Like other domains such as taxation, social security and defence, healthcare is one of the least ‘Europeanised’ policy areas in the EU. Member states continue to hold most of the cards. But the fact that the European institutions only have a limited number of competences in the field does not mean that Europe plays no role. Europe’s general pharmaceuticals legislation has a profound impact on everyone’s daily lives. It influences drug prices, encourages or discourages medical innovation, regulates which medicines enter the market, and influences how manufacturers shape their supply chains. In short, it determines whether patients will have access to new medical treatments, and it affects whether and how manufacturers will develop and deliver them.
The existing legislation, introduced in 2001 (Directive 2001/83/EC) and 2004 (Regulation 726/2004), is in need of an update. The Commission has opened a revision procedure. At the moment, the Commission is running a public consultation, which gathers input from citizens, NGOs and the private sector. Based on the outcomes of this consultation and other preparatory research activities, the Commission will publish a legislative proposal in the fourth quarter of 2022. Although the contents of the revision will still remain unknown for a long time, there are many signs that shed a light on the direction of the revision. The best available ‘guide’ to the revision is the Pharmaceutical Strategy for Europe, adopted by the Commission in November 2020. This document is part of the Commission’s wider plans for a European Health Union. The Pharmaceutical Strategy is strongly influenced by the lessons learnt from the coronavirus pandemic, and identifies the future direction of the Europe’s pharmaceuticals policy. Today and yesterday, the Pharmaceutical Strategy was debated in the European Parliament’s ENVI committee (Environment, Public Health and Food Safety).
This article, the first in a series of two, will delve into the topic and point out what to expect from the changes. This part will focus on two ‘pillars’ of the revision: supply chain resilience and affordability. Part two will focus on two other priorities: innovation to address unmet medical needs, and red tape reductions.
Supply chain resilience
As the earliest months of the coronavirus pandemic painfully showed, Europe’s healthcare infrastructure is highly dependent on foreign countries. This dependence translates into a high vulnerability to exogenous events and foreign, sometimes geopolitical, issues. Besides that, a large number of widely used products, which have been on the market for a long time, are suffering from frequent shortages, irrespective of the coronavirus pandemic. The EU acknowledged its dependence on foreign countries in this field as a strategic vulnerability.
In response, it is now striving to build ‘open strategic autonomy’: an open trade policy, paired with a push for internal capability-building and a reduction in foreign dependence. Pharmaceuticals are a key part of this new ambition. The Commission wants to invest in stockpiles of certain medications to be prepared for future health emergencies. It wants to ‘re-shore’ vital parts of pharmaceutical supply chains back to Europe, so that Europe will possess immediate production capacity and adequate know-how in times of need. Finally, Europe wishes to invest in improved management and coordination. The Commission wants to increase its oversight, meaning that manufacturers would need to notify earlier in advance in case of expected shortages.
To inform the reform process regarding supply chain resilience, the Commission has launched a two-phase ‘structured dialogue on the security of medicines supply’. This brings together manufacturers, the public sector, academia, doctors and patients. Phase 1 aims to increase the EU’s knowledge and awareness. Its conclusions were presented at a high-level conference on 16 July this year. Phase 2 is currently discussing concrete proposals for resilience-building measures. These are primarily focused on digital reporting and diversification. On the one hand, tools would be introduced that allow authorities to monitor supply chain risks reported by manufacturers. On the other, manufacturers would be obliged to source their raw materials from multiple suppliers. No conclusions have yet been published, but the head of unit at DG GROW, Giacomo Mattinó, hinted that the Commission will publish recommendations regarding the strengthening of supply chains towards the end of this year or in early 2021.
By including all of these elements, the revision of the upcoming legislation will reinforce HERA, the newly created department for health emergency response. HERA was covered by our previous in-depth analysis, which you can access here: https://lykkeadvice.eu/opinions/hera-what-business-opportunities-behind-the-new-eu-health-authority/.
In sum, expect that the new revisions will offer both supportive and restrictive measures for pharmaceuticals. On the one hand, the EU intends to offer incentives to manufacturers to bring back production to Europe. The above-mentioned suppy chain diversification measures will likely be paired with financial incentives to assist in this process. More attractive pricing conditions for older, widely used medicines could also help towards achieving the Commission’s ambitions. On the other hand, the Commission is likely to introduce stricter conditionality with regards to imports and exports. Pharmaceutical companies should prepare for measures demanding more transparency.
The second aspect that will be covered by the revision of the legislation is the question of affordability and accessibility of medicines. Drug prices are rising in Europe, which creates pressure on healthcare budgets. The prices for medical products vary markedly across EU member states. Up until the emergency acquisition of coronavirus vaccines, there was no centralised EU purchasing and tendering policy. This will remain the case. A recent study surveyed the difference between the highest and the lowest price of the seven best-selling ingredients across various EU member states. The differences in pricing between member states ranged between 450 and 3027 percent. In addition, there is currently no obligation for manufacturers to offer their products on the entire Single Market. It is entirely at the discretion of companies to withdraw products from certain member states.
The differences in pricing and supply are in part due to autonomous choices in the manufacturer’s pricing strategy, but also depend on the incentives that member states offer. Factors that play a role are the population size of the member state, the organisation of national healthcare systems, administrative procedures, and national pricing and reimbursement strategies. Because smaller, less wealthy member states are often less capable of offering lucrative incentives, they suffer the most from affordability and supply issues.
In particular, the presence of biosimilar or generic drugs on the market incentivises actors to lower the average prices of medicines. Currently, the EU offers 20-year patents to pharmaceutical manufacturers. When taking into account the typical duration of the development and approval process, most drugs enjoy an average market protection of eight years. Once these intellectual property protections have expired, other actors, including local pharmacies and SMEs, are able to produce similar medicines. The resulting competition between actors reduces the prices of drugs. In its Pharmaceutical Strategy, the Commission writes that pharmaceutical companies often employ tactics which restrict or slow down the uptake of generic medicines on the market. Examples of this are the use of various patent extensions, which can extend the protection of a product up to five years. In addition, the Commission also notes that mergers between pharmaceutical companies can have negative effects on the prices of medicines.
Finally, the Commission writes that there is a lack of transparency regarding the pricing of medicines. Although billions are required to complete the development of a single drug, production and marketing costs are relatively low. Especially in niche markets, manufacturers tend to charge higher prices for their products. In combination with the ethical dilemmas surrounding profitability, this creates a demand for transparency. The Commission wants manufacturers to be more open about the costs they make and the profits they expect to receive.
Expect therefore that the revised General Pharmaceuticals Legislation will bring changes to the rules on intellectual property. The Commission might restrict certain intellectual property protections, and call for greater transparency from manufacturers. It will implement measures which foster the development and uptake of generic medicines. The Commission is also looking at possibilities to assist member states and regions in their negotiations with manufacturers, by issuing recommendations on improving procurement procedures, improving information sharing between member states and by supporting joint cross-border tendering. Finally, it is likely that new measures will introduce additional conditionality mechanisms. Obtaining public funding in the development stage may be made dependent on certain requirements regarding pricing, production and transparency.
Industry representatives and companies fear that the plans of the Commission regarding intellectual property and reshoring will have a negative effect on the investment climate in Europe. Numerous voices from the industry warn that more restrictive measures and increased conditionality will reduce the incentives for investment in Europe, thereby losing attractiveness in comparison to the United States and China.
Next week, we will delve into the two priorities of the Commission that seek to improve Europe’s attractiveness to pharmaceutical investments: addressing unmet medical needs and reducing red tape.
At Lykke Advice, we provide advice to companies and associations regarding the latest developments in the European institutions. We help you identify how upcoming legislation might affect your organisation. Please contact us if your company or association would like to know more about this legislation, or if you want to influence the political process to make sure that the legislation is fit for purpose and benefits your interests.