New Europe: always read the label

pharmafile | July 21, 2004 | Feature | |   

In May 2004, ten emerging economies across the east of Europe became members of the European Union. This might seem like a golden opportunity for the pharma industry to harmonise its marketing activity across a bigger swathe of the continent. But is this the right approach – and to what extent will it be possible anyway?

The more or less enthusiastic way that the people of the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Slovakia, Slovenia, Malta and Cyprus voted for EU accession, and the warm welcome they received, suggested an opportunity to bring their relatively undeveloped economies in line with the more prosperous existing 15 members and for businesses to take advantage of a suddenly enlarged single market.

The long-term prognosis is that expansion will turn the EU into one of the world's most powerful trading blocs. But will the route there, especially for our own industry, be straightforward, or is it littered with pitfalls?  

The pharma industry can simply expand its existing EU marketing model proportionately, and hope to continue as before. The ten new countries don't just mean millions of potential patients – they bring significantly different types of economies, cultures and markets, and the industry has some big changes in mindset to make if it is to take advantage of the opportunity that expansion presents.

Expansion doesn't just mean an amorphous mass of 450 million people opened up to the delights of free trade. It also means that the developed EU members are opening themselves up to unfair or at least unequal competition from low-wage, low-cost, and in some cases minimum regulation economies.

How can disparate pricing regimes be sustained where there is free movement of goods, without encouraging mass parallel importing? Will the EU achieve regulatory consistency and how quickly? Even if it does, should the industry actively market throughout Europe, or does it risk compromising its pricing structures in the existing EU markets? If it decides not to, what are the legal and ethical implications?  And, given the strength of generics in many of the relatively poor health systems which have joined the EU, how can branded products defend their positions if generic equivalents start to nibble away at their markets?

These are questions which have to be answered if pharma companies are to take on the pan-European marketing challenge.

Even those companies who have no intention of marketing their products in the accession countries cannot afford to bury their heads in the sand. The enlarged EU is sure to have a profound effect on every market across the continent, both directly and indirectly, and even businesses focusing simply on local markets will not succeed without considering the pan-European dimension.

For those seeking to maximise the opportunities the new EU brings, how far should their marketing strategy become pan-European? That is the key question which must be answered if the challenges of taking advantage of one of the world's biggest markets are to be faced.

It important to point out that these are not entirely new challenges. The ten accession countries have not been a totally closed book to the industry up until now – to a greater or lesser extent they are all existing markets. So what has changed?  The answers lie in regulation, pricing and access to generics.

Regulation

The centralised market authorisations procedure should now apply to all 25 member states (although there will be some transitional arrangements). This means that, provided the new countries comply, products which have national authorisations can become available right across the EU, provided they meet EU requirements.

To some extent this removes the ability for the pharma industry to market selectively within the EU, and will force it into a pan-European approach.

Getting to the stage where the existing 15 members have agreed and implemented a harmonised regulatory environment has been a long, drawn-out process, that is still not working as well as it should! But the cultural and economic gaps which exist between existing and new members is wider still so how realistic is it to expect rapid or effective harmonisation?

Most of the accession countries will struggle to comply immediately, and four (Cyprus, Lithuania, Poland and Slovenia) have already negotiated transitional periods, whereby authorisations which do not comply with EU law will nevertheless remain valid within national borders. For industry marketers trying to build business within these countries, there will be a period of unequal competition where non-compliant products will be protected within individual markets.

Apart from these transitional arrangements, there is sure to be a dropping by the wayside of products which currently have national authorisation in the accession states, but which do not comply with EU law. This gives the industry an opportunity to challenge competitors immediately.

Pricing

The area where a pan-European approach really falls down is when you stop to consider the radically different pricing regimes across the continent. The accession countries in particular have much poorer health systems, which have been protected by a harsher pricing regime. These countries are going to be neither willing nor able to raise investment or reimbursement levels and this could threaten the EU pricing regime.

According to Datamonitor, government healthcare spending in the accession states is two and a half times lower than in the existing 15 member states. If all states reference their pricing structures against the EU average, there is irresistible pressure for that average to fall. Volumes may rise, but revenues could actually fall, with the  increase in volumes insufficient to cover reduced profit.

But without some kind of consistency in pricing regimes, an open invitation exists for the parallel importers to clean up. In practice, there is little the industry can do about this, if it is not prepared to see prices drop significantly right across the EU. Once again, the pan-European approach seems to have a major drawback.

Generics

The disparities in wealth levels between the 25 EU member states has inevitably led to individual health systems finding ways of coping with this wealth deficit. The most common way they have managed to do this is by embracing generic products at the expense of branded ones.

Separation between the two has been easier because many of these economies were outside the free trade area of the EU, and therefore the industry has been able to maintain a kind of medical apartheid to protect its branded markets. Taking a pan-European approach threatens this position and branded manufacturers will face an escalating challenge from generics.

Although an expanded Europe has brought this problem to prominence, it is not new, even within the existing member states. In fact, generic substitution already exists to a greater or lesser extent in most European markets. Expansion will probably have the biggest impact on those major markets – France, Italy and Spain – where this trend has been least evident; marketers in these countries will therefore have to adapt most.

Moreover, this change is likely to be welcomed by health systems right across Europe. Whereas individual countries have felt relatively powerless to widen the scope of generic prescribing on a country by country basis, it is likely that governments will welcome the opportunity to trim health spending while blaming the resulting revenue loss for the pharma industry on EU expansion.

The pharma industry has traditionally been able to use extended patent exclusivity periods to protect against generic substitution. In this area there is wide disagreement across Europe, and the pressure for shorter exclusivity periods is likely to form part of European marketing thinking into the next decade.

This pressure is already coming from the accession countries: in September 2003 the health ministers of all ten signed a document calling on the EU to step back from extending the data exclusivity period to 8+2 years, claiming: "the proposed amendments will influence significantly the fragile national health systems and the public health situation in our countries".

The obvious line of defence is to bring branded and generic pricing structures closer together. But is the industry willing to pay this price to defend its market position? Does it have a choice? As with each of the three challenges outlined above, the solution needs to be part of an integrated marketing approach.

The marketing approach

The pricing issue is going to drive the question: Should we even be marketing our products in certain countries even if they are full members of the EU? Is a pan-European approach actually appropriate for such an economically and culturally diverse free trade area?

Those companies with both branded and generic arms are in a good position to pursue individual markets via the generics route, effectively creating a dual-pricing strategy to protect their branded markets. How sustainable this proves to be in the long-term, once governments get wise to what is going on, remains to be seen. But it is a feasible approach up to the medium-term.

While regulation is not fully harmonised, another option might be for companies to develop locally-branded products with local authorisation, which will not compete in its branded markets. But, again, this is only a short-term proposition, and still leaves the issue of parallel imports.

It is likely that rather than adopting a true pan-European approach, the answer lies in 'clustering' – dividing the continent into markets which are similar in size, wealth and attitude (much as a local market might be segmented).

Although the lines of demarcation between such clusters can only be artificial, with the right approach they can be built up. What happens to the wholesaling situation, and whether it becomes truly pan-European, will have an impact on the success of such an approach.

Any decision not to market a particular therapy in a particular market also has legal and ethical consequences. Attempting to deny members of the EU access to specific products will not sit well with politicians, and accusations of 'money-grabbing pharma industry' can easily be imagined. In theory EU rules mean reverse parallel importing could be used to get round the problem by individual countries but at a cost they probably can't afford.

The good news

For those who get it right, the expanded EU will  offer massive opportunities in the long-term. It is clear that membership is going to have a beneficial effect on the ten accession countries.  As they grow steadily richer, their populations will come to expect better levels of healthcare, and their health systems will have more resources to deliver it.

Cynics might argue that the developed countries (with one or two exceptions) have yet to grasp the positive affect on GDP of the lower morbidity and mortality that increased healthcare spending brings, so it's unrealistic that the new countries will get to grips with that concept too quickly either!

The way forward could be to move from regarding governments as the key customer, given that many countries will be unwilling or unable to pay the bill themselves, and instead focus on patients with the ability to pay, and drive the market forward in that way.

The free movement of people across the continent will also help to break down cultural barriers, enabling pan-European initiatives to find receptive audiences more easily. Breaking down emotional as well as physical barriers will enable visionary pharma companies to create truly excellent marketing functions, benefiting from the cross-fertilisation of people and processes.

But this will require a new way of marketing – it will emphatically not be a simple translation of the current way of doing things into a bigger market.

The message is clear – successful pan-European marketing will require an open mind, adaptability, and a desire to create and meet new expectations. We just have to hope that the industry marketers are up to the challenge.