This article appeared in the September 2007 edition of INNsight

The German Drug Reforms – a fatal blow to the German industry?

At the start of August, the pharmaceutical press announced that Astellas was streamlining its operations across Europe, particularly in Germany where it is dismissing staff in its sales force and drug development.

What is the relevance of this to the generic world? The relevance lies in the root cause of its decision – the German drug reform that came into force in early 2007.

The German government decided some time that, like all other healthcare providers, it and the sick funds that provide healthcare cover in Germany, were paying too much for drugs. Like all other governments it was trying to find some way of getting something for nothing if possible or, if not possible, getting it as cheaply as possible.

To this end, it introduced several reforms to the way that healthcare would be paid for. In fairness, it does have a big bill to pay – Euros 143.6 billion in 2006 – but not all of this was due to medicine costs alone.

The details are way beyond the scope of this article, but it is worth focussing on the particular issues of pricing and generics.

An innovation that the Drug Reform – with the impressively catchy title of “GKV-Wettbewerbsstärkungsgesetz” – introduced was compulsory price cuts. It is these heavy price-cuts that have persuaded a number of companies to freeze their investments in Germany or even to pull out of the country.

Astellas is not alone in abandoning Germany – even the local company Merck-Serono has elected to move its headquarters to Geneva after the merger of the two companies. In particular, the novel concept of “value for money” or cost-benefit analysis has entered the picture. A mechanism like this has already existed for some time in the UK in the shape of “NICE” and presumably the German authorities have looked at it and liked what they have seen. It is this new value for money approach that is really causing some problems for branded companies because some of these insurance funds will be bale to fix maximum prices that they will pay for specific products.

Companies will now have to enter into negotiations with the “Krankenkassen” sick funds that provide cover for most of the population to agree supply contracts. This requirements does not just apply to the multinational suppliers of high-priced brands, but also to the generic companies

The generic companies are now also in the position of having to negotiate prices, rebates and discounts with the sick funds or else being left out of the supply chain.

Some statistics from the German generic association ProGenerika show that generics saved the sick Funds the sum of €2.41 billion in the first half of 2007, but the effects of the reforms have only shown up in the latter part of this period.

ProGenerika quoted some figures from IMS relating to the specific case of Simvastatin generic. In March 2007 the top three (Ratiopharm, Sandoz and Stada) had a 50% market share for this product – in April this fell to 28%. The reason for this was the fact that some of their competitors had entered into deals that were more attractive in terms of discounts and rebates to the Sick funds than the deals offered by the Big Three.

The price competition is continuing and the pressure is increasing. More figures from ProGenerika illustrate this for selected molecules (data from IMS).

Product	March 2006	November 2006	April 2007	Change 03/06-04/07
Omeprazole	€0.72	€0.49	€0.47	-35%
Ramipril	€0.18	€0.08	€0.05	-73%
Citalopram	€0.54	€0.38	€0.31	-43%

These figures are individual unit prices per tablet at ex-manufacture prices and show clearly how much even generic prices are under pressure in Germany.

It comes as no surprise that the pharmaceutical industry is under attack by a government trying to reduce healthcare costs as this tends to be the normal practice whenever saving are needed. Attacking the people who make a profit out of your grandmother’s illness is always good politics and plays well with the crowds.

What is more surprising is that the German generic industry is also a target for price-cutting measures since there is no doubt that it does contribute to reducing healthcare costs. Its critics point to the fact that German generic prices, even if significantly cheaper than the brand that they replace, are generally higher than those of the same product in other EU countries.

It is probably this fact that will persuade the generic companies to not despair of the German market like their branded competitors because there are still reasonable margins on the generic products that they sell, particularly when compared to cut-throat markets like the UK.

If you have any questions or comments

on this article, please feel free to contact me.

peter@interpharm-consultancy.co.uk

www.interpharm-consultancy.co.uk