Europe’s pharma sector : living through the crisis

pharmafile | March 14, 2012 | Feature | Business Services, Manufacturing and Production, Medical Communications, Research and Development, Sales and Marketing |  Greece, Tonarelli, Witty, austerity, pharma 

Pharmaceutical markets across Europe have been badly hit by the economic crisis, with revenues in some countries being decimated by their sales austerity measures.

At the centre of Europe’s wider financial crisis is, of course, Greece. The country has been in recession for five years, and has been on the brink of meltdown for much of that period. 

A default on debts or exit from the euro for Greece was once again averted in early March, but the country’s problems continue to destablise the Eurozone countries and beyond. But even without Greece, austerity measures are being implemented which are hitting pharma’s revenues hard. 

Spain has been delaying payment to the pharma industry for a number of years, and now its regional governments owe the industry tens of millions. Portugal, Italy and Ireland have all made swingeing cuts to spending on new drugs and generics.

However, these local setbacks for pharma do not stay local for long. Many European countries use international reference pricing, which means when these countries have slashed their prices, this automatically triggers a price cut in other territories.

Richard Bergström, head of Europe’s pharma organisation EFPIA says international or therapeutic reference pricing “poses a threat to the long-term innovative capability of Europe and hinders access to medicines.” 

He adds: “This is even more worrying if emergency price cuts under exceptional circumstances such as in Greece lead to automatic and arbitrary price cuts in 15 other Member States.”

EFPIA says the pharmaceutical industry is working with the European Commission, member states and international institutions to ensure that pharmaceuticals “support patient needs in countries in difficult economic times” – but for many health ministries in Europe, prescription drugs are clearly a ‘quick win’ when costs need to be cut.

Figures from the OECD show that European countries spend between 8% and 12% of their health budget on prescription medicines. 

The pharma industry argues that this represents a relatively small proportion of the health service bill. But the difference between spending 8% and 12% could be worth hundreds of millions of euros for a European health service, and most budgets are now under severe downwards pressure. 

Analysts at Business Monitor International, say pharmaceutical sales to pharmacies and hospitals declined 2.2% in France, 3.1% in Italy and nearly 9% in Spain.

GlaxoSmithKline’s chief executive Sir Andrew Witty recently spoke out against the trend. He says Europe’s drug budget cuts are undermining the industry and not addressing the biggest cost pressure in healthcare.

“You could shut down the entire European drug industry, you could have every drug for free – you’d still have 90% of the problem you started with.” Witty and other pharma leaders acknowledge that spending on medicines is a lot easier to cut – and more politically and socially acceptable – than making doctors and nurses redundant.

Greece

The European Union, European Central Bank, and International Monetary Fund are now playing a dominant role in managing Greece’s debts and have been dubbed the ‘troika’. This group is directing in detail how the country should make its savings in public spending, and this includes spending on medicines. 

At the beginning of March, Greece’s parliament approved longer pharmacy opening hours and cuts to drugs spending as part of a package of healthcare reforms. 

One of the most draconian measures is a proposal for delaying the launch of new medicines into the Greek market.  Insurance funds will have to wait until new medicines are reimbursed in 8-10 EU member states before they can be reimbursed in Greece. 

Greek newspaper Ta Nea reported that the initial proposal by the troika was to delay entry to the Greek market until  a drug was reimbursed in 18 member states, but this figure was negotiated down to 8-10 by Greek health officials. Oncology medicines are also exempt from the plans. 

The measures were included as part of a wide range of public spending cuts in return for a €130 billion international bail out package. The moves are part of so-called ‘prior actions’ which Greece needed to implement ahead of a budget reduction of €3.2 billion and a steep cut in the national minimum wage.

Greece has been under intense pressure to honour its pledges, amid growing scepticism about the will of prime minister Lucas Papademos’ government to push through unpopular changes. 

There has been growing concern that the draconian austerity measures will deepen the country’s recession, and make it impossible to cut its public debt, which currently stands at 160% of GDP.

The Greek parliament voted to limit spending on drugs by state pension funds and mandate generic drugs prescriptions to cut costs. Greece spends some €25 billion a year, roughly 10% of its GDP, on health and controlling a bloated public health system, has been a priority.

Resistance to the measures among medical unions has been fierce – campaigns have included a poster attacking health minister Andreas Loverdos as a ‘gravedigger’ plastered over pharmacy shop fronts.

Generics currently account for just 18% of the market in Greece, one of the lowest levels in the EU, compared with 80% in Germany. The latest measures aim to lift the Greek total to 50%, in line with the rest of Europe. There is little doubt that Greece’s spending on prescription medicines over the last decade reflect a wider indiscipline in public sector spending.

Total public and private spending on medicines in Greece hit €4 billion in 2011, equivalent to 2.4% of GDP. This is the highest level in any industrialised country, Greece spends even more than the US and Canada in terms of per capita spend. 

Nevertheless, while disinvestment is appropriate, the Greek market’s collapse into chaos and the threat of debt defaults has been damaging for the health system, patients and for the pharma industry. 

Italy

Former Economics lecturer Mario Monti was appointed prime minister of Italy last November after Silvio Berlusconi was finally forced out of office. 

Known as ‘Il l Professore -‘The Professor’’, Monti is also minister for the economy and finance, and has promised to bring Italy’s debt under control. Business Monitor International ranks Italy as eighth out of the ten among western European nations in terms of its attractiveness to pharma.

Italy’s public debt amounts to 119.1% of GDP, poor infrastructure and a lack of competitiveness indicate that the country will remain one of the region’s laggards over the forecast period. 

Monti’s government is determined to push through reforms, and its serious approach to reducing debts has helped allay the worst fears of investors about the country.

Italy’s pharmaceutical sector is set for more lean years as healthcare spending is a prime target for government austerity measures. These will add to the €30 billion ($39 billion) emergency budget approved last December by the new government, led by Mario Monti, and to the €25 billion ($32 billion) austerity package approved in July 2010 by Monti’s predecessor, Silvio Berlusconi. 

Among the measures are initiatives for increasing the prescribing of low-cost generics; a reduction in sale margins on class A reimbursed drugs to be split between pharma companies and pharmacists, with the former losing 1.83% and the latter 1.82%; and reimbursement rates for generics, by the Sistema Sanitario Nazionale (SSN), Italy’s national healthcare system, based on their average price in Europe as of 2011. 

Generics blocked

The European Commission recently stepped in to force Italy to change a law which had been blocking generics entering the market. The Italian law prevents generics firms from submitting their marketing authorisation request until the penultimate year of patented drug’s life. 

In January the Commission stepped in, and demanded that Italy change the law, which it said contravened European legislation. If Italy does not comply with the ‘Reasoned Opinion’ within two months, the Commission may decide to refer the case to the European Court of Justice, but Mario Monti’s government is certain to seize the opportunity to cut costs.

The European Generics Association, which first alerted the Commission to the Italian law, welcomed the news. Greg Perry, the EGA director general said: “In this time of severe economic difficulty faced by European citizens and public health authorities, it is of crucial importance that patients can access affordable treatment with no unnecessary delays.

“Delays in access to generic medicines were deemed unacceptable by the pharmaceutical sector inquiry and the economic crisis makes such blocks as patent linkage totally unjustifiable,” he concluded. 

In a recent interview with Il Sole 24 Ore, Italy’s leading financial newspaper, Massimo Scaccabarozzi, president of Farmindustria, the Italian association of the pharmaceutical industry, said reforms that favour generics, in particular, will likely have “a devastating effect on brand-name drug manufacturers.”

For this reason, many of the key players in the industry will consider investing elsewhere. Up to 165 Italian and foreign pharmaceutical manufacturing plants could be moved abroad, says Scaccabarozzi, resulting in some 20,000 workers in the industry losing their job. 

Austerity squeezes spending

While the government says austerity measures will help rescue Italy’s economy, some fear it will stifle growth. Farmindustria says the cuts are undermining the sector, which it argues is central to the country’s economic growth, thanks to its export capacity. 

Italy’s spending on medicines accounts for 17% of the total health expenditure, higher than many other European nations (Germany spends around 15%, the UK around 10 per cent). 

By April this year, as part of the Berlusconi measures from 2010, the industry is required to give the government €1 billion, as a contribution to rescuing Italy’s economy.

Farmindustria has been working closely with the government and AIFA (the Italian Medicines Agency) to find ways to fulfil the monetary obligation without too heavy consequences for pharma companies. 

The industry association says it will fight to protect the sector from needless damage inflicted by austerity measures. It is also hoping to create the foundation for the industry’s longer-term future, in spite of the current unfavourable political and economic climate. 

Farmindustria says it is ready to make an agreement that guarantees the development, and prevents the weakening of a sector that Italy needs to grow.

Farmindustria’s concerns fit well with analysts’ views and predictions. It looks as, with its austerity manoeuvres, Italy is trying to lower its debt – a whopping €1.8 trillion ($2.5 trillion) – at the expenses of its economic growth. But, what this will do is drag the country deeper into debt; it will not push it out of recession.

Some experts say the country has a better chance of paying off its debt by focusing on economic growth, for example, by supporting sectors like the pharmaceutical industry. 

A government growth plan unveiled in January called ‘Grow Italy,’ comes after four consecutive austerity packages. It includes measures aimed at increasing by 5,000 the number of pharmacies, and allowing pharmacists to apply discounts on certain medicines.

But Italy has had a poor record of growth in recent years. In the last ten years, the country’s annual real GDP growth rate has been near zero. To eliminate its debt, Italy needs to achieve GDP growth of more than 6% – a change that some analysts consider unlikely.

Falling revenues

The situation is causing great concern among Italy’s pharma companies. Menarini is Italy’s largest home-grown pharma company, and has five manufacturing plants in Italy and four abroad, and generates annual sales of about €3 billion, more than 60% of which comes from foreign markets. Italy’s other big player in the industry is Recordati, and major companies include the Italian Chiesi Farmaceutici and Zambon.

Recordati, for one, is feeling the pinch in its home market. In 2010, despite a 0.1% increase in pharmaceutical sales abroad, the company’s sales in Italy dropped by 4.2 per cent. 

Another major problem is the increasing number of Italy’s state hospitals that are struggling to pay their medicines bills. A full 80% of Italy’s cancer units are insolvent, according to data released last November by the Italian Association of Medical Oncology. 

Painful scenario

As for the impact on the Italian healthcare services, to date, the various austerity measures appear to have worsened an already difficult situation. Public hospitals in Italy already had over-stretched budgets and limited resources, and have already had stricter administrative control applied to spending. Hospitals say they are facing shortages of even the most basic supplies such as gauze and alcohol.

Dr Andrea Bedei, head of ophthalmology at San Camillo Hospital, Forte dei Marmi, Lucca says consequences for patients are easy to predict: longer waiting lists and higher out-of-pocket expenses. 

Bedei says: “The government’s course of action may be justified by the need to reduce the country’s debt. But it certainly makes it more difficult for us to provide patients with the best possible care. Our national healthcare system cannot afford, for example, to pay for supplies and materials that would allow for a more widespread use of the latest technological advances in medicine to the advantage of patients. If this situation persists, most likely, there will be the need to find alternative solutions, including public-private partnerships.”

Spain

Spain elected a new centre-right government in November, which has swiftly announced new austerity measures. New spending cuts and tax rises have been announced to cut the public debt, with a target of €16.5 billion savings for 2012. 

Spain’s regional governments control budgets for health and education, but have gone deep into the red following the collapse of revenues from construction and property. The Spanish government says it is committed to repaying the money owed to pharma companies by the country’s debt-laden regional governments.

Spain’s pharma industry group Farmaindustria has asked for state-guaranteed securities from regional governments to cover €5.83 billion ($7.47 billion) in unpaid bills for drugs supplied to public hospitals. 

Health minister Ana Mato has promised the industry that the government will create a stable environment, but still stressed the need to reduce spending on medicines. IHS Global Insight reports that Spain cut its spending on medicines by a record 8.8%, thanks to its austerity package and three cost-cutting Royal decrees.

Spain spent €11.1 billion ($14.4 billion) on medicines in 2011, amounting to a saving of €1.4 billion on the previous year. This continues a decline in pharmaceutical spending in the country that began in 2010 when pharmaceutical expenditure fell 2.3 per cent. 

A Royal Decree in 2011 imposed a new system of prescribing by active pharmaceutical ingredient, thereby making it easier for generics to be used. This has had a major effect on spending, but has also hit pharmacies and pharmaceutical companies hard.

According to the Ministry of Health, growth in the number of prescriptions volume increased just 1.62% in 2011, in comparison to 2.54% growth in 2010 and 4.94% growth in 2009. The austerity measures have proved less effective in bringing down prescriptions costs in hospitals, however. These costs are estimated to have reached €5.8 million in 2010, with expenditure rising 55% in the 2008 – 11 period. 

Ireland

Another of Europe’s most indebted economies is Ireland, and here too, the industry is facing steep cuts to its prices. Spending on medicines had been growing rapidly during its economic boom, but the government is now seeking to peg these costs back. 

The Irish Pharmaceutical Healthcare Association (IPHA) says the government has reneged on agreements on new medicines after the industry had already delivered savings of €240 million. The industry says the savings were agreed with the condition that the current pricing agreement  would continue until 1 March. 

The pricing agreement allows drugs which have been approved by the regulator and have passed health technology assessments to be added to the drug reimbursement list.

“It is not working at all,” says David Gallagher, president of the IPHA and country manager of Pfizer told the Irish Times at the end of February. “Hardly anything has gone in [to the reimbursement list] in the past six months. Until that is resolved, it is difficult to sit down and discuss a new accord.” 

It is understood that the Department of Health has sought further savings of €112 million in the new drug pricing arrangements. 

Emerging markets

While the litany of cuts to spending across European markets paints a bleak picture for the pharma industry, it does not herald a complete collapse in demand. Indeed, research by the OECD suggests that while prices fall back during times of recession, these losses are more than offset when economies return to growth. 

Nevertheless, the pharmaceutical industry has long accepted that Europe will not provide it with the kind of strong growth its shareholders demand. That’s why the sector is investing so much in emerging markets, such as Russia and Turkey, China and India.

Europe could suffer in the long-term if the environment proves to be unwelcoming to the industry, which has many cheaper options for R&D, and faster growing markets elsewhere in the world.