European Pricing Squeeze

A jittery stock market, repeated profit warnings, concern about accounting practices, another industry mega-merger, and a new raft of legislative proposals. Small wonder that US analysts find it difficult to separate the words "troubled" and "pharmaceutical industry." American pharma marketers may think they face a tough operating environment, but it's nothing compared to what's going on in Europe.

New research by Cambridge Pharma Consultancy paints a gloomy picture of recent European trends-especially in the pricing and reimbursement arena. Yet all is not lost. This article outlines the report's findings, including significant opportunities for pharma companies to improve pricing and reimbursement performance in Europe and to increase return on investment in a difficult environment.

The Pipeline Trickle

At the heart of pharma's problem in Europe is the market's inability to "liberate the value" from its products. In marketing speak, that translates into a failure to generate enough profit from the fourth component after product, promotion, and place in the marketing mix-price. Unlike free markets, in which companies set their own prices, Europe is beset by a complex maze of government-enforced pricing and reimbursement controls. Those controls have depressed pharma prices to the point where some companies now believe it is just not economical to launch new products in certain European countries. Marion Bamberger, senior director for Bristol-Myers Squibb, hit the nail on the head at a recent European pricing conference. She joked, with more than a hint of gallows humor, that she often has to explain to her US colleagues that "the words price increase do not exist in France."

Top ten? only ten!

As in the United States, the biggest challenge to European industry is not so much pricing as the dearth of new products. "The 99.9 percent chance of failure in research is the biggest challenge facing our industry, and it has been for many years," Shire Pharmaceuticals' chief executive Rolf Stahel told delegates at a recent meeting in London. The number of new molecular entities (NMEs) gaining market access in Europe fell for the second consecutive year in 2001, as the top 16 pharma companies launched just ten new products among them. (See "Top Ten? Only Ten!") Of those, only Novartis' Gleevec (imatinib) is a genuine breakthrough product. And even Gleevec's potential is stymied by its orphan indication (chronic myeloid leukemia). Yet, as former SmithKline Beecham chief executive Jan Leschly claims, the leading industry contenders need between two and four major new product launches a year to deliver the stock market's historic expectations of 10 percent annual sales growth and 15 percent profit growth. (See "Does Not Meet Standards.")

Does not meet standards

The industry's inability to fill its new product pipeline has two major implications for pricing and reimbursement. First, as every new product becomes increasingly valuable, achieving optimal prices and rapid market access is a management imperative that cannot be compromised. Second, managers need to focus on maintaining net-realized prices over a product's entire lifecycle. To bridge the new product gap, an increasing proportion of companies' economic returns will have to come from products in later stages of their lifecycles.

Key Trends

All of which is easier said than done in a price-hostile European market. With industry and government pulling in opposite directions-the former to improve shareholder value, the other to contain costs-most indicators point to the payers coming out on top.

Few products achieve premium prices. Of the new products with significant roll-out in 2001, relatively few achieved consistent price premiums across Europe. One possible exception was in the oncology market, in which Sanofi-Synthelabo's Fasturtec (rasburicase) for acute hyperuricaemia and Gleevec set new price points for their indications, albeit in a limited number of countries. Meanwhile, Bristol-Myers Squibb's Uftoral (tegafur/uracil) for colorectal cancer achieved an average 43 percent premium over Roche's Xeloda (capecitabine) in markets where both are available. In other therapeutic areas, several new medicines entered the market at a discount to comparable products:

• Schering-Plough's Aerius/NeoClaritin (desloratadine) is priced in some countries at a discount of 50 percent less than its predecessor Claritin (loratadine)-presumably so the company can retain its valuable franchise in oral antihistamines.

• Pfizer's migraine treatment Relpax (eletriptan) is priced 15–45 percent below GlaxoSmithKline's Imigran (sumatriptan) in most markets.

• GSK's combination HIV treatment Trizivir (abacavir/zidovudine/lamivudine) is priced at a discount to the sum of its component parts.

It's easy to infer that companies are trading prices for rapid market uptake in non-price regulated markets and using pricing and reimbursement delays to stall entry in price-regulated markets. With so few new products achieving a premium over first-in-class entries, one senior pricing and reimbursement executive was moved to bemoan Europe's unwillingness to recognize that pharmaceutical innovation is an organic process-and thus goes largely unrewarded. "Progress doesn't come in big leaps; it comes from incremental improvements," he said."As long as the authorities refuse to accept that an incremental improvement deserves some price advantage, Europe will not be at the forefront of promoting progress in the pharmaceutical business."

Existing hurdles limit EU roll-out. There is slightly better news about the speed of new product uptake in 2001. Yet, although new products reached the European market significantly faster than last decade's average, it was primarily the result of speedier pan-European regulatory approval rather than improved performance in pricing and reimbursement negotiations. Three of Europe's largest markets-France, Italy, and Spain-are among the major culprits in delaying market access through protracted negotiations. Some industry insiders have even suggested that such negotiations are the new preferred delay tactic of national authorities, now that marketing authorization is largely harmonized across Europe.

Pricing and reimbursement delays were historically the preserve of new breakthrough therapies, as companies sought to justify large premiums by demonstrating enhanced product benefits. Now they are much more routine, even for products not seeking a price premium. That trend is a reflection of reimbursement authorities' growing confidence in using their strong negotiating positions to drive prices down even further. It also refutes the industry's belief that a parity/discount pricing strategy assures rapid market access. Some companies are clearly entering into payer discussions ill prepared for the challenging negotiations that lie ahead.

Price consistency no longer prioritized. The scarcity of price premiums is reflected in the lack of priority that major pharma players give to price consistency in Europe. Despite growing concern over parallel trade-a practice recently described by Pfizer chief executive Hank McKinnell as "a method of diverting trade to the benefit of the middleman, not to the benefit of government payers, patients, or the encouragement of industry"-the evidence from 2001 is that price consistency is not an objective for many companies.

Although price variations tightened marginally in 2001 relative to a five-year European average, wide differentials remain in the prices for new drugs. The price of Trizivir, for example, varies greatly in the 11 markets in which it was launched before the end of 2001-from minus 34 percent to plus 51 percent of the average European price. AstraZeneca's Symbicort (eformoterol fumarate/budesonide) exhibits even greater variation (minus 37 percent to plus 58 percent).

From that evidence, it seems that companies would rather accept a high price where it is given and deal with the potential for parallel trade as a separate issue than implement a tighter price corridor in all markets. On the upside, a narrow price range helps curtail parallel trade by lowering the profit available to middlemen from shipping drugs from low priced markets to higher priced markets.

On the downside, the inclusion of lower priced markets in price band calculations can drag down the profit available to manufacturers in higher priced markets. The problem is exacerbated by the widespread use of international price referencing in Europe, whereby countries benchmark their prices against other European Union member states and adjust them accordingly. Faced with the prospect of leaving profits on the table in higher-priced markets or reducing their parallel trade bills, few companies are willing to enforce inflexible price bands.

Opportunities to Excel

Despite the tough pricing and reimbursement environment, pharma companies can still create competitive advantages in the marketplace, and senior management must implement them to improve the economic value of products relative to their competition.

Maintain net price yields. European authorities are increasingly combining supply and demand measures to control pharmaceutical expenditures. Some countries have even gone a step further by devolving responsibility for healthcare delivery and budgetary control to regional bodies. Principal among them are Italy, Sweden, and Spain, where the autonomous region of Catalonia is at the forefront of measures to contain drug costs. (See "Catalonia Cuts Costs.") Recently introduced measures include

Catalonia cuts costs

• treatment guidelines and monitoring systems for expensive or widely used drugs

• new target levels for generics in specific therapy areas

• restricting the use of expensive drugs to hospitals

• regional reference pricing.

The pricing and reimbursement implications of that devolution are great. Companies must develop and nurture new relationships with regional budget holders while simultaneously maintaining strong negotiating positions at the national level. They must tailor effective global pricing strategies to the objectives of those new customer groups and give greater consideration given over to local implementation. With procurement at the regional level already leading to more contract tendering and preferred drug lists, companies need new tools to optimize the yields from local customers by avoiding excessive discounts and rebates.

Companies can address regional challenges by restructuring their organizations with competent negotiators. In many respects, the new approach is more in tune with the multi-dimensional strategies developed by US companies to conduct business with HMOs.

Better returns from "patient-pay" products. Most lifestyle drugs are not reimbursed in Europe. For an industry that is used to pricing reimbursed drugs, the shift to patient-pay medicines isn't easy. Challenges arise in both price setting and ongoing price management. "Pricing to the patient requires a fundamentally different approach than pricing reimbursed drugs," says Chris Sutton, senior vice-president at Cambridge Pharma Consultancy. "Current pricing strategies fail to maximize the economic value of those products. There are significant advantages to be gained by developing effective competencies in this area."

The inability to deliver strong returns in the lifestyle segment is reflected in the revenue profiles of reimbursed versus patient-pay drugs. Although patient-pay products typically exhibit explosive initial growth, their uptake rapidly flattens or even declines. On the other hand, reimbursed products tend to exhibit slow, steady growth. (See "Revenue Profiles,") The challenge for pharma companies is to convert initial take-off into sustainable growth.

Revenue Profiles

And, to an extent, patient-pay products have two distinct advantages: 1) price is a significantly greater driver for consumer behavior than it is for the reimbursed market and 2) most European nations permit free pricing for non-reimbursable drugs. Price therefore offers greater opportunities as a growth lever in the patient-pay segment of the market.

That might not be an easy transition to make for an industry more used to marketing its products to healthcare professionals, but significant opportunities arise from:

• matching of pricing strategies to consumer motivation for purchasing lifestyle drugs

• understanding consumers' priorities for spending disposable income

• leveraging the episodic pattern of consumer expenditure in lifestyle areas

• managing consumers' price discussions with physicians and pharmacists.

It is up to management to abandon the traditional "once-and-for-all" price model in Europe and use price as a driver of more sustained performance for patient-pay products.

Take advantage of the regulatory environment. Like FDA, the European regulatory authorities, including the centralized European Medicines Evaluation Agency (EMEA), are becoming increasingly restrictive. The consequences for pharma are longer clinical studies, limitations on dosage, and indications aimed at later stages of disease management. With careful management of the development and commercialization processes, companies can convert those regulatory hurdles into opportunities to negotiate higher prices.

The process is by no means straightforward. But in an environment in which full market penetration is only achieved progressively over time, lifecycle planning of pricing and reimbursement strategies assumes greater importance. In practical terms, it can deliver higher yields over the full product lifecycle. One note of caution, however: over-optimistic projections of the indications and labels that will be approved by regulators may lead to a lack of preparation for the pricing and reimbursement opportunities of a more restrictive label. As products mature, pharma companies have opportunities to expand their indications and labels, thus increasing the product's value and avoiding the discounts associated with older products.

Time to Act

Based on the number of products filed for regulatory approval in 2001, this year is unlikely to see an improvement over last year's disappointing number of launches.

"For many companies, managing pricing over time has been a neglected discipline," says Cambridge's Ron Baynes. "But with fewer new products reaching the market and more restrictive regulations facing those that do, the days of focusing solely on target launch price are over. Sustaining post-launch pricing is now key."

What's more, companies will have to manage their pricing and reimbursement strategies in an increasingly difficult environment as European nations add new layers of decision makers to contain launch prices and erode post-launch yields. Price-controlled countries such as Italy, Spain, and Sweden, for instance, are busily adding new regional bodies to implement budgetary control measures.

Conversely, markets in which access hurdles have traditionally been at the regional or prescriber level are beginning to impose additional national hurdles to reimbursement. Since its inception in 1999, the UK's National Institute for Clinical Excellence (NICE, or the "National Institute for Cost-Effectiveness," as it was originally rumored to have been called) has largely protected government payers from all but the best evidence-based medicine. The rest of the world is watching closely. Meanwhile, Europe's largest market, Germany, is preparing to introduce a positive list and reimbursement by a diagnostic-related group.

Under the circumstances, pharmaceutical management has been slow to develop the skill bases and processes necessary to improve pricing and reimbursement performance. Only a few companies have dedicated management attention to developing effective competencies in those areas-despite the fact that pricing remains the single most effective tool in driving product ROI. Significant rewards await managers who conquer the pricing and reimbursement hurdles through innovative business solutions over the full product lifecycle.