Drugmakers rattled by EU austerity moves

Europe is playing hardball with pharma.

One after another, governments in the continent are coming out with measures to stem rising healthcare costs by introducing price cuts and discounts on pharmaceutical products.

Experts said the measures, introduced to deal with the impact of the economic recession, can affect the margins of drugmakers, besides increasing competition.

“Healthcare and pharma, being one of the main spending areas of governments, would see a hit,” said Ajit Mahadevan, partner, business advisory services, Ernst &Young. “Drug costs are rising because of an ageing population.”

Tender-based sales in EU and price cuts are producing a negative impact.
“But, given the sheer size of the EU market, no Indian company looking at chalking out a global footing can choose to ignore it,” said Sujay Shetty, associate director, PricewaterhouseCoopers.

The total EU pharma market is worth $200 billion, or about 25% of the total global market.

Various estimates predict that leading markets like France, Germany, Italy, Spain, etc. will grow at a compounded annual rate of 5.5% till 2015.

Kiran Mazumdar Shaw, CMD of Biocon had earlier said that the German government’s decision of imposing a 16% rebate on all pharma companies present in that country would impact both margins and toplines.

According to industry experts, margins in the EU are in the 10-18% range, with Germany weighing in at the lower end.

In comparison, margins in the US range from 15% to 25%, depending on the type of product and the sales and distribution network of drugmakers.

“EU looks promising, but given the generic competition that we face from the likes of Sandoz and Teva, these austerity measures would affect us to a large extent. Though entering the market might appear easy, surviving in that market, and trying to keep our heads above the water will be very tough,” said a senior official from a domestic company.

Mahadevan said medicines for lifestyle ailments such as diabetes and cholesterol are most at risk of pricing pressure, given the high expenditures involved.

However, some players feel the changing dynamics in the EU will not have much of an impact on their businesses.

“For us, the EU business grew 72% in the third quarter of 2010-11. We have had a strategic focus on addressing niche therapy areas, and developing difficult-to-develop therapies like oral contraceptives and ophthalmics. This has worked in our favour,” said S Ramesh, president, finance and planning, Lupin.

Adithya Bhat, manging director of business consulting firm Protiviti Consulting, said the pricing pressures and austerity measures notwithstanding, Indian companies can make the most of drugs going off patent in the EU.

Several medicines worth over billions of dollars, like Lovenox ($4 billion sales, Sanofi Aventis), Seroquel ($4.4 billion sales, AstraZeneca) and Diovan ($5.4 billion sales, Novartis), are slated to lose their patent protection in the EU in the next few years.

“Since India has a very large number of USFDA approved manufacturing plants, Indian firms can gradually make a mark for themselves by supplying off-patent versions at low prices,” said Bhat.

Experts also feel pricing pressures will increase penetration of generics in the EU markets, thereby benefiting Indian generics firms.

“UK has 60-65% generic market, which can go up to 70-80% as drugs go off patent. Spain and Italy’s generic markets would also grow from the current 30%,” said Mahadevan.