Sector News

The real reason Europe’s medicines industry is dying

April 29, 2023
Life sciences

The European pharmaceutical sector is screaming bloody murder.

The crime? An overhaul of the European Union’s pharmaceutical rules, published Wednesday, in which the European Commission plans to cut into industry’s profits in a bid to improve access to medicines throughout the bloc.

Industry execs argue that their industry is already in trouble and any such threat to their bottom lines would land the finishing blow.

After a draft of the legislation was leaked in January, industry bigwigs including the chief executives of Novo Nordisk and Eli Lilly said the new rules would encourage pharma companies to go overseas.

The source of their ire: a proposal that would shave two years off the amount of time new medicines have the market to themselves. A shorter exclusivity period means earlier competition from unbranded competitors, leading to lower drug prices — and lower profits.

To make their case, these business executives are playing on the fear that Europe is being left behind: with the next new cancer drug being developed in Boston or Beijing, and with European patients at the back of the line to receive it.

European lawmaker Susana Solís Pérez, who worked at pharmaceutical company Johnson & Johnson before entering politics, echoes this fear. “I am afraid we will slowly but surely shift from being a leading powerhouse to a customer of innovation,” said the MEP, who is part of the centrist Renew Europe group.

Figures show that Europe’s pharma industry is indeed treading water on a number of metrics, with the U.S. still the global leader and China quickly catching up. Most worrying: Europe’s research pipeline is stagnating and it’s lagging behind on trials of cutting-edge gene and cell therapies.

And the industry’s main lobby in Brussels, the European Federation of Pharmaceutical Industries (EFPIA), warns that that the gap between the amount pharma companies spend on research and development in Europe compared with the U.S — which has already increased to almost €25 billion from €2 billion in 2002 — will grow to €90 billion by 2030 if current trends continue.

But exactly why the sector is ailing — and whether the pharma legislation will indeed finish the victim off — warrants a bit of deeper digging.

Prime industry suspect: Drug prices
For industry, drug prices are the main culprit. It costs a lot to develop a new drug and companies say they need high prices to justify this investment. Far-sighted Americans are willing to pay well for their medicines and they reap the rewards with a booming industry. In Europe, punitive pricing, combined with red tape, is grinding the industry down. And plans to cut prices further by reducing the market exclusivity period would compound this problem.

Is the case so open and shut? While it does cost a lot to develop a new drug, with estimates varying from a little under €1 billion to over €2 billion (taking into account failures), the link between high drug prices and research spending is, at best, unclear.

Companies keep data on R&D costs close to their chest, making independent analysis difficult. However, one study in the journal JAMA Network Open analyzed 60 new drugs approved by the U.S. Food and Drug Administration from 2009 to 2018, and found no link between estimated research and development investments and the cost of those treatments. And a draft Commission document prepared ahead of the legislation notes that when it comes to the rules protecting new drugs from competition, “In international comparisons, the EU is considered generous.”

Olivier Wouters, assistant professor of health policy at the London School of Economics and the lead author of the paper told POLITICO that even if it was the case that data protection periods influenced where R&D investments were made, it was only one factor among many.

“There’s so much that influences companies’ spending decisions,” he said.

Suspect 2: Limited VC
One of those other factors is the availability — or not — of outside financing.

Born in the early days of the Silicon Valley technology boom, venture capitalists make big bets on new, high-risk companies. It’s a model well-suited to biotechnology, where most drugs fail, but which, when they succeed, can net founders billions of dollars. These early funds are a crucial lifeline to young companies, and can make or break them.

Venture capital isn’t totally absent in Europe. But it’s much smaller and less mature compared with the U.S. Karl Nägler, from Munich-based venture capital firm Wellington Partners — one of a handful in Germany specializing in life science investment — calculates about an eight-fold difference compared with Germany, when adjusting for the size of the economy. Translation: It’s easier to find willing investors in America — which is also why many European companies chose to list on the New York stock exchange when they go public.

VC is also a model where networks, as well as an understanding of cultural and linguistic context, are key.

Nägler recalled with a laugh a moment in his previous job at Atlas Ventures, a pioneering American fund, when one of his colleagues got lost driving around in Germany. The firm was trying to decide whether to invest in a German company working in the field of silencing RNA — a hot area of research at the time — or a less advanced, but better connected, American rival.

“[The partner] was trying to visit the company and called me and said ‘We’re lost in Northern Bavaria,” said Nägler. Despite being behind in research, the VC ended up investing in the U.S. business, which bought its German rival a few years later.

Suspect 3: Geographic spread
Nägler’s story also shows something else: geography — and clustering — matters.

“We see concentration in certain hubs in the U.S.” said Ralf Huss, the managing director of the BioM Biotech Cluster in Bavaria. “Everybody is talking about the Boston area.”

The northeastern American city has always been important in the life sciences, but in the past decade it’s seen an explosion in the number of companies working in the sector. This dense cluster of universities, startups, and financing adds up to a thriving R&D scene that attracts a large portion of VC and public funding, has significant job growth each year, and accounts for 7.2 percent of the global drug development pipeline.

By contrast, in Europe the industry is spread out over a large area, said Huss, whose job it is to encourage the development of a similar network in southern Germany.

Different national governments jostle to encourage their own local pharmaceutical companies, often trying to get them to invest in less economically developed areas. The end result is that Europe “drags everybody along, every country along, even areas that aren’t as productive,” said Huss.

In the end, the situation is reminiscent of the central crime in Agatha Christie’s “Murder on the Orient Express” — the culprit is a little bit of everything.

Laura Gutierrez, head of global corporate public affairs and policy at Paris-based Sanofi, said the sector could benefit from the kind of joined-up thinking policymakers are adopting for microchips. Besides pouring money into the industry, Brussels is setting aspirational targets: aiming to bring the EU’s share of the global semiconductor value chain to 20 percent by 2030.

The pharmaceutical legislation takes a narrow view, focusing on the rules governing the market for medicines rather than wider industry reform.

But the EU needs to connect the dots, from looking at how to attract talent, to making sure that the tax situation, regulatory conditions, and market access are all aligned, said Gutierrez.

“We need to make a choice whether we want this innovation to happen in Europe, or we want to be dependent on other countries,” she said.

By Carlo Martuscelli


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