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This article was published in the XIP newsletter for June 2005
The generic pricing squeeze
Everyone who works in, or with, the pharmaceutical industry knows that it is often perceived by the public as selling overpriced products of dubious therapeutic value. Actually, that is probably not true since if the leaders of the industry truly appreciated that fact, they might divert some of the industry’s mighty marketing and PR prowess towards improving the industry’s public image.
So far, however, they have not done so and hence the generally negative perception of the industry remains. The result of this unenthusiastic view is that when governments feel that it is time for them to be seen to be doing something about healthcare costs, beating the pharmaceutical industry over the head about its pricing is seen to be a vote winner.
Subconsciously, many individuals probably feel something along the lines of “my poor grandmother is ill and somebody is making a profit out of her illness”. And so when the industry is under attack on the issue of prices and profits, few people will rush forward to defend it.
The US pharmaceutical industry in particular is open to such accusations. Comparisons between prices in the US and elsewhere generally show that it has prices that are significantly higher than in other countries. Some recent evidence to support its critics comes, surprisingly, not from consumer groups or politicians in the US but rather from the UK’s Department of Health. In March 2005, it issued its Eighth Report on the PPRS (Pharmaceutical Price Regulation Scheme) that is used to control pharmacy company profits in the UK.
The report includes a table comparing ex-factory prices for a basket of products in the UK to those of other countries. The products involved were the top 150 branded products in the UK that are also generally available elsewhere. Taking the 5-year average for the period 1999 – 2003 with the UK as 100, the USA came out as 210! Within Europe, Germany was next at 94 followed by Austria at 86; Spain was the lowest at 74. For those who are interested, the full report is available at www.doh.gov.uk/pprs.
At this point, generic observers may say “very interesting, but so what?” Well, firstly it shows how the US market is ripe for price controls of some sort and secondly when these price controls do arrive they will probably also hit the generic industry as well. If the US Congress for example decides that pharmaceutical process should be marked down by, say, 25% then the starting point for generic introductions after patent expiry will similarly start 25% lower.
What will be worse for the generic industry though is if Congress takes note of what has been happening within certain of the European generic markets that were the subject of last months’ article. Reference prices at first glance seem to be a relatively good idea for cost control – set an upper limit for the price of a particular product and leave it to the pharmacist’s discretion to decide who should supply the product that he dispenses.
However, the manner in which some countries have sought to implement these schemes have proved quite painful to the generic industry in those markets. When combined with generic substitution as has become widespread across Europe, many governments are effectively putting a price squeeze not just on branded product prices but also on generic prices.
Take the example of Germany where the “Aut idem” (Latin phrase meaning “or similar”) regulation is constantly pushing prices lower and lower. It is a hideously complex piece of legislation (memorably entitled “Arzneimittelausgaben-Begrenzungsgesetz”) but in essence requires a pharmacist to dispense a generic from the bottom third of a reference price group, irrespective of which product in the group has been prescribed. The result of such a scheme is that products priced above this level are excluded until the government publishes the next reference price tables.
The companies whose products are excluded in one round will therefore reduce their prices in order to be included in the lower part of the price table next time around. The inevitable result of this is a constant erosion of prices with the consequent negative impact on the industry’s profitability. At the time when the scheme was first introduced in 2002, the local industry body DGV spoke of its fears that this would lead to the demise of some smaller companies with only a handful of survivors which it described in a press release in August 2002 as “the last five Mohicans”.
It is perhaps understandable that the government of a country that sits in the upper levels of any price comparison would want to introduce a price control mechanism that includes generics. It was however more difficult to understand when something similar happened in Spain whose prices were already low even before the government introduced comparable measures. A combination of reference prices and mandatory substitution is making the newly established Spanish generic industry fearful for its future, and similar control methods are hurting the infant industries in France, Italy and Portugal.
In Spain, Miguel Barbero, the Director General of the Asociación Española de Sustancias y Especialidades farmacéuticas Genéricas (AESEG) spoke of his concerns in a press release of 20th April 2005 following the recent implementation of Annexe III of the Reference Price Order and a 7% generic price reduction. He wrote ”this situation could lead to the disappearance of the sector by the end of the current legislature”.
Perhaps his fears are exaggerated, but perhaps he is correct and the existence of the industry is genuinely under threat.
Whichever is the case, there is a high probability that US legislators are keeping an eye on what is happening in Europe. If they decide to copy some of the cost control systems that have been introduced across Europe the impact on US generic company profits will be painful.
This then leads on to another question. What will happen to members of the US generic industry if they are also subjected to a price squeeze at the same time as ever more low cost producers are entering the US market?
If you have any comments or questions on this article,
please contact me on peter@interpharm-consultancy.co.uk
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