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Insight & Intelligence : Mar 14, 2012
Falling Euro Hurts Some Biopharmas as Nations Scramble to Cut Drug Costs
Companies are seeing revenues decline and finding it tougher to access capital.!--h2>
The impact of the Euro’s woes on biopharma can be seen most in the currency’s home continent. Last month, the industry’s trade group estimated that unpaid debt owed by governments to the industry climbed more than 50% just from November to February. It rose from €10 billion to between €12 billion and €15 billion, in other words from about $13 billion to as high as about $20 billion.
The European Federation of Pharmaceutical Industries and Associations (EFPIA) said that most of the debt has been accumulated by Greece, Italy, Portugal, and Spain. “Things are getting rapidly worse,” Richard Bergstrom, EFPIA’s director general, told Reuters in February. What EFPIA didn’t detail is the effect of the Euro’s problems on European pharma and biotech companies.
The currency slide has hit both consumer demand for drugs as well as government purchasing of medicines for mostly state-run healthcare systems, according to GlaxoSmithKline. The firm blamed European pricing pressure for a 5% (£320 million or about $500 million) decline in regional sales during 2011. “We anticipate a similar impact in 2012,” GSK noted.
Several other big biopharmas saw sales slumps they attributed to the Euro or trends stemming from the Euro’s slide. AstraZeneca, for example, said total revenue fell 2% at constant exchange rates (CER) despite a 1% gain to $33.6 billion. Western European revenue fell 11% last year, to $8.5 billion, due to both volume and price declines in the mid-single digits plus the loss of about $1 billion in revenue due to competition with generics. Accounting for constant currency, AstraZeneca expects a revenue decline this year “in the low double-digit range.”
For Roche the Euro’s slide against the Swiss Franc led to a 10% loss in group sales, which fell to CHF 42.5 billion ($46.3 billion). The same 2011 result reflected a 1% gain at CER and even a 5% gain in U.S. dollars. Western Europe pharmaceutical sales shrunk 3% at CER to CHF 8.2 billion ($8.95 billion). The effect could have been worse, Roche said, but for the fact that 80% of its cost base is located outside Switzerland.
Sanofi reported that while 2011 net sales jumped by 9.2% to €33.4 billion ($44 billion) at CER, fueled by the $20.1 billion acquisition of Genzyme, the increase shrunk to 3.2% given depreciation against the Euro by the U.S. dollar, the Venezuelan Bolivar, and the Turkish Lira. Worse, the currency woes helped boost the company’s net loss last year to €8.8 billion ($11.5 billion). Western Europe sales slid 4% to €9.13 billion (almost $12 billion), but the drop would have been 10.5% absent Genzyme and sales of A/H1N1 vaccines.
Faring better was Qiagen, as growth from products added through its Cellestis and Ipsogen acquisitions resulted in a strong fourth quarter, with sales rising to $334.4 million, up 17% both in actual and CER terms. Six of those percentage points reflected sales of products from the two companies it acquired.
For all of last year, sales of molecular diagnostics products rose 7% at CER and represented 47% of net sales. Qiagen reports its results in U.S. dollars, which explains why for all of 2011, its 8% sales gain, to nearly $1.2 billion, amounted to only 4% at constant exchange rate.
Governments’ Cost Containment
The decline of the Euro has accelerated efforts by governments to lower drug costs. As of January, Germany’s Restructuring of the Pharmaceutical Market in Statutory Health Insurance (AMINOG) law took effect. It requires drug manufacturers to submit a cost-benefit assessment to the agency that regulates healthcare, the Joint Federal Committee or G-BA (Gemeinsame Bundesausschuss). Drug companies are reimbursed based on the benefit of their drugs in cost effectiveness or clinical effectiveness. Absent such proof the G-BA can set its own price for new drugs, over the objection of biopharma drug developers.
The new law prompted Eli Lilly and Boehringer Ingelheim to call off plans to introduce the type 2 diabetes drug linagliptin after they differed with Germany’s new Institute for Quality and Efficiency in Health Care (IQWiG) on what therapy linagliptin should be compared with in assessing its added benefit to patients. IQWiG concluded earlier this year that additional benefit has thus not been proven for linagliptin, which is marketed in the U.S. as Tradjenta and in Europe as Trajenta. The first drug to pass IQWiG’s new test was AstraZeneca’s heart attack treatment Brilique, marketed in the U.S. as Brilinta, allowing the firm to negotiate a price with healthcare officials.
Just last year, Germany angered the biopharma industry by raising the discount manufacturers must offer state health insurers from 6% to 16% and also froze drug prices for three years. The German Pharmaceutical Industry Association (BPI) said the higher discount cost the industry €1.5 billion (just over $2 billion) in 2010.
Germany is among European countries that have contained costs over the past decade through agreements allowing insurers to purchase a given quantity of medicine at the price quoted by the lowest responsible bidder, analyst Ranjith Gopinathan of Frost & Sullivan told GEN. The agreements have shifted influence in healthcare from the drug developers themselves and the governments that support them, to insurers and other payers of healthcare more focused on cutting costs, he explained.
Changing Business Models
As governments have responded to the decline of the Euro, so too over time will biopharma drug developers. “The challenging situation in Europe gives impetus to determine what possibilities exist for development in other markets, including emerging markets,” Alexandre Delacoux, executive director of the European Biopharmaceutical Enterprises, told GEN. Emerging markets such as China and India are already attractive to biopharma, given quick review-to-market timeframes, a growing supply of professionals, and their original lure of continued lower manufacturing costs compared with Europe and the U.S.
Additionally, biopharma businesses impacted by exchange rate variations, as all businesses, factor these variations into their business models. European biopharmaceutical companies that develop their business and operations in Europe are increasingly affected by the decrease in capital available in Europe, Delacoux said.
“The decline in available capital is an issue for European innovation and for the lifeblood of small- and medium-size companies. In order to address these challenges, companies have a tendency to search for partnerships much earlier in their development plans. Various forms of collaborations happen increasingly all along the value chain,” Delacoux added.
Take for example French-owned NovAliX, a €10 million-a-year developer of enabling technologies for drug development. Over the past 12 months four companies have signed it on for early-stage R&D. In one, NovAliX will be responsible for discovery of small molecule candidates for an osteoarthritis target chosen by Belgian-owned Galapagos. France’s Fondation Jérôme Lejeune also tapped NovAliX to develop small molecules targeting the cystathionine-beta-synthase, whose overexpression has been linked to Down syndrome.
Two other NovAliX collaborations are with Japanese companies. In the newer accord, announced in January, NovAliX will use its Graffinity SPR-based screening platform in a discovery program of Teijin Pharma. And last year NovAliX agreed to apply the fragment-based screening platform to a drug discovery program by Shionogi.
With the Euro continuing to slide (to a six-week low as of March 6), big and even smaller biopharmas can be expected to depend more on Asia and other emerging regions for keeping up their numbers, even if few so far have taken the approach of AstraZeneca in committing to it. The firm reported that it continues to expect double-digit revenue growth in emerging markets.
Alongside the declining Euro are several other factors that influence healthcare spending in Europe and consequently how companies operate, Delacoux pointed out. These factors, he noted, include the broader global economic downturn; rising healthcare costs linked to an overall aging population; cost containment measures in several cash-strapped countries scrambling to balance their budgets; regulatory pressures linked to the changing healthcare environment from mass market medication to an individualization of healthcare; and the pharma patent cliff.
European governments can be expected to step up cost-cutting where medicines are concerned, from simply cutting their medicine budgets, as Greece has done since the onset of its financial crisis, to adopting variations of Germany’s new test for both cost and clinical benefit to patients as preconditions for subsidizing new medicines.
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