<s docid="FT932-13564" num="7"> THE pharmaceuticals industry is under attack.</s>

<s docid="FT932-13564" num="8"> Around the globe, governments and health providers are struggling to control their healthcare budgets.</s>

<s docid="FT932-13564" num="10"> The Japanese, German and Italian governments have all implemented measures against medicine prices, or use, over the past 18 months.</s>

<s docid="FT932-13564" num="26"> 'Society needs cost-effective healthcare, but we also need money for R&D.</s>

<s docid="FT932-13564" num="27"> Finally we also have shareholders who are not altruists and need a return on their investment,' he argues.</s>

<s docid="FT932-13564" num="33"> With prices of existing medicines frozen or falling in most countries, only those groups capable of discovering and rapidly developing innovative drugs will survive.</s>

<s docid="FT932-13564" num="44"> To cope with falling prices and rising costs, the industry will need to manage R&D more efficiently, says Dr Tom McKillop, of Imperial Chemical Industries' bioscience subsidiary Zeneca.</s>

<s docid="FT924-7380" num="50"> But pharmaceutical manufacturers already devote a higher proportion of their revenues to R&D than other high-technology industries such as electronics and aerospace.</s>

<s docid="FT924-7380" num="51"> They face a likely squeeze on profits over the next few years as governments tighten price controls.</s>

<s docid="FT943-45" num="22"> In the late 1980s, many companies in the US raised prices in a manner that some senior executives now admit was scandalous.</s>

<s docid="FT943-45" num="23"> During six years in the late 1980s and early 1990s the price of some drugs increased by more than 100 per cent, while the consumer price index rose only 26.2 per cent.</s>

<s docid="FT943-45" num="24"> Subsequent arguments put forward by the industry about the cost-effectiveness of using drugs were swept aside.</s>

<s docid="FT943-45" num="25"> Attacks on medicine bills have hit every significant pharmaceuticals market over the past 24 months.</s>

<s docid="FT943-45" num="26"> Last year, the German market collapsed by 9 per cent after healthcare reforms.</s>

<s docid="FT943-45" num="27"> The US market also decelerated to only 5 per cent growth, compared with double-digit growth in the late 1990s.</s>

<s docid="FT943-45" num="28"> This year it has been the turn of the Japanese, French and Italian markets to collapse, all registering static growth or falls.</s>

<s docid="FT943-45" num="29"> The UK, Spanish, Dutch and Belgian markets have also recorded reduced growth rates.</s>

<s docid="FT943-45" num="34"> Faced with falling volumes, the inability to raise prices and, in the US, price competition, individual companies are suffering.</s>

<s docid="FT924-11213" num="15"> The prices of some medicines have been reduced nine times in the past 14 years.</s>

<s docid="FT924-11213" num="16"> But it is in the US, the world's biggest market for pharmaceuticals and one of the last, with Denmark, in which drug prices are not set by the government, where the implications of price curbs could be most serious.</s>

<s docid="FT924-11213" num="17"> Companies are already voluntarily limiting their prices in the hope of avoiding legislation, but their efforts may be too late to prevent it.</s>

<s docid="FT924-11213" num="18"> The reason for worldwide pressure on prices is that healthcare budgets in almost every developed country are out of control.</s>

<s docid="FT924-11213" num="19"> A combination of rising demand for care from ageing populations and increasingly expensive medical technology has sent health spending spiralling.</s>

<s docid="FT924-11213" num="22"> In the US, healthcare expenditure has risen from 7 per cent of GNP in 1970 to 12 per cent in 1990.</s>

<s docid="FT924-11213" num="23"> Over the same period the proportion of the costs met by federal and state authorities has increased from 22 per cent to 41 per cent.</s>

<s docid="FT924-11213" num="24"> The rest is paid by individuals and private health insurers.</s>

<s docid="FT924-11213" num="25"> Governments, faced with such rising healthcare expenditure, have preferred to target the prices and volumes of drugs prescribed rather than trim spending on politically sensitive areas such as hospitals and doctors.</s>

<s docid="FT924-11213" num="27"> The report showed that the price of some drugs (see accompanying chart) had increased by more than 200 per cent over the past six years, compared with an overall rise in the consumer price index of 26.2 per cent.</s>

<s docid="FT924-11213" num="65"> The have-nots are those groups with few new products and expiring patents.</s>

<s docid="FT924-11213" num="66"> These weaker groups, which used to generate profit growth through price increases, have been particularly hard hit by the recent pricing constraints.</s>

<s docid="FT941-1818" num="20"> Development of compounds that may offer only a slightly better safety profile over products already on the market is a luxury which research-based drug companies can no longer afford.</s>

<s docid="FT941-1818" num="21"> In certain cases, 'that marginal improvement gives to the system exactly what politicians and government officials want.</s>

<s docid="FT941-1818" num="22"> They lower the price because once you have two or three or four of those (products), prices collapse immediately,' argues Raul Cesan.</s>

<s docid="FT941-1818" num="29"> However, incentives to take such risks could soon disappear if the pricing controls proposed under healthcare reform are approved - 'the proposal to severely review the ultimate pricing of a drug, even if it's a breakthrough product, gives a disincentive to how much risk money you would put up for those types of activities,' warns Dr Spiegel.</s>

<s docid="FT941-1818" num="30"> In any case he believes that current market forces are taking care of price controls within the drug industry.</s>

<s docid="FT941-1818" num="31"> In its 1993 annual report published last week, Schering-Plough announced that between 1991 and 1993, it held average US net prescription drug price increases to below the rate of increase in the consumer price index (CPI), and in 1994 expects price rises again to be at or below the increase in CPI.</s>

<s docid="FT923-11707" num="11"> Until recently, Japanese drug companies have been complacent about R&D because of the government's drug-pricing policy, where all new drugs were awarded premium prices whether or not they were dramatic improvements.</s>

<s docid="FT923-11707" num="12"> Companies, lacking the incentive to develop innovative drugs, chose only to make small changes to existing drugs rather than spend big sums on product development.</s>

<s docid="FT923-11707" num="14"> The push by the government for new and effective drugs has been prompted by a change in pricing rules.</s>

<s docid="FT923-11707" num="15"> From this fiscal year, the only drugs to be allowed premium prices will be those which represent a new concept, are more effective than existing drugs and which make a noticeable contribution to treatment.</s>

<s docid="FT923-11707" num="16"> Profits at companies lacking new products have been squeezed by the government's official price cuts implemented every two years from 1981 and averaging from 10 to 15 per cent.</s>

<s docid="FT923-11707" num="17"> The cuts are applying pressure on companies to produce new drugs because the impact on the profit margins of new drugs is less severe.</s>

<s docid="FT923-11707" num="19"> As companies increase R&D and capital investment spending, the need to establish a worldwide presence in order to recoup costs has increased sharply.</s>

<s docid="FT923-11707" num="22"> R&D expenditure has doubled during the past 10 years while net sales increased by only 50 per cent during the same period.</s>

<s docid="FT923-11707" num="23"> The percentage of R&D expenses to net sales rose to 11.1 per cent in the last fiscal year from 7.2 per cent in fiscal 1982.</s>

<s docid="FT923-11707" num="24"> Because a typical drug takes 10 years and Y10bn to develop, only those companies large enough to absorb costs will be able to survive in the long run.</s>

<s docid="FT923-11708" num="9"> Over the past decade, the industry habitually raised the price of prescription drugs in the US at least twice or three times the rate of inflation.</s>

<s docid="FT923-11708" num="10"> The steep price increases contributed to hefty double-digit profit gains of 17-20 per cent.</s>

<s docid="FT923-11708" num="11"> But because of the pressure to limit price increases, most analysts agree that annual profit gains will slow to 13-15 per cent by 1995.</s>

<s docid="FT923-11708" num="12"> Some analysts even predict that overall industry earnings growth could dip below 10 per cent.</s>

<s docid="FT923-11708" num="14"> Pharmaceutical giant Merck said last year it would not raise prices more than the rate of inflation and other companies, including Pfizer and Bristol-Myers Squibb, have followed suit.</s>

<s docid="FT923-11708" num="16"> The pressure to stem the rise in drug prices is apparently taking a toll already in some areas.</s>

<s docid="FT923-11708" num="17"> Earlier this year, drug companies reported below par first-quarter results, leading to a sell-off on Wall Street.</s>

<s docid="FT923-11708" num="20"> Analysts say continuing pricing constraints will hurt companies without strong product pipelines.</s>

<s docid="FT923-11708" num="21"> Upjohn, a drugs company based in Kalamazoo, Michigan, that many analysts say lacks a strong research and development pipeline, has announced that it expects its second-quarter net income to be flat.</s>

<s docid="FT923-11708" num="22"> It said it was offering voluntary retirement to about 10 per cent of its workforce to reduce costs.</s>

<s docid="FT923-11708" num="23"> Bristol-Meyers Squibb surprised Wall Street last month when it released a disappointing second-quarter earnings forecast.</s>

<s docid="FT923-11708" num="24"> While price increases have apparently moderated, Americans still pay some of the highest prices in the world for prescription drugs.</s>

<s docid="FT923-11708" num="25"> In most other countries, prices are subsidised by governments that negotiate with drugs companies, but drugs companies in the US have long set their own prices.</s>

<s docid="FT923-11708" num="31"> Some well-publicised prices for newer drugs underscore the issue.</s>

<s docid="FT923-11708" num="32"> In May, cancer experts criticised Johnson & Johnson for setting too high a price for the drug Levamisole to treat colon cancer.</s>

<s docid="FT923-11708" num="33"> The company set the price at Dollars 1,250 to Dollars 1,500 for a year's supply, some 100 times higher than an older version of the drug used in veterinarian medicine.</s>

<s docid="FT923-11708" num="34"> Advocates for the mentally ill have attacked Swiss drug giant Sandoz for the price it has set for Clozapine, used to treat schizophrenia: Dollars 7,500 for the drug itself plus a required weekly blood monitoring.</s>

<s docid="FT923-11708" num="35"> And even before the experimental cancer drug Taxol is out of clinical trials, advocates for breast cancer patients wonder if the price of the drug, which may eventually reach Dollars 2,000 a gram, will simply be out of reach of most women.</s>

<s docid="FT923-11708" num="36"> The pharmaceutical industry has long justified its prices by citing huge research and development costs.</s>

<s docid="FT923-11708" num="37"> According to the Pharmaceutical Manufacturers Association (PMA), the industry's trade group in Washington, research costs will near Dollars 11bn in 1992, up from Dollars 9.6bn in 1991 and about Dollars 600m in 1970.</s>

<s docid="FT923-11708" num="38"> The industry argues that it has to recoup its R&D costs.</s>

<s docid="FT923-11708" num="39"> In the US, it spends a little over 16 cents out of each sales dollar for R&D, compared to 4.5 cents to 5 cents for all other industries, said Mr Jeff Trewhitt, PMA spokesman.</s>

<s docid="FT923-11708" num="40"> 'Of course in nations where there are price controls, like southern Europe, the prices are lower', said Mr Trewhitt, adding that in those countries with price controls there is little biomedical innovation.</s>

<s docid="FT923-11708" num="41"> 'Between 1975 and 1989, 47 major world-class drugs originated in the US alone.</s>

<s docid="FT923-11708" num="42"> This innovation has been fostered in a free-market atmosphere.</s>

<s docid="FT923-11708" num="43"> Certainly, the R&D costs have to be covered', said Mr Trewhitt.</s>

<s docid="FT923-11709" num="48"> The need for substantial investment in research and development required to discover 'block-buster' drugs with sales of more than Dollars 500m a year was beyond the means of all but the largest companies.</s>

<s docid="FT941-1666" num="18"> Government healthcare reforms around the world, designed to tighten controls on spending, have already cut drug prices in Japan and sales in Europe.</s>

<s docid="FT941-1666" num="19"> Some drugs are no longer available on national health services.</s>

<s docid="FT941-1666" num="20"> Others have had price cuts imposed.</s>

<s docid="FT924-2087" num="7"> The extension of the effective period of marketing exclusivity for drugs through a system of supplementary protection certificates (SPCs) is designed to give pharmaceutical companies a fair return on the growing cost of researching and developing new drugs, and to prevent research work moving from the EC to the US or Japan where drugs already enjoy extended patent protection.</s>

<s docid="FT924-2087" num="12"> For a long time, there has been widespread concern that necessary safety testing for new drugs imposes a heavy penalty on pharmaceutical inventions compared with other sectors of technology.</s>

<s docid="FT924-2087" num="13"> Patents in Europe generally last a maximum of 20 years from the application date.</s>

<s docid="FT924-2087" num="14"> But, according to Ms Patricia Harris, an intellectual property lawyer with City solicitors Lovell White Durrant, the development period for new drugs - from discovery to marketing authorisation - lasts an average of 12 years.</s>

<s docid="FT924-2087" num="15"> In complex areas of research into diseases currently regarded as incurable such as Alzheimer's, motor neurone disease and multiple sclerosis, the development time may be even longer.</s>

<s docid="FT924-2087" num="16"> This means that by the time they have obtained approval to market the drug, companies have little of the patent term left in which to use their monopoly rights to recoup the increasingly heavy costs of research and development, she says.</s>

<s docid="FT924-2087" num="19"> But governments recognised that, far from pushing up the overall drugs bill, extended protection could be used to drive pharmaceutical prices down, says Mr Martin Paltnoi, a pharmaceuticals marketing consultant.</s>

<s docid="FT924-2087" num="20"> This is because, once a reasonable period of marketing exclusivity is guaranteed, the rationale for allowing drug companies to charge high prices to recoup development costs over an uncertain and short period of patent cover no longer exists.</s>

<s docid="FT922-2196" num="26"> Japanese drug companies have traditionally been complacent about R&D because of the government's pricing policy on drugs.</s>

<s docid="FT922-2196" num="27"> The Health Ministry used to award all new drugs premium prices, whether they were improvements or not, and failed to give drug companies an incentive to develop innovative drugs.</s>

<s docid="FT922-2196" num="28"> Rather than take the risk of spending high sums on product development, many of the larger companies chose to only make small improvements of existing drugs, and distribute drugs supplied by foreign companies under licence for the Japanese market only.</s>

<s docid="FT922-2196" num="29"> Development programmes have also been hurt by cumulative price cuts by the Health Ministry, which started in 1981.</s>

<s docid="FT922-2196" num="30"> It forced 10 to 15 per cent price reductions every two years.</s>

<s docid="FT922-2196" num="31"> This pressured cash-flow at the Japanese drug companies, which are considerably smaller than their western counterparts.</s>

<s docid="FT922-2196" num="32"> However, attitudes towards R&D are changing rapidly as innovation has become the key to profits.</s>

<s docid="FT922-2196" num="33"> The ministry is pushing for innovative drugs through a change in its pricing rules.</s>

<s docid="FT922-2196" num="34"> From this fiscal year, the only drugs to be allowed premium prices will be those which represent a new concept, are more effective than existing drugs, and which make a noticeable contribution to treatment.</s>

<s docid="FT922-2196" num="35"> At the same time, foreign drug companies have started to end distribution tie-ups as they establish their own networks in Japan, reducing commissions at the former Japanese partners.</s>

<s docid="FT922-2196" num="36"> Ultimately, companies will need to establish a worldwide presence in order to recoup mounting R&D costs.</s>

<s docid="FT922-2196" num="37"> Fujisawa needs to globalise because its market share in Japan has hit a ceiling and profits have reached their upward limit.</s>

<s docid="FT922-2196" num="38"> Companies which do not succeed internationally will see a pressure on profits.</s>

<s docid="FT941-12321" num="20"> In an effort to control costs, Germany has cut its national health drugs spending from DM26bn (Pounds 10bn) in 1992 to DM22bn in 1993.</s>

<s docid="FT941-12321" num="21"> Italy this month reduced the number of drugs eligible for subsidy, saying it wanted to cut the national drugs bill by 30 per cent.</s>

<s docid="FT941-12321" num="22"> The French government last week signed a deal with drugs industry representatives that will cut the growth in drug sales from more than 8 per cent a year to 4 per cent, according to estimates by Goldman Sachs, the securities house.</s>

<s docid="FT941-12321" num="23"> Last year, the UK government imposed a 2 1/2 per cent cut on the prices of drugs the NHS buys.</s>

<s docid="FT941-12321" num="24"> And Spain is considering toughening controls on drug prices.</s>

<s docid="FT941-1816" num="27"> By early 1994, the document was ready.</s>

<s docid="FT941-1816" num="28"> Its chief importance - certainly for the industry - was that it addressed the most serious concern of research-based drug companies: national controls on pricing and reimbursement.</s>

<s docid="FT941-1816" num="29"> It did not go quite as far as the drug firms wanted, but it clearly recommended economic deregulation, with free pricing for new products, a phasing in of more general price liberalisation, and increased patient co-payment to move drug reimbursement further away from political control.</s>

<s docid="FT932-13547" num="10"> No-one should underestimate the technical effort and the cost that is needed to translate scientific success in drug discovery into a commercially profitable new medicine.</s>

<s docid="FT932-13547" num="11"> In the late 1980s, when Wellcome came under pressure to reduce the price of AZT, its compound for treating Aids, the company had a manufacturing process it could not scale up because one stage was too dangerous - had already exploded, in fact.</s>

<s docid="FT932-13547" num="26"> It can take as long as 20 years to bring a new medicine to the market, Dr Barry Price, research director of Glaxo Group Research, told a Royal Academy of Engineering conference on Strategies for Effective Research last month.</s>

<s docid="FT932-13547" num="27"> Yet three out of four medicines that get to market fail to make money, he said.</s>

<s docid="FT922-576" num="27"> Costs associated with the research, development and marketing of drugs are rising fast because drugs must go through expensive licensing procedures in individual countries at the same time.</s>

<s docid="FT922-576" num="28"> Meanwhile revenues are threatened by worldwide downward pressure on drugs prices as governments struggle to contain ever-growing health expenditure.</s>

<s docid="FT931-2756" num="13"> Mr Kirk Raab, president of Genentech, a leading US biotechnology company which researches genetically engineered drugs, warned that 'if there are price controls on new products it could stifle research and development'.</s>

<s docid="FT931-2756" num="21"> At the root of the administration's determination to overhaul the healthcare system has been a sharp increase in costs.</s>

<s docid="FT931-2756" num="22"> Between 1980 and 1992, costs - including prices charged by hospitals, doctors, laboratories, equipment makers and drug companies - increased at more than double the rate of inflation.</s>

<s docid="FT931-2756" num="23"> Health expenditure as a proportion of GDP rose from 7 per cent in 1965 to 12 per cent in 1990.</s>

<s docid="FT931-2756" num="24"> It is now Dollars 800bn a year.</s>

<s docid="FT931-2756" num="30"> Between 1980 and 1992 drug prices increased by 128 per cent - nearly six times the rate of inflation, according to the Bureau of Labour Statistics.</s>

<s docid="FT931-2756" num="31"> Prescription medicines are far more expensive in the US than elsewhere: on average, a drug costing Dollars 1 in America costs 67 cents in Canada and 60 cents in Europe.</s>

<s docid="FT931-2756" num="41"> The industry also says it needs high prices to fund the research and development of new medicines.</s>

<s docid="FT931-2756" num="42"> The drug companies say that society needs a viable and innovative industry if it is to find a response to Aids, cancer, Alzheimer's and other illnesses.</s>

<s docid="FT931-2756" num="47"> Last year, 10 leading pharmaceuticals groups, including Merck and Pfizer of the US, Glaxo and ICI of the UK, and Roche of Switzerland, pledged they would in future not increase prices by more than the rate of inflation - on average.</s>

<s docid="FT931-2756" num="48"> Few consumers and politicians noticed the words 'on average'.</s>

<s docid="FT931-2756" num="49"> Inevitably, the prices of some drugs rose faster than the rate of inflation, even the if the groups' average prices were within the set limit.</s>

<s docid="FT931-2756" num="50"> Moreover, prices offered to bulk buyers of drugs such as Medco, a company that specialises in selling cheaply to company healthcare plans, are often at a discount.</s>

<s docid="FT931-2756" num="51"> That means there is an increasingly uneven price burden for consumers.</s>

<s docid="FT931-2756" num="52"> Many older Americans, whose insurance fails to cover the cost of medicines, have been left shouldering large price rises.</s>

<s docid="FT931-2756" num="64"> This month, Mr Wendt issued a rallying call for the sector to negotiate a new social contract between the pharmaceuticals industry and society.</s>

<s docid="FT931-2756" num="65"> 'We must show our customers that medicines are good value,' he said.</s>

<s docid="FT931-2756" num="66"> He called for the industry to engage in price restraint and to invest in studies that not only showed that drugs were safe and effective, but that they were cost-effective as well.</s>

<s docid="FT923-11712" num="16"> All pharmaceutical labs, whatever their size and location, face a common challenge: how to restrain the soaring costs of R&D and at the same time speed up the discovery and development of new drugs.</s>

<s docid="FT942-2835" num="10"> Those who ultimately pay for drugs - insurance companies and their policy holders in the US, and governments elsewhere - have decided to drive hard bargains with pharmaceutical companies in an effort to control the cost of healthcare.</s>

<s docid="FT942-11804" num="15"> These pressures have been particularly acute in the US.</s>

<s docid="FT942-11804" num="16"> The Clinton administration has proposed sweeping healthcare reforms in an effort to cut the cost of treating sick Americans - including the possibility of capping drug prices, a move which would alter the economics of drug development, which depend on high returns from heavy investment.</s>

<s docid="FT942-11804" num="17"> Though the reforms have not yet been fully debated, the price of drugs is already being squeezed.</s>

<s docid="FT942-11804" num="18"> Those who ultimately pay for the drugs - insurance companies who meet claims and employers who pay premiums - are employing intermediate companies, called healthcare management organisations or pharmacy benefit managers, to negotiate discounts with drugs manufacturers.</s>

<s docid="FT942-11804" num="23"> Therapeutic substitution, in which a cheaper drug, often non-branded, is used on grounds of price.</s>

<s docid="FT942-11804" num="24"> This could happen later this month when SB's ulcer treatment, Tagamet, loses patent protection and doctors could choose it over Glaxo's more expensive Zantac.</s>

