fair Trading's (OFT) report on pricing, pharmaceutical spending may be put under further scrutiny.

While significant changes to pricing formulas, such as jumbo reference pricing and increasing out-of-pocket costs for patients, have dominated the continental European markets, the UK has enjoyed relatively free pricing. Pharma is seen as more of a friend than a foe, compared with some other markets, and is rewarded for its economic contribution.

The Pharmaceutical Price Regulation Scheme (PPRS) entitles firms to a 21 per cent profit margin, measured as the return on net capital employed - with additional capacity of up to 40 per cent. This has made the UK a favourite in Europe, not only for R&D investment, but also as good launch environment thanks to favourable pricing.

Past recommendations to scrap the PPRS have fallen mainly on deaf ears. While the PPRS is by no means seen as perfect, it is much more palatable than rigid individual product pricing systems. However, the forthcoming report from the OFT may destabilise the delicate balance between industry and government in the UK.

The report is expected to make a series of recommendations, including value-based pricing and/or therapeutic substitution. These suggestions are likely to resonate with a cost-conscious UK Treasury that already feels it has been overly generous to the industry. The Treasury has a keen desire to curb drug spending but what impact will this have on pricing in the UK and across Europe.

European pricing
Continental Europe has led the drive to reduce the costs of individual drugs. While each market has its own unique system, respective governments have been using the same language: budget cuts, generic substitution and technology assessments. These tools, coupled with the introduction of reference pricing, have significantly reduced drug price margins, while putting a new and powerful pressure on firms to demonstrate cost-effectiveness.

In the past year, European ministries of health have announced a raft of budget cuts. In October, French Health Minister, Xavier Bertrand, said he would enforce price cuts of up to 20 per cent on vaso-dilators prescribed for cognitive disorders, and reduce support for 41 other prescription medicines for which the government currently reimburses a third of the cost.

Echoing Bertrand's sentiments, MutualitÈ FranÁaise, one of France's biggest insurers, said that it would also reduce coverage of the listed drugs.

More recently, Spain introduced a new reference pricing system that is expected to reduce drug expenditure by 7 per cent. Even wealthy countries like Switzerland are considering budget cuts.

Expenditure control is also taking place through substitution, and with greater effect. While generic substitution is allowed in France, Germany and Spain, Germany is the most aggressive in its pursuit to replace branded drugs with generics.

Last spring, the German government announced a goal to switch 70 per cent of all prescribed medicines to generics. While pharmacists are generally required to inform and receive permission from patients before substitution, this is questionable, particularly in countries where pharmacists are given financial incentives and/or are subject to generic conversion quotas.

Meanwhile, physicians are hesitant to prescribe non-reimbursed drugs in order to avoid out-of-pocket costs to their patients.

Assessment agencies
Pricing and reimbursement in Europe is now largely determined by economics. Patients will have access to drugs that have sufficient supporting cost-effective data.

The UK, France and Germany have the most established health technology assessment agencies: the National Institute for Health and Clinical Excellence (NICE), the Commission de la Transparence and the Institut f¸r Qualit‰t und Wirtschaftlichkeit im Gesundheitswesen (IQWiG).

Leading the trend towards pharmaco-economics, NICE is the most developed in measuring cost-effectiveness. Germany is considering a healthcare reform plan to adjust the way that technology assessments are carried out (IQWiG evaluates quality and efficiency, but it does not analyse cost-effectiveness, although it has an indirect influence on reimbursement).

Even smaller markets are placing more focus on cost-effectiveness. The Spanish government is funding more than 100 health technology assessment projects, investing Ä51m, while Ireland has passed new legislation reorganising its technology assessment agencies and bringing them under the umbrella of the Health Information and Quality Authority.

UK environment
While more autonomous than its European counterparts, the UK is no longer isolated from European trends. It too has faced the demands of price cuts and has the greatest number of cost-benefit-based health technology assessment agencies. The last PPRS was accompanied by a 7 per cent across-the-board price cut, although firms can `modulate' the list price of their PPRS products by reductions that equate to an overall level of 7 per cent.

Positive recommendations by NICE are often not implemented and foremost among those responsible for the failure to implement NICE guidelines are health authorities, which are increasingly looking at ways of cutting their drugs budgets as they frantically seek to balance the books and prepare for a reduced rate of health expenditure growth from April 2008.

The Treasury has traditionally been sceptical of the industry because it sees drug costs rising too fast. The Treasury's misplaced perception of value is on cost, not cost-effectiveness. Hospital costs for ulcers, mental health and TB are a fraction of what they used to be thanks to innovative new treatments. The same is true for many new drugs in other disease areas.

The Treasury's position will be boosted by the report from the OFT on the PPRS, and a how much difference this will make to the European market is a point for debate?

The OFT has always been antagonistic towards the PPRS and it is no surprise that its review was announced without consultation with the Department of Health and its recommendations will be hostile to the pricing scheme.

It is widely anticipated that the report will recommend 'value-based pricing', by which the perceived value of a drug is set by reference to other similar drugs and its value over its peers - the OFT may even give a favourable nod to therapeutic substitution. If therapeutic pricing or substitution were adopted, it would probably mark the end of the PPRS.

However, it is difficult to see how this could happen in the immediate future as the current PPRS will last until the end of 2009, and changes can only be made by joint agreement between the Department of Health and the Association of the British Pharmaceutical Industry (ABPI).

Assuming that therapeutic pricing will fall within the PPRS, which may be a matter for lawyers to decide, the ABPI simply would not agree to measures so hostile to pharma. The Department of Health is also unlikely to throw it out at the behest of an unsympathetic body, having spent a year negotiating a new scheme.

In addition, the Ministerial Strategy Group, comprising the Department of Health, the Treasury, Department of Trade and Industry and the ABPI, will be expected to review such fundamental proposals. One reason it was set up was to achieve a steady approach to policy and bring all sides together. The adverse impact of such OFT proposals on pharma would merit very close examination.

There are also the considerable political and economic implications. The pharma industry contributes more R&D to the UK economy than any other sector, so undermining the government's commitment to raise the proportion of UK GNP devoted to R&D would antagonise the science community on which it relies.

As for therapeutic substitution, having a pharmacist replace a GP's prescribed medicine with another from the same therapeutic category would raise a storm of protest from professional bodies like the British Medical Association and individual physicians, as well as from patients and patient bodies. A resurgent opposition party would not let this chance slip.

The real danger to the industry may be more insidious. If the government is seen to be toying with any adverse OFT proposals, or if the Treasury comes up with its own alternatives, such as further price cuts or a much wider Selected List, then the UK environment will be seen as increasingly hostile and new investment will shift even more to the US or the Far East.

Stark reality
If, as expected, the OFT endorses value-based pricing and were the government to seriously consider this recommendation, or even to adopt it in the longer term, there would be a number of unintended consequences throughout Europe. Thanks to the liberal pricing system in the UK, pharma firms usually launch their products first in the UK, then Ireland, Germany and so on. Upsetting this trend could position another market as a launch favourite, particularly one where physician uptake of new medicines is more rapid.

Likewise, a UK value-added system raises serious methodology questions, similar to those that have plagued traditional health technology assessments; namely what value do you place on health?

Furthermore, if the OFT assumes correctly that value-added pricing will reduce drug costs, pharma will take a hit in markets using international prices in their pricing models. Traditionally, pharma pricing departments are under significant pressure to obtain the highest price possible in order to help pricing negotiations in other markets, especially in Spain and the Netherlands.

The realities are stark for pharma. While the singling out of pharmaceutical budgets is an inefficient and ineffective attempt to curb the increasing rate of healthcare expenditure growth, the trend looks set to continue. This is reinforced by an expected hostile OFT report, made all the more painful as it is being issued in a historically industry-friendly market.

Pharma's health outcomes departments and pricing experts will have to work hard to justify the cost of new and innovative medicines. Meanwhile, industry executives will have to better communicate the value not only of their products but their investment into the regional economies.