Good! - Drug Companies Feel Price Pressure - NYT

Budget cuts mean that many European governments are willing to pay less for pills, but new laws in some countries are also putting pressure on companies to prove the effectiveness of their drugs or see them dropped off the coverage list — or, at the very least, covered at a lower rate.

And price reductions in Europe can have a ripple effect. Profits from sales in emerging markets may also fall, since governments in emerging markets refer to the prices set in Europe to determine their own.

That would particularly hurt European pharmaceutical companies, which have been quite successful in emerging markets over the past five years. U.S. companies, by contrast, do not rely as much on overseas revenue because of their large domestic market.

Before the recent wave of austerity measures, drug companies faced relatively low resistance from European governments when they set prices and introduced new products. Countries with strong industrial bases, like Germany, France and Britain, allowed companies the most flexibility when they set prices.

“The euro crisis is forcing governments to restructure how they think about medications,” said Richard Bergstrom, director general of the European Federation of Pharmaceutical Industries and Associations.

Since the prices that governments are willing to pay are falling, drug companies are recalibrating their business strategies and considering economic factors earlier in the process of developing medicines. They are also cutting down on the number of new drugs in which they invest research money.

On average, West European countries spend 8 percent to 12 percent of their gross domestic product on health care — a proportion that has remained stable despite the crisis, according to the Organization for Economic Cooperation and Development.

The pharmaceutical sector, though, is being hit disproportionately hard because cutting prices for pills is a quick way to reduce spending, compared with alternatives like cutting hospital funds or restructuring health care systems.

During the past year, pharmaceutical sales to both pharmacies and hospitals declined 2.2 percent in France, 3.1 percent in Italy and nearly 9 percent in Spain, according to Business Monitor International, a company in London that follows the pharmaceutical industry.

Analysts say that it is difficult to predict exactly how badly profits will be affected in the next financial year. Other factors, like expiring patents, mean that each company’s profit will be affected differently.

Still, “the austerity measures themselves are going to affect everyone,” Mr. Bergstrom said.

And the numbers are not encouraging.

Novartis, the Swiss pharmaceutical giant, posted a 7 percent decline in net income for 2011 despite a 16 percent increase in sales. AstraZeneca, based in Britain, posted full-year revenue for 2011 of $1.34 billion, down 2 percent from 2010. In 2011, net profit for the company’s West European market was down 11 percent from the year earlier.

Kaushal Shah, an analyst with Business Monitor International, said the clearest way to see the effects of the euro crisis on pharmaceuticals was in job cuts. AstraZeneca plans to cut more than 7,000 jobs in Europe, in addition to the 21,600 positions it has eliminated since 2007. Novartis, a largely European company, will cut nearly 2,000 jobs in its U.S. bases this year. Pfizer, the U.S. giant, cut 6,000 jobs last May.

In times of hardship, pharmaceutical companies usually lay off sales representatives and protect their research and development departments, which spearhead the creation of new drugs. In this crisis, even R.&D. posts are getting the ax — 2,200 of the AstraZeneca cuts are in the research sector — as companies strive to make these departments more efficient so as to cut costs while maintaining a pipeline of new products.

“2011 is the first year recorded where R.&D. is down in the industry as a whole,” Mr. Bergstrom said.

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via nytimes.com

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