INNsight article by Peter Wittner, Interpharm Consultancy, September 2010

You may remember that I wrote recently about how a plague of government price cuts is spreading across Europe and seriously risks weakening the industry. I suggested that in their approach to the generic industry, some governments seem to have forgotten the old fairy story of “The Goose That Laid the Golden Eggs” and could end up slaughtering the goose.

There is another peril for the industry in the shape of a second epidemic, that of generic tenders. These are not new in the sense that the UK’s NHS for example has used them for many years as a tool for selecting suppliers of generics to hospitals. The NHS was however always careful to use the tenders in such a way that was consistent with maintaining a healthy and competitive generics industry. The NHS wanted to avoid a situation where it pushed too hard on pricing and so ended up with a handful of generic survivors in the market with all the risks that might present to competition and continuity of supply.

This does not seem to be the case in other European countries. In Germany for example, it seems that those companies who lose out on a tender find themselves in a very difficult position because they are effectively excluded from most of the market for the period that the tenders are running. This is serious because the tenders are organised by the AOK (Allgemeine Ortskrankenkasse = General Local Health Insurance Fund), which is the overall coordinating body for a collection of German health insurers. It covers about 24 million members, which is about one third of the German population.

The way that the system works in a very brief summary is that the individual generic manufacturers offer to supply the insurers with a range of generics that are specified in the tender at discounted rates. Those who win enjoy a partial monopoly at low prices but with high volumes to compensate. The generic trade association ProGenerika is not happy about these discounts that it believes are imperilling the health of the industry and will lead to just a handful of survivors in the long term.

Similar tenders in the neighbouring Netherlands have resulted in a very significant fall in generic prices.  In the Netherlands the generic share of prescription was 57% in 2009, but statistics from the local organisation SFK in March 2010 showed that the average generic price in 2009 was 22% lower than in 2008!

The local trade association BOGIN commissioned a report on the topic entitled “Penny Wise, Pound Foolish?” from Roland Berger Strategy Consultants that looked at the whole issue of the recent Dutch reforms.

In its Executive Summary it concluded amongst other things “the emphasis has been almost exclusively on cost” and suggested that the reforms risk overshooting their objective and becoming counter productive. It concluded that the consequence was that “increasingly one-sided cost pressure is now threatening the ability of originators, generics producers, wholesalers and pharmacists to fulfil their roles, forcing them to cut back jobs, research, investments and services”.

The report predicted significant job losses in the sector and serious negative consequences for the availability of both patented and generic drugs.
Having focussed on just the cost savings visible in the Netherlands and Germany, other countries have spoken of introducing similar systems; Italy for example, announced in early 2010 that it would introduce pharmaceutical tendering as part of its austerity measures.

But then, surprisingly, the light dawned and the government realised that there were alternatives when it responded to the criticisms of the plans that came from both branded and generic sides of the industry. The Italian Health Minister, Ferruccio Fazio, announced that the government had decided that measures to increase generic volumes made more sense than just keeping reimbursement costs low. The Italian volume markets share for generics is still only hovering around the 10% level. Nevertheless, Italy will go ahead with a policy of reducing generic prices

The question, is though, whether other governments considering generic tenders systems will adopt the UK/Italian approach of trying to keep generic prescribing high and the industry healthy and competitive, or whether they will adopt the Dutch/German approach of hammering down prices until they drive some of the smaller companies out of business. Whatever happens, the big boys in the generic industry will survive since even when they lose out on a tender in one country their geographic spread allows them to survive in other markets. Smaller companies though will feel the pain from these cost-cutting measures For example, a couple of years ago Stada announced 230 job cuts and a 29 million euro charge as a direct result of the tenders that forced them to make much of their sales force redundant.

Time for another parable! 

Having illustrated one article with the story of the Golden Goose, I am reminded of another story that provides a good analogy for the spread of the tenders. This is the one about the man who, to save money, feeds his donkey less and less each week.

But then, just as he manages to teach it to survive on nothing, the wretched animal goes and dies!


If you have any questions or comments on this article, please feel free to contact me.

Peter Wittner
September 2010
peter@interpharm-consultancy.co.uk
www.interpharm-consultancy.co.uk