The forces at work to define the prices of pharmaceuticals are extremely complex. Patents on new drugs, EU regulation, and monopolistic buying by governments to supply national health services all play important roles, as Leigh Hancher of the University of Tilburg explains.
Prices for medicines, especially prescription medicines, continue to diverge dramatically across the Member States of the European Union - with some market leaders costing up to 50% more in the high price Northern markets as compared to the Southern European markets. The eventual accession of the Eastern European countries now lined up to join the European Union will undoubtedly lead to a wider divergence in prices. As is well known, price divergences within Europe fuel the process of parallel importation - that is the re-exportation of branded medicines from low priced markets to high priced markets. On patent expiry, the lucrative market position enjoyed by leading branded products increasingly comes under threat from generic substitutes. Patent protection for pharmaceuticals has been traditionally weak in many of the candidate countries, and their thriving generic manufacturing sector is gearing up for full integration into the European Union. A new and untested component for the future of the European market is the potential impact of e-commerce and the spread of campaigns by patient advocates and health care and insurance companies for more efficient medicine purchasing procedures.
The European framework
The pharmaceutical market differs in several important respects however from the market for most consumer goods. Demand for prescription products is filtered through the prescribing physician and to a certain extent, through the health insurance bodies responsible for patient reimbursement: the consumer/patient rarely selects the product or pays or is even aware of the full price. Nor can the supplier usually set its own price: in the majority of Member States prices are regulated or administered through a bewildering variety of techniques ranging from direct price control to complex profit control schemes. The classification of drugs into the categories of prescription only, over-the-counter and so on remains essentially a national prerogative. However, and unsurprisingly, systems differ extensively from one country to another. At the risk of generality, government intervention is more stringent, resulting in tougher price controls, where the volume of demand is traditionally high.
Drugs can only be marketed once they have been subjected to extensive testing to ensure they meet efficacy and safety standards. For most drugs this means that they must meet the requirements of national licensing procedures - albeit procedures based on criteria which have been extensively harmonised on the basis of European-wide Directives. The European Agency for the Evaluation of Medicinal Products (EMEA), which began operations in 1995, can presently issue European-wide marketing authorisations for a limited category of mainly innovative products. Proposals to extend the scope of the centralised procedure to cover a wider range of products, and to offer European-wide licences to generic copies of certain products, are currently under debate. In other words, although the supply side of the European pharmaceutical market is increasingly subject to harmonised norms and procedures, the management of the demand side currently continues to be the sovereign preserve of the national governments.
The need for innovation
To add to the complications, the pharmaceuticals sector and the eventual creation of a single pharmaceutical market poses the European Commission a particular set of legal problems and confronts it with several intractable policy dilemmas. Repeated claims by the research-based industry that the incessant rise of parallel importation threatens not just short term profits but the long term investment and innovation potential of one of Europe’s most important industrial sectors have found some sympathy at Commission level - in particular at DG Enterprise - the Commission directorate responsible for industrial policy. More importantly the Commission has been forced to try and reconcile its legal duties to protect the process of parallel importation under the European Treaty’s free movement of goods and competition rules with its industrial policy ambitions for a strong, innovation-based European sector.
These issues are by no means new - but they are becoming increasing urgent, especially as the prospect of enlargement is likely to exacerbate the situation. An important dilemma - which has both policy as well as legal connotations - is the nature of the Commission’s executive competence to launch policy initiatives and eventually propose binding rules to deal with the phenomenon of pricing and reimbursement divergence, and with it competition from parallel imports and generic products: is this to be dealt with solely as an issue of industrial policy or health policy or social security and consumer protection? The choice of policy focus has a definite legal dimension: the legal powers of the Commission to develop instruments to steer pharmaceutical demand patterns are certainly more limited. This "competence gap" should be a key focus for the G10 High Level Group on competitiveness in the industry, and its attendant "issue groups". (1)
Exercising competitive pressure
The Commission’s policy of encouraging parallel importation as a way of exercising competitive pressures is now under challenge from the pharmaceutical industry.
Glaxo Wellcome has appealed to the European Court of Justice over a decision of 8 May 2001 prohibiting the company from maintaining a dual-pricing scheme for Spain. This decision had confirmed that the Commission was not prepared to accept the research-based industry’s argument that it should be entitled to take appropriate action to respond to differences in national price control regimes.
Glaxo Wellcome had notified the Commission of new conditions for the sale of all its products to wholesalers in Spain (where maximum regulatory prices prevail). The wholesalers would have to pay higher prices for products which they would export than for products which they would resell for consumption on the domestic market. It was considered that GW’s dual pricing system limited parallel trade from Spain to other Member States for the vast majority of its products and therefore interfered with the Community’s objectives of integrating national markets. It also restricted price competition for GW products to a significant extent. The Commission was not convinced by the "consumer welfare" claims that losses incurred by GW due to parallel trade would seriously affect GW’s R&D budget which it uses to develop innovative drugs.
The Court’s eventual ruling on the Glaxo Wellcome’s dual pricing scheme will be an important test case - the Court confronted with a set of agreements which explicitly sought to restrict parallel trade but which the company sought to justify on economic grounds. If the Court upholds the Commission’s decision the implications are clear: companies will have to continue to live with national regulatory divergences. Importantly, in its decision, the Commission stressed that the R&D budget of most pharmaceutical companies only represents around 15% of their total budget: losses stemming from parallel trade could equally be deducted from the companies’ other budget items such as marketing and advertising costs.
The findings of the recent report on "Global Competitiveness in Pharmaceuticals: A European Perspective" commissioned by DG Enterprise, have undoubtedly encouraged the Commission to take such a bold stand in favour of parallel importation. The report confirmed that the competitiveness of the European pharmaceutical industry has declined in comparison with that of the USA. The report suggests a number of explanations to support its finding that, as a whole, Europe is lagging behind in its ability to generate, organise and sustain innovation processes that are increasingly expensive and organisationally complex. Significantly, it stresses that many national European markets are not competitive enough, and that the nature and intensity of the competition in final-based markets is too weak to nurture efficiency and innovation. Parallel trade is the only source of competition for products still under patent.
These important findings, as well as the work of the High-Level group, may also provide renewed stimulus for Community action on national price regimes since it is these which can insulate the sector from competitive forces. At the same time, however, its attempts to tackle the issue of price divergence at source have been resisted on two fronts. In seeking to harmonise national rules or regulations on pricing and profit controls, the Commission faces resistance from the Member States who regard this as a matter of health policy, and therefore of national competence, and from the research-based industry who distrust attempts to set average "European" prices for their product.
Where to now?
A key policy question will be whether the Commission can succeed in convincing national governments to accept intervention not only in industrial policy matters but also sensitive health policy issues. There are a number of possible avenues to explore. A more vigorous promotion of generic competition is certainly one avenue, but here the Commission will have to reopen the debate on how far the R&D based companies should continue to enjoy intellectual property rights protection - still a matter of national law.
Another option would be to adopt the current American experiment and seek to move more prescription products into the Over-the-counter (OTC) market. This might well appeal to budget conscious governments. Inevitably both strategies will lead to bargaining for regulatory concessions on the part of the R&D based industry. A certain relaxation of the current Community restrictions on advertising of prescription products to the public is now a controversial candidate in the trade-off game. European consumer organisations are sceptical and fear that relaxation on the advertising prohibition will be abused to drive up consumer demand for high-priced products, increasing pressure on health care budgets. The Commission’s response to consumer and health organisations is that European patients with internet access can already obtain access to all the information they require so that the ban makes little sense in practice. (2)
Whatever the merits of this response it is clear that the Commission can no longer afford to leave the demand side for health care products and services entirely to national prerogatives. For some, this may well be a bitter pill to swallow!
Drug spending in Europe
Total expenditure on pharmaceuticals and other non-durables as a percentage of total (national) expenditure on health (figures from 1997). Source: OECD Health Data 2001
Belgium: 16.1
Denmark: 9.0
Finland: 14.8
France: 21.3
Germany: 12.2
Greece: 17.2
Ireland: 9.3
Italy: 17.5
Luxembourg: 12.6
Netherlands: 10.3
Portugal: 26.9
Spain: 20.7
Sweden: 12.8
United Kingdom: 16.3
References:
1. Issue group meetings bring together representatives drawn from industry, the medical profession, consumer/patients representatives, Member States and so on. Themes include generics, information to patients, benchmarking, competitiveness, innovation, and clinical cost effectiveness.
2. For more information, see EPHA’s website or UPDATE 61 Direct-to-consumer advertising: for or against?
Info:
Leigh Hancher, Professor of European Law
University of Tilburg
Kennedy Van der Laan, Postbus 15744
NL-1001 NE Amsterdam, The Netherlands
Tel: +31 20 550 6685
Fax: +31 20 550 6785
Email: L.Hancher@kvdl.nl
Website: http://www.kennedyvanderlaan.nl
