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As election year 2012 gets into swing, the pharmaceutical industry can expect a roller-coaster ride from Washington. As lawmakers continue to grapple with the nation’s burgeoning federal budget deficit, healthcare spending has moved into the cross-hairs of fiscal and legislative debate. Pharma’s outlook is even less certain in Europe, as the deepening euro-zone financial crisis compels governments there to constrain drug prices for state-funded healthcare systems—the main source of European pharmaceutical sales.
In the United States, drug manufacturers received a reprieve in November 2011 after the congressional Joint Select Committee on Deficit Reduction, or co-called Super Committee, failed to recommend at least $1.2 trillion in federal budget savings over a 10 year period. The Super Committee had been considering a number of proposals that could have directly impacted drug manufacturers, including rebates on products used by low-income Medicare beneficiaries, a shorter exclusivity period for branded biological drugs, and a ban on payments to delay the marketing of generic drugs.
Instead, the Super Committee’s inaction triggered a sequestration process involving automatic, across-the-board spending cuts in defense and other discretionary spending starting in 2013, including a 2% reduction in Medicare payments to healthcare providers. "The bottom line is that we avoid (for now) the bigger healthcare cuts that might have come under a larger-scale deal, which is a near-term positive for healthcare and particularly for hospitals and large-cap pharma that might have faced the most risk under a bigger deal," wrote Goldman Sachs analyst Jami Rubin in an investment note.
While Congress has the coming year to revise the pending cuts, if it chooses to do so, President Obama has pledged to veto any legislation that backs away from the agreed-upon levels of reduction. For now, the initial reading is that drug manufacturers are better off with the automatic sequestered cuts compared to what the Super Committee had been considering.
For instance, in September, the Obama administration presented the Super Committee a plan that would cut $320 billion in Medicare and Medicaid spending over 10 years. The proposal would require drug companies to extend the prescription drug discounts or rebates that are given to Medicaid purchasers to also be given to low-income Medicare beneficiaries. The savings to Medicare Part D spending (and the loss to pharmas) was estimated at $135 billion over 10 years, amounting to a 23% reduction in branded drugs sales and a 13% reduction in generics, according to administration officials.
This would result in a $20-billion annual reduction in pharma revenue and the loss of 260,000 jobs throughout the United States, according to a July 2011 report prepared by the Battelle Technology Partnership Practice, which was commissioned by the Pharmaceutical Research and Manufacturers of America (PhRMA), the branded drug trade association. Moody’s Investors Service separately estimated the measure, if enacted, would reduce overall drug company revenues by 2% to 7%.
"It is critical that our policymakers embrace dynamic and innovative business sectors, such as the biopharmaceutical research sector, and refrain from stifling job growth through shortsighted proposals, such as government-mandated price controls in Medicare Part D," said John J. Castellani, PhRMA president and chief executive, in a statement.
The Obama plan also recommended reducing the data exclusivity period for bioequivalent drugs (so-called generic biotechs) from 12 to 7 years. The administration has twice before unsuccessfully sought to shorten the exclusivity period, during which time generic manufacturers would be prohibited from marketing lower-priced bioequivalent versions. The White House estimates the change would save Medicare and Medicaid nearly $2.34 billion through 2021. The dispute has so far been academic because the Food and Drug Administration has not finalized regulations by which generic manufacturers can seek market approval bioequivalent products.
The White House proposal would also ban pay-to-delay deals, in which branded drug makers pay generic companies to not market chemical (small-molecule) alternatives for a given time period. The Federal Trade Commission and some lawmakers have attempted for some time to ban pay-for-delay deals, despite the fact that both branded and generic manufacturers support the practice. The FTC has said such a ban would save the federal government $8 billion over 10 years (but cost drug manufacturers an equivalent amount).
In Europe, the outlook for 2012 remains gloomy. "It’s going to remain very tough," said Richard Bergstrom, director general of the European Federation of Pharmaceutical Industries and Associations, a Brussels-based organization representing research-based drug companies. Particularly worrisome, he said, is the mounting debt that state-run hospitals owe for pharmaceuticals—an amount approaching €10 billion ($13.8 billion) just in Portugal, Spain, Italy, and Greece, Bergstrom told Reuters.
Roche has stopped delivering certain drugs to state-funded hospitals in Greece that have large unpaid bills, and instead is supplying medications through pharmacies that have better payment records. Prescription price cuts, imposed by many European governments in 2010, are likely to continue this year. "We don’t think that’s going to get any easier; it’s probably going to get tougher," AstraZeneca’s chief financial officer Simon Lowth told reporters last October. Analysts at Deutsche Bank say average drugs prices in Europe declined by about 5.5% in 2011 and 3.5% in 2010. Price pressures will likely continue this year.
During 2010 and 2011, drug manufacturers gave up revenues of more than €7 billion, about 8% of their annual revenues, to governments of Greece, Ireland, Italy, Portugal, and Spain, according to industry figures. The pressure is likely to spread to other European countries this year, as policy makers grapple to constrain government spending.
About the Author
Contributing editor Ted Agres, MBA, is a veteran science writer in Washington, DC. He writes frequently about the policy, politics, and business aspects of life sciences.
