Drug firms demand cure for sector’s ills

Date: 06/01/2000

By Peter Chapman

BRITISH drugs giant Glaxo Wellcome is stepping up its legal challenge against a regime which many companies claim is killing the EU's once-predominant pharmaceuticals industry.

The firm took part in behind-the-scenes hearings with EU anti-trust experts last month in a bid to overturn a July ruling outlawing its sales practices in Spain. Its target was a 'statement of objections' delivered by former Competition Commissioner Karel van Miert last summer in which he warned that Glaxo could not charge distributors a separate, higher price for drugs they intended to sell outside the Spanish market, where government controls keep prices very low.

Van Miert said the restrictions - which are mainly intended to thwart 'parallel imports' by traders to wholesalers in the UK, where drug prices are much higher - fell foul of EU competition rules. Glaxo, he warned, could not ignore the EU's single market rulebook and must give its Spanish distributors a free rein or risk heavy fines.

If the former Commissioner's findings are confirmed in the institution's final ruling on the case, which was launched in response to a complaint from the European Association of Parallel Traders, it would have wider repercussions for the whole sector.

Industry critics claim that Glaxo's problems are a symptom of a EU drugs market riddled with national idiosyncrasies which make a mockery of the Commission's demands.

In most member states, governments intervene to a greater or lesser extent in the drugs market, negotiating prices for both new prescription medicines which are covered by patents and 'old' drugs whose patents have now expired. In Austria, Belgium and Greece, there are even controls on the prices of 'over-the-counter' medicines such as throat lozenges and indigestion treatments which do not require a prescription.

Critics argue that since there is no single market for drugs, why should the Commission slavishly impose internal market rules on firms trying to thwart the parallel traders?

Glaxo claims that profit margins in lower-price countries are not sufficient to fund research into new drugs, especially when parallel traders undermine firms' returns in member states where governments acknowledge the huge cost of R&D by setting higher prices. "We have made our position very clear to the Commission," says company spokesman Martin Sutton.

Commission officials say Van Miert's preliminary ruling could be overturned if the firm's arguments are compelling enough. But the omens are not good for the UK drugs giant.

"It must be said that the Spanish authorities, which set the price for drugs marketed in Spain, do take into account the research costs of the drug at issue and future R&D funding," said one EU anti-trust expert. "Moreover, Glaxo Wellcome actually filed for approval and pricing of their drugs in Spain, submitting all the relevant information. If it were not worth their while, the chances are they would not be selling there."

Whether Glaxo wins or loses its appeal on legal grounds, the firm has won the support of many other industry players in its campaign for an end to the anomalies in the Union's drugs market, which fails to reward firms for the €500 million it takes on average to research and develop each new drug and penalises them when they try to protect their interests.

"There are two ways we can go. Either markets can be liberalised like in telecoms or we say to the Commission 'stop applying your religion so rigorously'," says Brian Ager, director-general of EU drugs lobby group EFPIA.

Against this background, he argues, the competitiveness of European industry is declining vis-à-vis the US, where the home market for American companies is unfettered by controls.

Meanwhile, he predicts, consolidation will continue as even the biggest firms realise they must merge to pool their huge R&D bills. "In 1997, the US outstripped us in delivering new molecules to the market. R&D in the EU has doubled over the last ten years; in the US it has tripled," he added.

Companies hope that the arguments over the Glaxo case could have a positive side effect, reviving a debate which has languished since former Industry Commissioner Martin Bangemann stepped down last year.

Before leaving office, Bangemann held a series of high-profile 'round table' events with industry and member states to seek a consensus on phasing out price controls for drugs.

Solutions mooted at the last meeting in Paris included a UK plan to reduce controls for 'off-patent' medicines and an end to intervention in over-the-counter drugs.

The most innovative firms argued that this would naturally lead to lower prices for these medicines and said the resultant cost savings would give national health authorities the 'budgetary headroom' to pay a 'fair price' for drugs still covered by the 20-year patents, which protect inventions for 12 years of research and development and eight years of sales.

But the bid to reduce controls, which would also allow firms to stop the parallel traders from undermining their returns, foundered amid opposition from those member states - mainly in southern Europe - which intervene most to keep drugs prices in their markets as low as possible.

Less formal talks between member state representatives, Commission officials and stakeholders are continuing. But much depends on whether Bangemann's successor Erkki Liikanen decides to launch proposals to shake up the sector, which employs nearly half a million EU citizens. "The last attempts at the end of 1998 did not prove very successful and if we want to go in a more promising direction, we have to be more inventive," said one Liikannen aide.

Industry insiders acknowledge that without the consent of member states, attempts to introduce even modest changes would be doomed. But if the reforms stall, warns EFPIA's Brian Ager. the prognosis for EU firms is distinctly gloomy. "If I was in the US Trade Representative's office, I would be clapping my hands," he says wryly.

British drugs giant Glaxo Wellcome is stepping up its legal challenge against a regime which many companies claim is killing the EU's once-predominant pharmaceuticals industry.