EU debt crisis adds uncertainty for contract services

Having barely begun recovering from the economic slump that began in 2008, the contract services industry must now face the consequences of the debt crisis in Europe, which will include reduced bio/pharmaceutical expenditure by governments. CMOs will feel the effect of this in fewer batches and increased pressure to reduce prices.
Jun 01, 2010
Volume 22, Issue 6

Jim Miller
The business press in May was dominated by Europe's sovereign debt crisis and its implications for the survival of the Euro as the common European currency. The crisis began in Greece, but the great fear was that it would rapidly spread to Spain and Portugal, and quite possibly to Ireland and Italy. Even the UK, though not a Euro country, was viewed to be at some risk of default on its sovereign debt.

While the immediate nature of the crisis is financial and monetary, the efforts to remedy it will ultimately strike the bio/pharmaceutical industry. To ultimately resolve the crisis and prevent it from spreading further, the individual Euro zone countries must attack the underlying cause of the problem — excessive government spending on social programmes financed by uncontrolled government borrowing. This, however, will require acts of political resolve and courage that few political parties in any country (including the US) have ever demonstrated.

European pharmaceutical sales likely to decline

Table 1: Health expenditures in major European countries.1
As European governments begin to focus on their fiscal profligacy, spending on healthcare generally — and bio/pharmaceuticals in particular — will come under close scrutiny. In most European countries, healthcare accounts for 15% of public spending and has been growing faster than most budget items (Table 1).

Government-run programmes account for 75% of all healthcare expenditures in Europe and at least 70% of pharmaceuticals purchased there, according to data from the OECD.1 So as European governments make drastic cuts in public expenditures to bring down deficits and reduce sovereign debt, spending on healthcare and bio/pharmaceuticals will probably be a major target.

The decrease in pharmaceutical spending is likely to come about in several ways:

  • Increased use of generics. The countries with some of the biggest problems also have some of the lowest generic penetration. For instance, in the market for off-patent drugs, generics account for just 41% of pharmaceutical unit volume in Spain, and 40% of unit volume in Italy, according to IMS Health.2 By contrast, generics account for 75% of unit volume in Germany and 71% in the UK. As a reference point, generic penetration in the US is 89% of unit volume. IMS Health estimates that increased use of generics by the 27 member states of the EU could generate annual savings of €30 billion.
  • Lower prices for branded and generic products. Government agencies set prices for bio/pharmaceuticals in most European countries and we may see aggressive price-cutting as governments try to reduce expenditures. Spain and Greece have already announced plans to reduce prices for generic drugs by 25% while Germany has announced 10% cuts. European drug prices are already well below US drug prices — as much as 60% below US prices in many countries.
  • Exclusion from formularies. Government agencies could make it more difficult for new drugs to get reimbursement eligibility, especially expensive new biopharmaceuticals. For example, NICE, the agency responsible for allowing coverage of new drugs in the UK, has put severe limits on the conditions under which the government will pay for expensive therapies for oncology and autoimmune conditions.

The reduction in government spending on healthcare and bio/pharmaceuticals will not be the only negative factor weighing on the industry; across the board, government spending cuts and tax increases aimed at reducing deficits will have a depressing effect on European economies for several years, which probably means that private healthcare expenditures will also decrease for a few years.

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