Business Europe: Big Pharmaceuticals Take the Gloves Off
By Stephen Pollard

12/17/2001
The Wall Street Journal Europe

Has the pharmaceutical industry gone suicidal? After a year in which
the battles over HIV-AIDS treatments in South Africa seemed like one
ongoing PR disaster, the industry has now decided to throw down the
gauntlet over European drug prices.

In what amounts to a high-stakes gamble on the future shape of the
drug business in Europe, big pharmaceutical companies are making it
clear they've had enough of Europe's price-fixing ways. At the
beginning of December, Hank McKinnell, chief executive of Pfizer,
went on the attack over the pricing arrangements insisted on by many
EU governments, arguing that their logical consequence will be a
Europe denied access to new treatments.

Mr. McKinnell's remarks were directed at France, which has an
especially poor record for making new medical technologies available
to patients. Even after they are approved by regulators, their
availability becomes bogged down in negotiations on price. "These
talks can take two to three years longer in France than in any other
country," he said. And, he went on, the discounts pharmaceutical
companies are forced to give in France affect the prices they can
charge elsewhere. Japan, for example, bases its prices on a weighted
average of prices in other markets. By keeping a new drug off the
market in France, companies can thus earn more for it elsewhere.

It's not just Pfizer either. Tom McKillop, chief executive of
AstraZeneca, was also recently quoted as saying, "Europe has got to
get its act together. I think all the major pharmaceutical companies
are making decisions not to launch products [there]."

The crux of the matter is this. European governments demand severe
discounts on pricing. With a base price of 100 in the U.S., the
average French price for a drug, for example, is 42. With research
and development funded by profit, the PhRMA companies argue that the
Europeans are in effect after a free lunch -- access to innovation
without having to pay for it.

A report published earlier this month by the Tufts University Center
for the Study of Drug Development found that the average cost of
developing a new prescription medicine is $802 million. The cost is
so high because, in addition to the usual research and development
costs in other industries and the heavy capital investment required,
only one in five medicines that enter clinical trials ends up being
an approved drug. Development takes an average between 12-15 years.
The Tufts figure is similar to the estimate in a report released this
summer by the Boston Consulting Group, which calculated $880 million.

The industry umbrella group, PhRMA, has released figures showing that
the total sums being invested in R&D are staggeringly high, and
increasing: $30.5 billion in 2001, 18.7% higher than the amount in
2000, and over 300% more than the investment made in 1990.

The two issues of European cost-cutting and increasing research
budgets are, of course, deeply entwined. As Steve Slovick, senior
vice president with the Cambridge Pharma Consultancy in New York, put
it in The Wall Street Journal Europe on Dec. 12, "The U.S. ends up
funding all the research and development," European countries aren't
"paying their fair share."

The industry's line is clear: such sums have to come from somewhere,
and one place they are not coming from is Europe, which by forcing
down prices is refusing to play its part. As one senior industry
figure put it to me: "It's as if every month we get another set of
measures put forward, all with the same aim: cutting our profits,
which means cutting our research, which means cutting back the level
of innovation, which means cutting the number of patients who can be
helped." In recent months further cost-cutting measures have been
announced in Germany, Italy, Spain and Sweden.

In September, for instance, the German government began the process
of cutting back on so-called me-too drugs: the shorthand for new
medicines that deal with a problem for which an existing medicine is
already available. But limiting these treatments cuts a swath through
the basis of almost all scientific innovation -- innovation by
increment. Revolutionary new treatments are rare; most new medicines
do a little more to help, and it is only over time and with a full
body of clinical evidence from the different drugs available that
real transformations in medicine happen. Moves to block "me too"
drugs are thus profoundly short-sighted, and threaten the very basis
of innovation.

It's not just the mainly U.S.-based pharma companies that are
pointing out the growing problem. A year ago, the European Commission
itself published a report by Professor Fabio Pammoli on "Global
Competitiveness in Pharmaceuticals: a European perspective." The
study was commissioned to look out how far and why the European
pharmaceutical industry was losing ground to the U.S. Even the most
superficial glimpse at the industry can see that previously
EU-headquartered companies have moved to the U.S. As one key player
said: "The environment is becoming steadily more inhospitable." Put
simply, the 80 pages of the Pammoli report concluded that the EU
pharma industry was uncompetitive and that governments needed as a
priority to rekindle investment in R&D. Yet far from doing that,
their price-control policies are undermining research.

Novartis AG Chairman Daniel Vasella told The Wall Street Journal
Europe on Dec. 12 that still more investment will go to the U.S.
unless something is done to stem the tide. "Money goes where money
flows. If you have a more attractive market in the U.S. [than in
Europe], you will go there."

Prospects for the short and medium term may not be especially good,
but in the long term something has to give. If pharma companies do
not find the EU "hospitable" -- for which read profitable -- then
there is nothing to force them to stay or, perhaps still more
importantly, to offer their latest treatments to European patients.
The EU will be the loser. But in the long term it is difficult to see
prosperous patients settling for second-class status. Once they
realize what they are being forced to settle for -- and without --
they will surely push for changes which will give them access to new
medicines. The rise of vocal patient groups is merely the beginning
of this. Governments may be the cause of the problem, but the
solution is almost certainly out of their hands.

---

Mr. Pollard is a senior fellow at the Centre for the New Europe, a
Brussels-based think tank.

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