Europe must pay for innovation

Innovation does not come cheap, especially in the pharmaceutical industry where the accepted figure for getting a drug from discovery to approval is US$1 billion.

As a result, new therapies arrive with big price tags. And it’s a premium that Europe’s healthcare systems have become less and less able to meet.

“Europe has slipped in terms of its willingness to pay for innovation,” according to Andrew Witty, CEO of GlaxoSmithKline (GSK) plc, speaking at the company’s annual results meeting in London on Tuesday (7 February).

The consequence is not only that new products are launched first elsewhere, delaying benefits for patients, but also that GSK will do less clinical research in Europe. “We have to take a view and face reality: it’s about the U.S. and excitingly, about Japan in terms of where innovation should be driven,” Witty said.

Litany of cuts

There is a snapshot of what Witty is getting at in the annual results last week of another innovative European pharma, Ipsen SA. The French company gave a market-by-market litany of the tax changes and price cuts forced through by European governments, detailing how they have bitten into Ipsen’s turnover. The list includes cuts in Belgium, Spain, France, Portugal, Romania, Poland, the Czech Republic, Slovakia, Hungary and the Baltic States.

For GSK such cumulative pressures led to a 4 per cent - or £320 million - fall in sales in Europe in 2011, with the same expected in 2012. Compare this to the US, where despite healthcare reforms and patent expiries, sales were the same as a year earlier, or Japan where sales rose by 28 per cent.

As Witty noted, there are of course many differences between national pharmaceutical markets across Europe. But overall, two general phenomena emerge: one is price cuts, the other “a sustained pattern of extensive delays”  with the patent clock ticking, before drugs that have regulatory approval get through national reimbursement negotiations and health technology assessments, and onto the market.

Pre-emptive price reviews

In Germany, Europe’s largest individual pharmaceuticals market, for example, the price is fixed at launch but can be reviewed after a year – just at the point when pricing negotiations are likely to be going on in other European countries. Meanwhile, in the UK, “you can read every day” of drugs failing to pass the cost benefit hurdles erected by the country’s health technology assessment body, the National Institute for Health and Clinical Excellence.

These prevarications are especially galling “when you go through so much” to get drugs approved in the first place, Witty noted.

Of course, prices have been under pressure all round the world, both as a result of economic turmoil, but also because of increased competition from generics. One of the main tactics pharmaceutical companies have turned to in reshaping their businesses to deal with patent expiries and dwindling R&D productivity has been to expand into emerging markets.

But volume growth has inevitably meant lower margins, and this was the topic on which Witty faced the most sustained questioning from analysts at the results meeting. His riposte is that GSK’s 2008 reforms of its R&D activities are now paying off, with a number of innovative – for which read high margin – products coming through to market.

Stuck in a bad place

And so for GSK the answer to Europe’s unwillingness to pay for innovation is to “go and focus elsewhere,” Witty said. This will mean novel drugs are tailored to markets that are receptive to innovation, with clinical trials moved out of Europe.

Payers in Japan and the US, “are not pushovers” but they are more pro-innovation. “We will still register drugs in Europe, but we won’t [shape] them for Europe,” Witty said. “At least for the next few years, Europe is stuck in a bad place."