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Are generic medicines too expensive in Europe? Posted 20/10/2010

Professor Steven Simoens speaks to GaBI Online about this and other issues surrounding generics.

In an interview conducted on 31 August 2010 by GaBI Online, Professor Steven Simoens answered questions about the generics’ industry and pricing of generic medicines. He also discusses what issues have had a major impact on the generics’ industry and what challenges there have been for generics during the last year (2009/2010) and what he sees as the future for generics.

Professor Simoens has worked extensively in the area of economic policy surrounding generic medicines in Europe and authored the 2006 report: Sustaining generic medicines markets in Europe. He is a professor of pharmacoeconomics at the Faculty of Pharmaceutical Sciences, University of Leuven, Belgium. He was also recently inaugurated as the new European Generic medicines Association (EGA) chair for ‘European policy towards generic medicines’.

Why are generic medicines less expensive than originator medicines?

Research and development (R & D) of medicines is very expensive, with some studies reporting costs of US$ 1 billion to develop a new innovative medicine. Companies, however, do not have to incur these costs when developing a generic medicine because they are replicating an existing medicine. This means that they have to carry out fewer clinical trials in patients, or even no clinical trials in patients at all, which means that they incur lower costs for R & D thereby reducing the cost of those medicines.

Clinical trials make up the majority of the cost for a new medicine, but what about registration costs?

Conduct of clinical trials with patients is the most expensive part. Registration of a new medicine costs money, but this is a relatively small amount compared to the costs of R & D and clinical trials.

Why does the price of the same generic medicine vary between countries?

That’s actually quite a difficult one because there are several reasons. Generic companies are international companies and they tend to centralise production in one country. It therefore costs the same amount of money to produce a medicine, but if you look at the price of that medicine in different countries there are price differences – and that’s strange.

These differences can also be quite significant, e.g. in Europe the lowest prices of generic medicines are observed in Scandinavia, whereas prices in Western and Southern Europe are much higher.

The reason for this is that companies try to ask for the maximum price that is allowed in each individual country. Other reasons for the price differences include the fact that there are some governmental measures that affect the price level of a generic medicine. For example, in a country that has a reference pricing system, this obviously has an influence on the price of generic medicines.

We also see that in countries that have free market pricing of medicines (where companies can decide for themselves the price of a new medicine), such as Germany, the price of generic medicines tend to be higher than in countries which regulate medicine prices.

We also see that in countries that have a well developed generics’ market the prices of generic medicines tend to be lower. The reason for this is thought to be that the market is more mature, so there are more companies on the market and therefore more price competition, which in turn reduces the price.

Prices of generic medicines are lower in countries with a more well-developed generics’ market, but how does reference pricing and free pricing affect this?

Regulation has a major impact, but reference pricing is not straight forward. In a country that has a reference pricing system we see that generic medicines follow the reference prices. Some reductions are therefore created, but reference pricing systems do not reduce the price beyond the reference price.

Generic medicines tend to be 20–80% cheaper than originator medicines. What explains this range of 20–80%?

When a company markets several medicines they adopt a pricing strategy for each individual medicine and the price of each is determined by the regulations and other factors in each country. Factors that influence the price include: whether there is a reference pricing system; competitor companies; therapeutic class; the market power of the company, etc. These factors, among others, explain why generic medicine prices may vary significantly.

Is there room for further price reductions of generic medicines in Europe?

Personally I think there is – for several reasons.

One reason is that generic medicines are increasingly being manufactured and produced in low-cost countries, such as India and China. It costs less to produce a medicine in India than in Europe, because they have lower labour and production costs. More and more generic medicines come into Europe from India, increasing the pressure on European generic medicines manufacturers to reduce their prices, to ensure that they remain competitive.

A second important reason is that, if you look at the market, companies offer relatively large discounts on generic medicines to wholesalers and pharmacists, which can be up to 50% of the price of the medicine. This means that at the moment we pay in many countries a considerable mark-up on the cost price of generic medicine. Meaning that health insurance funds, and also patients, pay too much for their generic medicines. There is therefore a large potential for reduction in the price.

Should discounts be banned?

As an economist I would argue that you need to prohibit discounts in order for the price to reflect the true value of the product. For generic medicines, this is currently not the case. Health insurance funds know that this is happening and will try to create elaborate systems to recuperate some of this money, but that is not as efficient as having a market that works properly and where the price reflects the true value.

In some countries, e.g. Poland, they are already discussing whether to prohibit this practice of discounting. It is therefore required that the governments of the respective countries introduce legislation to curb discounting.

What are the conditions necessary to achieve further price reductions?

This is really a question of addressing a mixture of several types of policies. Most countries in Europe have a reference pricing system, which reduces the price, because the price of a generic medicine needs to be below the reference price. But in addition to that more market driven measures need to be introduced to make sure that the price reductions are not limited to the reference price, but go beyond this.

Another crucial component is volume, because generic medicines’ markets in this respect behave like true markets, meaning that where there is a higher volume companies can reduce their prices.

Therefore in order to be able to create further price reductions governments need to take action in order to increase the volume of generic medicines. This means that they need to introduce policies for physicians to prescribe, pharmacists to dispense and patients to demand and accept generic medicines.

For patients, this could include reduced co-payments, e.g. in Portugal the co-payment on generic medicines was reduced for a number of years. This had the effect of substantially increased volume of generic medicines on the Portuguese market during that time period.

What has had the biggest impact on generics over the last year (2009/2010)?

The biggest impact on the generics industry has been the mergers and acquisitions between generic medicines companies. These mergers have not only been between different generic medicines companies, e.g. Teva has acquired Ratiopharm, but have also been between originator and generic medicines companies.

More and more originator companies are buying generic medicines companies, e.g. Pfizer has bought a Brazilian generic medicines company (Laboratorio Teuto) and sanofi-aventis is doing the same thing. This is producing really big international players who have a broad portfolio of generic medicines and, as they reach higher volumes, that hopefully will lead to price reductions as well.

Why do innovator companies buy generic companies?

In the past, pharmaceutical companies were mostly limited to patented medicines, but increasingly the off-patent (generic) medicines market is becoming very attractive, with millions of dollars to be made in the generic medicines market. Innovator companies are therefore expanding into the off-patent market in order to sell more medicines and increase profits.

There are also some companies, e.g. Novartis and Sandoz, where generics of the innovator company (Novartis) are marketed by the generics branch (Sandoz), but that doesn’t always have to be the case.

Were there any obstacles for generics in the last year (2009/2010)?

Well if you look at biosimilars (the biotechnology generics), in Europe there has been a pathway to register these products in place already for some time, but in the US, up until 2010 there was no clear pathway to register biosimilars. This was a major obstacle.

Other obstacles to generic medicine entry to the market may also be the existence of pay-to-delay deals between originator and generic companies. In these cases the originator company pays the generic company to delay introduction of its generic medicine. In the US there are discussions to prohibit this practice, and personally I am in favour of prohibiting these deals. However, from the point of view of the generic medicine company, it is profitable for them to sometimes delay market introduction of their generic medicine.

Where do you see the future of generics?

The future is definitely in biosimilars. When talking to people in the generics’ industry most are involved in the development of biosimilars, which usually takes about 5–8 years. All the major international generic companies are involved in biosimilars, and I think that the market will really develop from 2012 onwards. There are already some biosimilars on the market, e.g. erythropoietin and filgrastim (a granulocyte colony-stimulating factor), but a whole new wave of products will enter the market from 2012 onwards. This is mainly due to the expiration of patents on many biopharmaceuticals in the coming years.

EGA chair

When questioned by GaBI Online about his new EGA chair position, Professor Simoens added that “the aim of the chair is to carry out scientific research on pricing and reimbursement of generic medicines and hopefully inform health policy in European countries.”

Related article

Battle over ‘pay-for-delay’ deals continues

Pricing strategies in generic medicines

New EGA chair to study generic medicines policies

US bill to curb generic ‘pay-for-delay’ deals

References

EGA Press Release, Inauguration at Catholic University of Leuven: EGA Chair “European Policy Towards Generic Medicines”, Brussels, 8 July 2010.

US Generic Pharmaceutical Association. Press Release. GPhA Warns that House-Passed Curb on Settlements Will Delay Access to Affordable Medicines. 02 July 2010.

Federal Trade Commission. News Release. Statement by FTC Chairman Jon Leibowitz Regarding House Passage of Legislation To Stop Costly Pay-for-Delay Drug Settlements. 02 July 2010.

Simoens S. De Coster S. Sustaining generic medicines markets in Europe. J Generic Med 2006;3(4):257-68.

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