Pfizer Picks on France

Drug price fixing throughout Europe has long frustrated the pharmaceutical industry, but Pfizer's CEO has singled out France as the worst perpetrator.

European countries' drug pricing has long frustrated the pharmaceutical industry. But until recently most companies have gritted their teeth and dealt with it, cushioned by higher prices in the US. Last November, however, Henry McKinnell, chairman and CEO of Pfizer Inc. , the world's biggest drug company, said he'd consider withholding new treatments from France unless the government there allows higher drug prices. McKinnell declared his intention to meet with France's Prime Minister Lionel Jospin early this year to put forward the case for drug pricing reform.

France is not the only country where drug prices face downward pressure; the UK, like Italy, Spain, and Ireland, have all imposed drug price cuts, and even in the US, health care insurers are trying to shift growing costs onto consumers. Yet it's easy to see why McKinnell's declaration—the closest any pharma CEO has come to confronting a government directly—singled out France.

Europe's second largest pharmaceutical market—which last year accounted for 3.8% of global sales, according to IMS Health—already has some of the lowest drug prices in the western world. The price index for reimbursed drugs in France has remained level for the last decade, alongside a 17% rise in cost of living (and price rises in UK and US). Last June, the French government announced a further round of price cuts designed to save the health care purse $542 million per year as part of the Plan Medicament. More than 800 products saw their prices slashed on the grounds of "inadequate medical service" (meaning they either don't work very well or that there are better products around), but last year for the first time price cuts also hit drugs outside this category (so-called "innovative" products). Pfizer's Lipitor, (atorvastatin) (sold in France as Tahor) suffered an unusually high 8% price cut after three years on the market; the price of Merck & Co. Inc. 's older Zocor (simvastatin) also fell. "We can't keep encouraging older innovations," argues Noel Renaudin, president of the French government's economic committee for health care products, acknowledging that few drugs beat Lipitor in terms of efficacy. "Lipitor has had a great run in France. Such [innovative] products need to [be encouraged to] replace themselves."

France also has one of the most complex and prohibitive tax regimes in Europe, with more than ten different taxes specific to the pharmaceutical industry, including one on marketing spend. Drug companies in France have, for the last two years, paid more taxes than in any other European country, according to SNIP (Syndicat National de L'Industrie Pharmaceutique), the country's pharmaceutical industry association. Last year the total came to more than €900 million, or about 5% of turnover.

The government has left few stones unturned: tax burdens are dotted along the whole cycle of drug development and commercialization. SNIP accuses the government of thinking "purely in financial terms," rather than in line with the country's health care needs.

The "safeguard clause," introduced in 1999, makes it difficult to argue otherwise. The declared aim of this tax is to bring drug spend into line with the government's annual health care budget. Companies with sales growth of more than 3% in 2001 (up from 2.5% in 2000) will have to pay a minimum of 50% and up to 70% tax on additional revenues above this fixed threshold. The tax is also calculated both for individual companies and across particular therapeutic areas, meaning unlucky manufacturers can be hit twice.

SNIP contends that the 3% threshold is unreasonably low given that drug spend in France and elsewhere is rising by about 6-7% per year, driven by aging populations and an increasing range of available medications. Renaudin attempts to downplay the impact of the safeguard clause, however, by pointing out that it doesn't apply to innovative products: Novartis AG got its asking price from the French government for Visudyne (verteporfin inj.) for age-related macular degeneration, he claims, and it wasn't until last year that Biogen Inc. started paying any tax on sales growth of its interferon-beta product Avonex (interferon beta 1A).

There are other brakes on growth, however, besides the safeguard clause. Firms trying to increase sales through drug promotion will face taxes on marketing spend of anywhere between 9.5% and 21%, depending on the size of this spend relative to overall revenues. Although generic and orphan drugs escape this treatment, the tax still cost the industry €260 million in 2000, according to SNIP. Adding insult to injury: this increased spend is not tax deductible against profits.

In the case of the tax on marketing, France is not alone: the UK also imposes a tax on promotional spend, and Spain and Belgium are about to. But in France, firms wanting to lay off marketing staff as a result will be clobbered again by the socialist government's redundancy laws.

Such measures probably help explain why France's drug industry has grown at just half the rate of that in the US and UK over the last decade and dropped from 2nd to 7th in the world in terms of medical discoveries. Launching an innovative product in France takes an average of 8 months longer than in other European countries.

Given France's vigorous attempts to reduce health care costs, some welcomed McKinnell's unusually vocal criticism. "This was exactly the thing to do. It's about time they [the industry] stood up and said something," declares Mike Ward, a pharmaceuticals analyst at Deutsche Bank in London. Other US players entering the French market say they're also ready to challenge the system: Frank Baldino, Jr., PhD, chairman and CEO of Cephalon Inc. , a US biotech which recently bought France's Groupe Lafon [See Deal], declares that he'll negotiate directly with the French government if necessary on the issue of pricing for Cephalon's most important drug, Provigil (modafinil) for excessive daytime sleepiness associated with narcolepsy, which sells in France for less than half of its US price. (See "Biotech's Holiday Shopping Spree: Buy, Buy, Buy," IN VIVO, December 2001 [A#2001800243.) "Pfizer's move is a rallying call for the industry to stand up and be counted," sums up Deutsche's Ward.

Other large pharmaceutical firms appeared less willing to speak out so loudly on this occasion. But most have publicly bemoaned cost-containment and delayed access to medication in Europe more generally.

SNIP and EFPIA, the European Federation of Pharmaceutical Industries and Associations, share McKinnell's concerns but disagree with his methodology. SNIP's president is refusing to comment on the affair, but spokeswoman Michelle Gallard declares that "Pfizer can't simply boycott France." To EFPIA's Christophe de Callatay, "naming and shaming individual countries isn't the way to influence European politics." When you've got just one customer, who is so heavily involved in all the product life-cycle stages, it is best to stay in that customer's good books, he says. "Most companies prefer to negotiate calmly."

Calm negotiation hasn't worked very well, though. And it's hard to find an alternative to singling out member states, since the European Commission has no influence on individual countries' drug pricing (which is precisely the problem with last summer's EC proposals to improve the competitiveness of the pharmaceutical industry). (See "Can the EC boost Europe's Competitiveness?" IN VIVO, September 2001 [A#2001800167.) Pointing the finger at the worst perpetrators is justified to the extent that national drug prices across Europe are often set by those in neighboring countries, leading to a downward spiral in pricing over the last decade.

"The best that [European] governments could do would be to trust the markets enough to put pressure on us to innovate," declared McKinnell at a conference in London prior to his French trip last year. McKinnell—and without a doubt most other pharmaceutical company CEOs—calls for a US-style free market.

That's unlikely. The cost of medication in Europe will probably have to be shared out between governments, pharmaceutical companies and a growing patient population. Having a single European government—rather than 15 or even 23—at the negotiating table would make things easier; so would a better show of solidarity among drug firms and industry associations. Forthcoming presidential elections in France mean nothing is likely to happen there in the short term. But the increased prominence of health care on every government's agenda, alongside imminent EU enlargement, makes some kind of change to Europe's pharmaceutical pricing system inevitable.