R&D 'Exodus' Claimed as German Market Declines

June 27, 2005

International reports indicate that Germany's innovative pharmaceuticals sector continues to suffer amid the government's cost-conscious healthcare reforms. A new law, which increases the compulsory manufacturer discount on all drugs supplied to public hospitals from 6% to 16%, has reportedly led to an "exodus" by large US-based innovative drugmakers. Further potential losses from a new reference pricing system are estimated at US$1.5bn this year.

In view of other unfavourable recent reforms, downscaling in pharmaceutical R&D activity is unsurprising. Drugmakers now fear that prescribing changes which raise co-payments will also lead to loss of revenues. Under the reference pricing system, patented products may be subject to a "double" patient co-payment intended as a disincentive to costly, innovative drugs. Meanwhile, the removal of almost all reimbursement on OTCs could lead the sector to contract, as the removal of OTC price controls also drives up competition.

Meanwhile, the generics sector is set to become a major beneficiary of the changes. A new pharmacy dispensing fee on prescription drugs, calculated at EUR8.10 plus 3% of the selling price, could hit sales. However, this is likely to be less keenly felt than in the innovative sector, which will be hit by the fact that prices will be too low to justify reinvestment in R&D.

Demographic factors, as well as economic readjustments, are driving the cost-cutting. Germany's healthcare system is creaking under pressure from an ageing population, with people over 65 now accounting for more than 80% of the country's healthcare spending. In this sense, the government is not entirely to blame for the current crisis, although it appears willing to ignore likely long-term damage to the country's pharmaceutical R&D capability.