Pharma Industry – pricing crisis looms in 2004

Another crisis on pricing is looming over the European pharmaceutical industry in 2004, according to industry commentators at KPMG.

STEPHEN OXLEY, Head of Pharmaceuticals, KPMG looks at fears for the industry in 2004, focusing on concerns over what will happen if a new reference pricing scheme helps governments to drive down prices to the level of the cheapest generic version. Prices of whole product classes in Europe could collapse and doubts would have to be raised over who would actually bother to invest in future R&D when they are not the ones to see the benefit. The balanced set of recommendations to emerge from the G10 discussions last year left many feeling that 2003 would mark the end of the price disputes between industry and governments which had so characterised the sector in previous years. However, KPMG now maintains that Member State Health Authorities may not be supportive, meaning that 2004 will be dominated by their efforts to further leverage down prices for newer patented products.

There is a growing realisation that for the health sector budget holders at a national level, 2004 will be very much business as usual in terms of keeping prices low. The first indicator of this came as early as the middle of last year in the German Health Reform Plan. At first sight, the most striking feature was the imposition of a 16% discount or ‘ claw back ‘ on sales in 2004 of patented products, which are not covered by the existing reference price controls. However, the measure that hints at a wider EU conflict. This would set an upper limit for the price that will be paid, not just for one patent expired brand and its generic equivalents but for whole classes or clusters of drugs, regardless of whether they are patented or not. Only those products judged to be true or genuine innovations by an expert group – as yet to be constituted – would be exempt. In the face of such reforms, the industry will need to mount a vigorous campaign at the Member State level if it is not to suffer further erosion of its position in Europe and a widening of the price and revenue gap with the US. Germany has not been alone in proposing such measures. Several other Member States, with the notable recent addition of Holland, have proposed that maximum reference prices would be declared for mixed classes of patented and patent expired products, with the reference price set at, or close to, the cheapest generic versions of the patented products. This is often referred to as Phase II, or type II reference pricing. If implemented in a similar manner to Phase I reference pricing in the 1990‘s, KPMG feel that this could trigger the collapse in north European markets of whole classes of patented product prices.

The net effect would be another round of major cost savings for the health systems on big ticket items like the cholesterol reducing statins, at the expense of those companies that had made major R&D investments to bring these products to market. The concept of reference pricing emerged during the 1990s when many Member States, again following the German lead, achieved large cost savings on their drugs bill by encouraging brand generics to enter the market at patent expiry and then dramatically leveraging down the price of the original brand by declaring a maximum ‘ generic based ‘ reference price which they would pay. Companies therefore felt that they had no choice but to cut prices or lose most, or all, of their market share. The net effect was an immediate collapse of originator brand prices to the reference price levels. If this so-called Phase II of reference pricing now takes hold of the industry, it will bring back painful memories for many companies of the early ‘90‘s.

This time though the stakes will be higher as they have to decide whether to cut prices to the reference levels, in order to preserve market share, or to tough it out at higher prices in the hope that co-pay systems might work better this time. Perhaps, in hindsight, some of the optimism brought about by the G10 discussions was misplaced. After all, it is commonly agreed that the process avoided the more contentious aspects of national price controls and parallel trade. However, many were prepared to cling to it as a sign that common ground was being found in the pricing debate. In reality, as argued by FDA Commissioner McClellan recently, the situation is that EU countries have got the balance wrong in the way that state pricing regimes set the balance in rewarding innovators and non innovators; being too generous to the latter at the expense of the former.If the balance is not redressed, then you have to wonder who will be bold enough to make the future investments in R&D if they are not in line to reap most of the reward themselves.