One of the good things about Europe is that its citizens don’t need to worry about healthcare as the government provides for it. But last week, at the Group of Twenty summit, finance ministers from Europe abandoned their earlier call for stimulus and bowed to the bond market’s demand for fiscal prudence. The cuts in public spending will see governments go after the plump candidates first, and healthcare is among them. The initial effects are already being felt by the big pharma players, while the impact will eventually be visible on generic players, too.
Greece introduced new regulations for fixing the prices of drugs, which will result in prices falling by around 22% on a weighted average basis. These regulations will apply to both innovator and generic drugs, and are expected to save the country around €1.9 billion (Rs10,660 crore), which also represents lost revenue for the drugs industry. Two firms, Novo Nordisk A/S and Leo Pharma A/S, have threatened to pull some of their products off the shelves in the face of lower profits and the ripple effect that may be created in other countries. Leo Pharma, for example, said in a statement that Greek prices for its products are used as reference prices in a number of European countries.
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Italy too proposes to cut generic drug prices by 12.5% from June till December. In 2011, it proposes to move to a tender system, wherein reimbursements will be based on the cheapest version of a medicine, to be determined in a tender. When state-owned insurers in Germany adopted the tender system, generic companies’ revenues were hit as prices fell.
Again, Spain has announced a cut in both patented and generic drug prices, with the latter being cut by as much as 25%. In the UK, the new government is contemplating a move to value-based pricing, wherein the benefits to the patient will determine the price paid to the pharmaceutical firm. This is at a preliminary stage, but it indicates that the mood in general in the euro zone is one of cost control, which is likely to cause a lot of uncertainty to pharmaceutical players. To be sure, economies such as France and Germany may not face a fiscal storm, but they too may start exploring ways to tighten budgets.
What impact will these developments have on Indian players? Among overseas markets, the US remains by far the most important for most players. But Europe has been figuring more prominently in their plans, especially since the US became more difficult for generic companies to operate in. To that extent, a regime of lower prices and structural shifts could affect firms’ plans. Europe contributed around 12% of Ranbaxy Laboratories Ltd’s revenue in the March quarter and around 14% of Dr Reddy’s Laboratories Ltd’s revenue in fiscal 2010.
The relatively low exposure of companies to Europe may limit the impact of these developments. Also, new opportunities may arise, as Indian companies with cost- effective production bases may have an advantage in supplies. S. Ramesh, president for finance and planning at Lupin Ltd, believes that usage of generic drugs in Europe will increase as a result of these measures and the market become more critical for the Indian industry. But these events will play out in the longer run. In the more foreseeable future, the outlook for pharmaceutical companies in these markets has become more uncertain.
Graphic by Yogesh Kumar/Mint
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