European govts become more discerning on drug price cuts

London, Feb 1 | Updated: Feb 2 2006, 05:52am hrs
European governments seem to be swapping a bludgeon for a scalpel when it comes to cutting the cost of medicines.

Drug makers should not expect an end to the overall drive to squeeze prices but there are signs of a more discriminating approach that may actually help big pharma, according to industry executives and analysts. Andrew Witty, head of European pharmaceuticals at GlaxoSmithKline Plc said a growing number of governments are now realizing that healthcare reforms must include rewards for innovation.

There are still a few governments that are very focused on short-term, non-discriminatory cost measures, where they simply cut prices and they dont really care if it is an innovative product or an old one, but they are getting fewer, he told Reuters. There are more and more countries where we are seeing governments get much tougher on the prices of old, off-patent medicines and being prepared to reward meaningful innovation more quickly and more fully. For companies like Glaxo, which relies heavily on sales of newer drugs, that is good news.

Europes numerous generic drug suppliers, however, which have traditionally enjoyed relatively high prices for their unpatented medicines, could be in the firing line. Some big branded drug firms which still sell a large number of older medicines, such as Sanofi-Aventis SA are finding the shift a mixed blessing. They should benefit from better prices on breakthrough drugs but face cuts on old ones. Hanspeter Spek, Sanofis executive vice president of pharmaceutical operations, said French government plans to save 2.8 billion euros ($3.4 billion), or 10%, on its drugs bill would inevitably weigh on the French manufacturer this year. It is clear it will be significant for us, given the strong position we have in France, he told analysts in a conference call this week to discuss the companys 2005 sales performance.

Sanofi-Aventis is the market leader in France with an 18% share and is also unusual among large drug firms in having a generics drugs business. European pharmaceuticals growth is hovering around a 10-year low with sales in the top five markets Germany, France, Britain, Italy and Spain rising just 3% in the 12 months to November, according to IMS Health.

Yet Merrill Lynch believes the worst effects of European pricing reforms may now be over, with Germany in particular showing signs of recovery. Growth in German pharmaceuticals has picked up to 7%, from 1% in 2004, largely as a result of a cut in mandatory manufacturer rebates to the government, the investment bank said in a report this month.