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Race to the bottom

Pricing policies threaten pharmaceutical makers.

Photograph: Getty Images

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.