Jim Miller
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The business press in May was dominated by coverage of Europe’s sovereign debt crisis and its implications for the survival
of the euro as the common European currency. The crisis had started in Greece, but the great fear was that it would rapidly
spread to Spain and Portugal, and quite possibly to Ireland and Italy as well. Even the United Kingdom, although 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 directly
at the bio/pharmaceutical industry. The individual euro-zone countries must attack the underlying cause of the
problem—excessive government spending on social programs financed by uncontrolled government borrowing—to resolve the crisis.
If the runaway spending is not reined in, the crisis will indeed spread. However, that will take acts of political resolve
and courage that few political parties in any country (including the United States) have ever demonstrated.
European drug sales likely to decline
As European governments begin to focus on their fiscal profligacy, spending on healthcare and bio/pharmaceuticals in particular
will get close attention. Healthcare accounts for 15% of public spending in most European countries and has been growing faster
than most budget items (see Table I). Government-run programs account for 75% of all healthcare expenditures in Europe, and
at least 70% of pharmaceuticals purchased there, according to data from the Organization for Economic Co-operation and Development
and Bloomberg News. As European governments make drastic cuts in public expenditures to lower deficits and reduce sovereign
debt, spending on healthcare and bio/pharmaceuticals is likely to be a major target. The decrease in pharmaceutical spending
is likely to come about in several ways.
Increased use of generic drugs. The countries with some of the biggest problems also have some of the lowest generic-drug penetration. For instance, in the
market for off-patent drugs, generic drugs account for just 41% of pharmaceutical unit volume in Spain, and 40% of unit volume
in Italy, according to IMS Health. By contrast, generic drugs account for 75% of unit volume in Germany and 71% in the UK;
as a reference point, generic-drug penetration in the US is 89% of unit volume. IMS Health estimates increased use of generic
drugs by the 27 EU member states could generate EUR 30 billion ($38 billion) in savings annually.
Lower drug prices. 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%, and 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 also could make it more difficult for new drugs to get coverage eligibility, especially expensive new
biopharmaceuticals. For instance, the National Institute for Health and Clinical Excellence (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. That probably means that private healthcare expenditures will also decrease
for a few years.
Mixed news for European CMOs
Contract manufacturing organizations (CMOs) will feel the effects of reduced healthcare expenditures in the form of fewer
batches, smaller batches, and pressure from clients to reduce prices. This situation will be especially difficult for European
CMOs, which already must compete in a market with far too much capacity and widespread price-cutting.
There may be some positives in the situation for European CMOs, however. EU CMOs typically have a significant amount of generic
drugs in their product mix and may be able to offset reduced demand for branded products with increased orders for those generic
products. However, if the pressure on drug prices is especially severe, it could favor generic drugs imported from Asia over
domestically produced products, thereby delivering a double blow to European CMOs.
Another compensating factor for European CMOs could be the decline in the value of the euro relative to the US dollar. The
euro has weakened considerably in 2010 relative to the US dollar, dropping to a two-year low in early May. The
EUR 750-billion ($940-billion) bailout package approved by the European Central Bank (ECB), International Monetary Fund (IMF),
and EU members in mid-May stabilized the exchange rate, but the likelihood of a recession following the expected spending
cuts could keep the exchange rate down for several years.
A lower dollar/euro exchange rate should be a positive development for the European CMOs and contract research organizations
(CROs) because it will increase their competitiveness relative to their US counterparts. The cost in dollar terms of services
priced in euros is already 15% lower than they were just six months ago. Development services that span a relatively short
timeframe and are not subject to the long-term currency risk of commercial manufacturing contracts should benefit from the
currency depreciation, even if it is short-lived.
European CMOs appear positioned to benefit from a medium- to long-term euro decline. European CMOs have been building their
North American sales presence in recent years to find relief from the intensely competitive European market. Because of the
local market conditions, the European CMOs are more accustomed to competing on price than the North American CMOs, and the
cheaper euro could make their case stronger. Some European CMOs have been able to command a price premium even with a strong
euro, and they will look even more attractive with a weak euro.
Uncertain outlook
The sovereign debt crisis has blown up just as the contract-services market appeared to be emerging from the slump induced
by the financial crisis that began in 2008. This latest crisis promises to make the near-term prospects of the industry more
uncertain. Perhaps the ECB–IMF–EU stabilization plan announced in May will instill enough confidence in EU financial markets
to allow the market improvement to continue. However, there are major forces at work that may not be entirely in the control
of governments and international institutions, let alone individual companies. Only time will tell how things will play out
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, info@pharmsource.com
http://www.pharmsource.com/.
