Poison pills for golden geese
This article was published by the European Voice, on December 19, 2008.
It is rarely very popular to defend Big Pharma, or even to appear to do so. The pharmaceuticals industry ranks somewhere around hedge-fund managers in the eyes of the public.
For governments, drug firms’ revenues are viewed as a more or less inexhaustible reserve into which they can dip freely and controversially whenever they need to.
But do we now risk pushing up the price of innovation to the point of stifling the efforts that we expect to produce tomorrow’s cures?
The current economic crisis is almost certain to have an impact on R&D investment in this sector, but innovation is also threatened by pharma’s reputation as a golden goose.
In Germany, for example, legally mandated reductions on price are imposed. In 2007 these added up to more than €1.2 billion, or nearly 27% of what drug companies invested in R&D.
In France, they are subjected to specific taxes in addition to general company taxation amounting to €831 million in 2006, more than their industrial investments in the country (€818m).
The way such taxes are calculated bears no relation to drug firms’ actual financial results but is based, paradoxically, on the deficits of the health-insurance system: the higher its deficits, the greater the levy. Thus, for example, Astra Zeneca saw its taxes rise by 42% in 2005 despite a 2% decline in sales.
Such arbitrary tax measures cannot but reduce a company’s capacity to innovate. Nor are taxes the only factor. There exists a whole panoply of measures in EU member states aimed at containing the costs of public healthcare: price controls, reference pricing, quantitative goals limiting prescriptions by doctors, and so on.
This risks encouraging healthcare professionals to favour the cheapest alternatives when it comes to mandatory health insurance treatments, potentially at the expense of their patients’ health. It also, inevitably, discourages innovation.
Based on an unrealistic approach to competition, and failure to take fully into account risk-taking and innovation, EU anti-trust policy too often results in legal uncertainties and severe penalties for innovating firms.
Following publication of the interim European Commission report on 28 November aimed at promoting (cheaper) generic drugs, Neelie Kroes, the commissioner for competition, warned that « the Commission will not hesitate to open anti-trust cases against companies where there are indications that the antitrust rules may have been breached. »
Stephen Rose, competition partner at the international law firm, Eversheds, said the EU authorities had « declared war on the pharmaceutical sector. »
This is at a time when the cost of developing and marketing a new molecule has risen sharply: innovation in general is becoming every more costly.
Larger sample sizes, longer time periods, and more numerous administrative formalities inevitably add to costs, which may amount to an average of €1bn over a typical period of 12 to 13 years.
Public authorities clearly have no duty to ensure future profits for drug companies. But arbitrary taxation and heavy regulation are having increasingly severe consequences. The number of molecules launched by European drug firms has halved over the past two decades, falling from an average 97 molecules between 1988 and 1992 to 48 between 2003 and 2007.
Valentin Petkantchin is Director of Research at the Institut économique Molinari. He is the author of « Risks and regulatory obstacles for innovating companies in Europe, » a paper on the effect of anti-trust legislation on innovative companies.