Over the past few months, cuts to pharmaceutical prices have been announced in Ireland, Germany and Greece. France, Spain and Italy are preparing to make similar moves.

Analysts at Leerink Swann have even drawn parallels between the way such news keeps popping up and the fairground game, "Whack-A-Mole."

In answer to questions about why is this happening, now, one has only to look at the riots in Greece, and the large public demonstrations in other countries, to understand that European governments have to take wide-ranging measures to reduce their ballooning public debts (¹ Also see "Greece Lowers Drug Prices By Up To 27 Percent" - Pink Sheet, 5 May, 2010.).

Governments, which ultimately pay for health care in Europe, are taking a number of austerity measures in response, including cutting the prices of medicines (see chart: " ² Medicine Price Cuts Proposed In Europe In 2010 "). Other actions include cuts to civil service pensions, welfare payments and the salaries of public employees like doctors and nurses. But politicians can become slightly less unpopular by cutting the prices of medicines.

Slashing drug prices for many years has been part-and-parcel of managing health care budgets in Europe. Governmental authorities periodically cut prices of older products or adjust their category of reimbursement so that patients have to make larger copayments if they want a particular drug. Pharmaceutical companies have learned to live with ever-declining prices and know well that they have to launch new products and increase the volume of existing sales to survive.

The companies also know that governments sometimes take extra measures. GlaxoSmithKline's CEO Andrew Witty said during his company's first-quarter earnings call that four or five European countries implement "relatively dramatic" pricing changes every year in Europe. In effect, the products GSK sells in Europe are hit with a 3 percent cut every year, he remarked.

The question he and others are asking is whether European governments are asking for significantly greater pricing changes than usual, and whether they will likely have a more noticeable effect on the business of pharmaceutical companies.

"Are we going to see four or five countries do something which adds up to 3 percent for the whole year, in which case it is kind of normal. Or are we going to see something substantially beyond that?" Witty commented to analysts.

At the time he spoke, in late April, Witty said taking a view on the issue would be premature. Even now, at the beginning of June, consensus doesn't exist. Lack of clarity, however, hasn't stopped commentators and analysts from starting to speculate on whether the European pricing revisions will make a difference to the 2010 sales or profits of pharmaceutical companies.

Generics More Exposed

Leerink Swann analysts have noted that generic products may be more exposed to pricing revisions than branded products - generics are priced higher in the EU than in the U.S., they noted.

They also point out that pricing changes often are implemented months if not years in the future - for example, changes announced in 2006 in the Netherlands are just coming into effect this year, they report.

Still, several proposals bear watching and, if implemented, could have a significant long-term impact on pharma in those countries. These include Ireland's plans to introduce reference pricing, (³ Also see "Ireland Cuts Drug Prices And May Also Introduce Reference Pricing" - Pink Sheet, 22 February, 2010.), and a slew of changes on the table in Germany (⁴ Also see "Proposals For Drug Pricing Reforms In Germany Come Under Heavy Political And Industry Pressure" - Pink Sheet, 5 May, 2010.). These may be a greater long-term threat than one-off price cuts.

Deutsche Bank analysts believe that the financial risk to Big Pharma companies of the European price cuts announced so far are modest and manageable. The impact might reduce revenues by 1 percent to 2 percent, but companies are making cost savings and other measures that should offset any dent in earnings. The threat of increased parallel trade is likely to be contained by restricting supply allocations to low-priced markets.

In a similar vein, Sanford F. Bernstein Research analysts reckon that fears over European price cuts are overdone. Price decreases will be modest, and their effects are already built in to companies' guidance, they comment.

Cowen & Co analysts note that the timing of many of the pricing measures is uncertain, and they speculate that risk, if any, is greater for companies with larger European businesses. GSK, for example, derives 32 percent of its revenues from Europe, AstraZeneca 29 percent, Merck & Co 28 percent, Lilly 23 percent and Bristol-Myers Squibb 18 percent.

[Editor's note: To track European business and regulatory news, sign up for free e-mail alerts at ⁵ http://www.europharmatoday.com .]

- John Davis ( ⁶ j.davis@elsevier.com )

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