Race to the bottom

Pricing policies threaten pharmaceutical makers.

One of the biggest threats to the pharmaceutical industry in the years ahead will be pricing pressure, which is coming from all directions. In the United States, big pharmaceutical companies have already agreed to certain cost control measures as part of the healthcare reform legislation known as Obamacare.. The companies apparently agreed to these measures in return for the promise of new patients, but a few short years after the law’s passage and before all of the provisions have even taken effect, politicians in Washington have already begun discussing further price control measures. Meanwhile, Indian regulators have caused a fuss by granting a compulsory license to generics maker Natco Pharmaceuticals for permission to manufacture a generic version of Bayer’s lucrative cancer drug Nexavar. Indian authorities argued that the license was necessitated by the high cost of branded Nexavar, which keeps Indian patients from accessing this life saving treatment. Bayer, meanwhile, made the well-worn but true contention that pharmaceutical advancement depends on companies’ ability to charge premium prices for innovative treatments.

Lately the debate about proper pricing for pharmaceuticals has shifted to Europe, where drug makers’ profits are under attack from multiple angles. As part of the ongoing debate concerning the best way to rein in spending, many countries are looking at cutting drug prices as a source of savings in government budgets. In no country will these new price controls have more effect than in Germany; as much for the country’s leading role in the European economy as for the lost revenue. Due mostly to its economic strength, Germany has maintained pharmaceutical prices that were relatively robust when compared with its European neighbors. After years of debate, though, Germany has begun switching from a policy that mostly allowed free pricing towards implementation of a new regime that weighs the costs and benefits of each drug, similar to that of the UK’s National Institute for Health and Clinical Excellence (NICE).

In addition to looking at the potential clinical benefit of any new medicine, German regulators will also consider the price for each drug in neighboring countries. Germany’s great wealth means that most of its neighbors have weaker economies, making them a poor benchmark for prices. Indeed, many of these countries look to their larger neighbor to take the lead on pharmaceutical pricing. These ingredients could quickly lead to a race-to-the-bottom for drug prices as countries push each other lower and lower. Germany’s new pricing policies have already claimed at least one victim – diabetes patients in Germany will not have access to a promising diabetes treatment. Wary of the threat of price controls, and deterred by rules for defining the proper comparator, Eli Lilly and its German partner Boehringer Ingelheim decided not to launch their new drug Tradjenta (linagliptin) in the German market. While regulators are working out bugs that may lead to more straightforward pricing in Germany, the overall effect will be the same – consistent lowering of prices.

The race to the bottom in pharmaceutical prices has already caused unintended consequences, spawning an army of carry-trade speculators trying to buy drugs cheaply in one country for sale in another.In the UK, for example, regulators have a reputation for insisting on drug prices that are lower than in neighboring countries. This has led to export of drugs from the UK into neighboring countries where they are sold at premium prices. This practice has already led to shortages of some important drugs in the country, prompting the All-Party Pharmacy Group (APPG), a trade organization, to urge the government to take action. Although the dire drug shortages cited by the APPG are disputed, the potential clearly exists for patients to be denied life-saving medicines. The same problem is manifesting for different reasons in Greece. Due to the slow-motion collapse of the Greek economy, pharmaceutical prices have been slashed dramatically. This has been done to allow people to keep access to their medicines without further bankrupting the government. The unfortunate and unintended consequence of the price cuts is a very lucrative carry trade for pharmaceutical wholesalers.

Amid the clear need for national governments to control healthcare spending, it is unfortunate that wholesalers and distributors are siphoning off pharmaceutical profits. While pharmaceutical companies can justify their high prices with the need to conduct expensive research, the carry trade directly detracts from this goal. Society tends to hold healthcare providers to a higher standard than most capitalists, making the bald taking of profits from unhealthy people somewhat unpalatable. As a result, the European Commission has announced the beginning of an investigation into pharmaceutical parallel trade. Considering these factors, it appears that international pricing pressure and its consequences will be a major area of concern for pharmaceutical companies into the foreseeable future.

Dr. Jerry Isaacson is head of GlobalData healthcare industry dynamics.

Photograph: Getty Images

Dr. Jerry Isaacson is head of GlobalData healthcare industry dynamics.

Photo: Getty
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Forget planning for no deal. The government isn't really planning for Brexit at all

The British government is simply not in a position to handle life after the EU.

No deal is better than a bad deal? That phrase has essentially vanished from Theresa May’s lips since the loss of her parliamentary majority in June, but it lives on in the minds of her boosters in the commentariat and the most committed parts of the Brexit press. In fact, they have a new meme: criticising the civil service and ministers who backed a Remain vote for “not preparing” for a no deal Brexit.

Leaving without a deal would mean, among other things, dropping out of the Open Skies agreement which allows British aeroplanes to fly to the United States and European Union. It would lead very quickly to food shortages and also mean that radioactive isotopes, used among other things for cancer treatment, wouldn’t be able to cross into the UK anymore. “Planning for no deal” actually means “making a deal”.  (Where the Brexit elite may have a point is that the consequences of no deal are sufficiently disruptive on both sides that the British government shouldn’t  worry too much about the two-year time frame set out in Article 50, as both sides have too big an incentive to always agree to extra time. I don’t think this is likely for political reasons but there is a good economic case for it.)

For the most part, you can’t really plan for no deal. There are however some things the government could prepare for. They could, for instance, start hiring additional staff for customs checks and investing in a bigger IT system to be able to handle the increased volume of work that would need to take place at the British border. It would need to begin issuing compulsory purchases to build new customs posts at ports, particularly along the 300-mile stretch of the Irish border – where Northern Ireland, outside the European Union, would immediately have a hard border with the Republic of Ireland, which would remain inside the bloc. But as Newsnight’s Christopher Cook details, the government is doing none of these things.

Now, in a way, you might say that this is a good decision on the government’s part. Frankly, these measures would only be about as useful as doing your seatbelt up before driving off the Grand Canyon. Buying up land and properties along the Irish border has the potential to cause political headaches that neither the British nor Irish governments need. However, as Cook notes, much of the government’s negotiating strategy seems to be based around convincing the EU27 that the United Kingdom might actually walk away without a deal, so not making even these inadequate plans makes a mockery of their own strategy. 

But the frothing about preparing for “no deal” ignores a far bigger problem: the government isn’t really preparing for any deal, and certainly not the one envisaged in May’s Lancaster House speech, where she set out the terms of Britain’s Brexit negotiations, or in her letter to the EU27 triggering Article 50. Just to reiterate: the government’s proposal is that the United Kingdom will leave both the single market and the customs union. Its regulations will no longer be set or enforced by the European Court of Justice or related bodies.

That means that, when Britain leaves the EU, it will need, at a minimum: to beef up the number of staff, the quality of its computer systems and the amount of physical space given over to customs checks and other assorted border work. It will need to hire its own food and standards inspectors to travel the globe checking the quality of products exported to the United Kingdom. It will need to increase the size of its own regulatory bodies.

The Foreign Office is doing some good and important work on preparing Britain’s re-entry into the World Trade Organisation as a nation with its own set of tariffs. But across the government, the level of preparation is simply not where it should be.

And all that’s assuming that May gets exactly what she wants. It’s not that the government isn’t preparing for no deal, or isn’t preparing for a bad deal. It can’t even be said to be preparing for what it believes is a great deal. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.