Our changing vista

What will happen in Europe if the US is tempted to turn up the heat on cost cuts?

We are facing significant challenges...in a profoundly changing business environment. These are the words of Jeffrey Kindler, Pfizer's CEO, following the announcement in January 2007 that Pfizer was to cut 10,000 jobs.

The job cuts, amounting to about 10 per cent of Pfizer's workforce, will involve closure of five research sites (three in the US and one each in Japan and France), and three factories (two in the US and one in Germany). Although the cuts are to be spread across three continents, it is big pharma business in the US that is changing profoundly.

The question is: will Europe change course in the wake of it - and, if so, will it be for better or for worse?

All eyes on the us
In 2005, ex-factory pharmaceutical sales in the US amounted to $252bn, or 45 per cent of global sales, compared with Europe's $157bn, or 28 per cent of world sales. This is despite the fact that the European Union's (EU) population of 505 million (plus Switzerland and Norway) exceeds that of the US by more than 200 million.

In today's globalised pharma industry, major changes in the world's largest and most profitable market will affect all of big pharma irrespective of nationality. Many medium-sized and smaller firms also look to the US as their main marketing outlet (direct or via licensing), and the biotech industry regards the US as by far its most promising source of enterprise finance.

What are the main political reasons for expecting profound change in the US? Firstly, the public sector's payments for prescription drugs is rising rapidly as a result of the introduction of Medicare Part D in 2006, enabling all elderly persons to enrol for `universal' drug coverage for the first time. Secondly, the Democrats of both houses have controlled Congress since Nov' 2006 with increasing expectations for a Democrat presidency from 2009. And thirdly, there is persistent evidence of big pharma's poor public image, which is best summed up by Peter Claude of PricewaterhouseCoopers Pharmaceutical and Life Sciences Advisory Services Group, after publication of its pharma survey in January: ...in the current climate of distrust, the public is questioning the industry's motives and practices from sales and marketing to pricing to drug development.

There are also powerful market signals of change: increasing numbers of patent expiries for blockbusters, followed by intensive generic price competition, and a slower annual rate of introduction of new chemical and biological pharmaceuticals in recent years.

By 2005, the rate of sales growth in America's retail prescription market had been decelerating for six successive years - though the US market was still growing by 5.8 per cent.

It would be a mistake to be overly pessimistic about the outlook in the US, but wise to be cautious. Change could take three different courses:

Scenario 1 - no significant tightening of pressure on pricing and formulary listing for reimbursement. This sounds reassuring but must be regarded as improbable.

Scenario 2 - at the opposite extreme, radical interventionist policies in the public sector based on Canadian and European models, with price regulation, much more restrictive formularies, slower acceptance of innovative medicines and mandatory scrutiny of cost-effectiveness.

We may regard that as possible, but not probable. It would seriously damage big pharma, as well as undermine America's world leadership in biotechnology. High-risk innovation, with major venture capital input, has flourished in the predominantly free market of the US, while Europe and Japan have lagged far behind.

Scenario 3 - this tries to strike a balance, whereby some elements of Canadian and European models are implemented, but stops short of inflicting crippling damage to US world leadership in biopharma innovation. The pressure on new medicines would focus less on price and more on intensifying targeted prescribing. It would be guided less by simplistic, but unreliable, forecasts of cost-effectiveness and more by 'real life' health outcomes; a more positive approach than price regulation.

Europe's dilemma
Healthcare in the EU is like a tree trunk that has been split down the middle. For pharma, `Brussels' is responsible for most of what might be called 'technocratic' issues: regulatory control of marketing approval, the use of intellectual property rights, and the free movement of goods and services are key ground rules where the European Commission (EC) leads the EU.

The other side of the EU tree trunk is represented by Member State governments and health authorities which can regulate pricing and reimbursement of medicines nationally, provided they comply with the EU Transparency Directive.

Although the EC has tried repeatedly to extend its reach by coordinating efforts to `harmonise' pricing and reimbursement across the EU - currently through the Pharmaceutical Forum - these steps have produced few, if any, positive results. Member State governments are jealously guarding their right to deal nationally with the financial implications of drug pricing, reimbursement, marketing and promotion. In their view, it is too explosive electorally to be `left to Brussels'.

Paradoxically, national control of pricing and reimbursement in the EU is as much in industry's interests as it is in governments', as `harmonisation' would almost inevitably move EU decisions towards the lowest common denominator: price control and severely rationed reimbursement. Most of Europe's 27 Member States do not have a research-based pharma industry of their own and are showing no signs of wanting to move in that direction.

On the other hand, all Member States will readily agree that expenditure restraint in healthcare is urgently required, and that restraining pharma spending is the easiest way to tackle the problem. This is the perennial conflict between 'industrial policy' and cost-containment.

It is fashionable, in EU pharma politics, to pay lip service to the restoration of competitiveness in innovation. Yet, when it comes to action there is persistent failure to accept the inevitable consequence of introducing a greater degree of balance between control of budgetary expenditure and industrial priorities.

Industrial policy
Among the five largest pharma markets in Europe, ex-factory sales in 2005 exceeded $30bn in Germany and in France; were close to $20bn in Italy and in the UK, and reached $15bn in Spain. These five markets represented 74 per cent of pharma sales in Europe in that year.

The trend in each of Europe's leading markets is to shift the balance away from industrial strategy towards expenditure restraint, which is perceived politically as an absolute priority.

This trend is clearly apparent and seriously damaging to the pharma industry in Germany; gently slipping, rather than crashing, in the UK; mixed in France, where addiction to control systems is in conflict with a desire to revive innovation; and essentially non-existent in Italy and Spain, where industrial pharma policy is debated in theory but denied in practice.

Germany: Six cost-containment laws have been introduced since 2001, of which the most damaging has set reference prices for reimbursement at low levels in 'jumbo' groups, mixing patented drugs not deemed to be 'truly innovative' with patent-expired brands and generics. This devaluation of intellectual property rights is setting a dangerous precedent in the EU.

WIdO (the Scientific Institute of the AOK sickness funds) is advocating further steps to cut expenditure on allegedly 'me-too' patented drugs by proposing the abolition of insurers' legal obligation to reimburse all approved prescription medicines, and instead allow them to select a single active ingredient in a 'jumbo' group after negotiating rebates with suppliers.

France: This is relatively favourable for innovative medicines. For example, according to PM Danzon and MF Furukawa (Health Affairs, Sept/Oct 2006), biotech sales per capita in 2005 were $63 in France, compared with $45 in Germany, $31 in the UK - but $119 in the US. The focus of French efforts to curb expenditure is on patent-expired brands. The main issue is pressure on pharmacists to achieve at least 70 per cent generic substitution.

UK: The publication of a review of the Pharmaceutical Price Regulation Scheme (PPRS) by the Office of Fair Trading has just occured [see page 22 for analysis]. Meanwhile, the National Institute for Health and Clinical Excellence (NICE) has caused considerable delay in prescribing, and controversy over the cost-effectiveness of, several innovative medicines.

Italy and Spain: Pressure on prices and reimbursement remains the principal weapon in expenditure control. In Italy, prices of medicines reimbursed by the public sector fell by an annual average of 4.0 per cent (2002-2005), while inflation rose annually by 2.3 per cent. In Spain, a new reference price system comes into force in March which, according to a study in 2006 by NERA Economic Consulting, can be expected to diminish the impetus to conduct more R&D in Spain.

Duel obligations
If Europe intends to revive its global competitiveness in innovation and catch up with the US in biotechnology, it needs to 'bite the bullet' of balancing expenditure restraint with industrial policy. If the US is tempted to exert greater restraint along Canadian and European lines, a 'mid-Atlantic' model that incorporates elements of the American drive for risk-taking and innovation should be Europe's response.

Industry should more freely accept the rapid growth of generics and pricing pressure on patent-expired brands as legitimate and effective methods of cost control. Big pharma will be obliged to build a new 'slimline' business model.

The authorities in countries with pharma industries should create 'industrial policies' to encourage appropriate prescribing and marketing of innovative medicines, with less emphasis on cost-containment and cost-effectiveness.

So far, there is little recognition that profound change in the US represents an opportunity for Europe - but one that is short-lived and non-recurring. If it fails to grasp it, China, India, Singapore and other Asian rivals will not hesitate to pre-empt it at Europe's expense in the next 20 years.

The Author
Heinz Redwood is an international pharmaceutical and health policy consultant