Drugs firms call for lifting of constraints on free market

Date: 15/07/1999

By Tim Jones

UNTIL recently, Europe's pharmaceuticals industry felt vulnerable, as the sector went through a merger wave.

Innovative middle-ranking companies such as Zeneca, Schering or Nova-Nordisk felt as small as Japanese people on the streets of Amsterdam.

Pharmacia linked up with Upjohn, Novartis emerged from the ashes of Sandoz and Ciba-Geigy and, while the Glaxo/Smithkline Beecham liaison may have failed, the trend is clear. The world market for patent-expired ('generic') drugs and standard over-the-counter, non-prescription medicines is overcrowded and needs to shrink.

Each of the mergers, as they were announced, concentrated on freeing up resources for research and development of new, ground-breaking drugs: potential gold-mine treatments for Alzheimer's disease, cancers or AIDS as well as the controversial use of gene therapies.

By last year, the number of European drugs company staff working in research and development had topped 70,000 out of only 485,000 in the entire sector.

Yet, the Union's competitiveness in the field is in long-term decline. Of the 47 new active substances launched on to the world market two years ago, 40% were discovered and developed in Europe compared with 65% three decades ago. In the new industry, biotechnology, Europe is way behind; boasting a mere tenth of the world market compared with more than 75% for the US.

Ask European pharmaceuticals chiefs why this is happening and they will give two answers: the still-underdeveloped entrepreneurial biotechnology industry in the Union and fetters to the free market for marketing drugs.

"In Europe, you cannot increase prices so you have to reduce your costs in a different way," says Jan Leschly, Smithkline Beecham's chief executive. "Our concern is that most of the regulation of the European health-care system is focusing on the drug bill and not on the overall health-care costs."

Since health-care systems in the EU are still national in character, there are massive variations in the price of best-selling treatments, which can differ by as much as 200% between southern countries, where prices are capped, and the North.

This has, in turn, led to the creation of a whole new 'parallel' trade - worth as much as €600 million every year - in popular medicines. If they are registered in both member states, drugs can be bought in one country by a wholesaler and sold to pharmacists or hospitals in another country; a phenomenon which infuriates big drugs companies.

When it released a consultative paper on the drugs price problem last year, the European Commission admitted that such parallel trade "creates inefficiencies because most of the financial benefit accrues to the parallel trader rather that to the health-care system or patient". However, it stressed that "parallel trade can equally be seen as an important driving force towards more market integration".

For this reason, the EU authorities have acted with little mercy against companies which take action to stop parallel trading. In a key test case, German drugs-maker Bayer was fined for refusing to supply its Adalat heart drug to French and Spanish wholesalers who wanted to re-export it to the UK, where the price of the treatment was higher.

Before he headed off to his lucrative retirement with Telefónica, outgoing Industry Commissioner Martin Bangemann was offering companies a 'third way' approach to the pricing problem, which would establish different EU-wide solutions to different sectors.

During an otherwise acrimonious round-table discussion between Bangemann, drugs firms and national health-care authorities in December, all sides agreed to at least consider a new regulatory approach to generic and over-the-counter drugs.

They said "unnecessary restrictions" to the sale of these medicines should be removed and marketing authorisations speeded up, while direct price controls should be removed from prescription-free drugs.

"Greater use of these medicines, if promoted in the right way, can in fact free resources for innovative products, leaving 'headroom for innovation'," said Bangemann after the meeting.

While they talk, market analysts expect there to be at least two more mega-mergers in the sector.