pharmaceutical industry

Big Pharma and the Austrian Economy

Pharma’s Market: The pharmaceutical industry has played an important role in Austria’s economic growth. But the challenge remains to find a balance between regulation and competitive pricing.

Sluggish economic growth in Europe has governments on edge. In Austria, after four years below 1% and a modest rebound of 1.6% in 2016, one of the best prospects for continued recovery is the pharmaceutical industry.

With forecasts at over 4% per year, pharmaceuticals are tracking substantially ahead of the economy as a whole.  However, with spiraling medical costs and pressure on the national health services, Austria is joining other EU countries in efforts to regulate drug prices, which account for 12.2% of all health care spending.  At the same time, Austria is an important innovator within the industry. How it balances these competing interests will be critical to the sector’s continued development.

“The research-based pharmaceutical industry is one of Europe’s top performing high-technology sectors,” says François Bouvy in the 2016 report of the Brussels-based European Federation of Pharmaceutical Industries and Associations (EFPIA).

Pharmaceutical Industry European countries spend millions on research and development (R&D) of new pharmaceutical products (measured in € million per year). // © EFPIA

Despite the impressive results, the €1 trillion industry has its critics. “The prices of new medicines have skyrocketed over the last ten years,” said Margrete Auken, the Danish Member of European Parliament. Auken emphasizes the importance of regulation for strained first world economies. “Health expenditure has outpaced economic growth,” she notes. “If we don’t slow down the upward price trend, many medicines will become unaffordable even for advanced economies.” As the companies have no incentive to change course, “legislators have to take action.”

Still, in a global industry, even EU-wide cooperation has only a limited impact. With rising consumption in major growth economies like China and Brazil – reporting 14% and 7% respectively, compared with 5.9% in Europe ­­– and further deregulation under a new administration in Washington, there may be little pressure on the industry to change.

Cutting costs & raising capital

In 2015, Austria spent just over 10% of its GDP on healthcare, some €33.7 ­billion and just over €4.1 billion on pharma­ceutical products alone, according to the Austrian Pharmaceutical Industry ­Association (Pharmig).

With an aging population and the cost of new therapies on the rise, Austria, too, is under pressure to control mounting health spending.

The cost of medications is one of the most elastic of consumer products, analysts say, spurring efforts to regulate drug prices. Lead by the joint SPÖ and ÖVP health ministers, negotiations are currently underway with pharmaceutical companies and government social insurers, who would regulate the price of expensive medications by law, covering anything over €700 per pack. The Ministry of Health has justified legal action saying that negotiations with the industry for voluntary solutions have brought no results.

It’s not an effort to demonize the industry. Governments expect high prices, often reflecting what a drug offers to patients in terms of remedy and life expectancy.  “Certain new advances (e.g. in hepatitis C treatment) bring considerable gains to patients and are cost-­effective by standard thresholds,” wrote researchers in a September 2016 report by the Organization for Economic Co-­operation and Development (OECD).  However, costs are currently outstripping even government calculations.  “Their high prices compromise patient access and put an unsustainable strain on health care budgets,” the OECD commented. “In the case of hepatitis C, the company recouped 25 times its initial investment in R&D in less than two years.”

How Long Does it Take to Make a Drug? Every new medicinal product undergoes an average of 12–13 years in the development phase before it is introduced to the market. The SPC (see below) extends the monopoly period of a “product” (active ingredient or combination of active ingredients) protected by a patent by five years. // © Karin Dreher

The OECD report was a call to arms for international policy makers to collaborate on pricing, investments, access and transparency.  This kind of joint action will enable governments to “deliver innovative treatments to all those in need, at an affordable cost.”

Pharmaceutical companies, however, are adamant that cost increases are justified.  Analysts currently estimate that it takes  €1.9 billion to bring a new drug to market, according to Tufts Center for the Study of Drug Development in Boston.  Industry research funding in Europe was €30.9 billion in 2014 – approximately 3% of total revenue that year. Of that, Austria controlled €650 million and produced 29 new medical products.

The cost of advancement

The pace of research in the pharmaceutical industry is slow – the initial molecule and patent application to the marketing authorization and clinical trials together take about twelve years, according to industry estimates.  A single company will end the year  with 5,000 – 10,000 substances under patent protection.  At the end of the research and development phase only one of these substances will have made it to consumers.

As an example, Bayer, the company responsible for Xarelto, posted total revenue in 2015 of €46.3 billion. Thus, while it costs €1.9 billion to bring a drug to market,  spread out over 12 years this amounts to relatively little in the company’s overall budget.

Leveling the playing field

A balance between the needs of pharmaceutical companies, doctors promoting innovative and often expensive therapies to patients and the need to control costs is necessary. Based on existing trends, a conducive research climate remains essential for the industry to live up to economic forecasts.

A proposed bill in the Austrian legislature allows for greater price control, by forcing companies to adopt the EU average price for expensive medications.  However, Austria cannot be effective alone.  And the EU pharmaceutical market is fragmented, says the EFPIA – this is true of pricing, legislative process, regulation, timing and trade.

“Today, medical companies prefer to negotiate with each health care ministry separately, to set price levels higher,” Auken says. Hence the need for regulation.

While higher prices are undoubtedly the industry goal they have an unintended side effect of fostering parallel trade, buying in lower-priced countries for resale in richer ones, according to Pharmig.  In 2014, this trade was estimated at a lucrative €5.5 billion, a gray market that “benefits neither social security nor patients and deprives the industry of additional resources,” writes the EFPIA.  The inevitable conclusion is that it drives prices even higher.

Pan-EU pricing regulation may be the answer not only for containing health care spending but for ensuring that industry receives a reliable and fair return. Auken is advocating for a joint effort between the pharmaceutical companies and Europe to regulate prices and promote transparency; it “will benefit patients, health budgets and of course not least, the pharmaceutical industry’s tarnished reputation.”

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