U.K. mulls repeal of price caps on drugs




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U.K. mulls repeal of price caps on drugs

by Rebecca Goldsmith, the Star-Ledger

November 16, 2003

LONDON - British regulators are weighing whether to move away from the European model of mandating cheap pharmaceutical prices, instead bringing them closer to a free-market American-style model.

Such a shift could have huge implications for the drug industry, in Europe as well as the United States .
The first few cents of every dollar spent on a prescription pill covers the cost of making the tablet, including ingredients and manufacturing. Most of the rest, the drug industry says, goes to pay for the medicine's development, and for research to create drugs.

The medicine you buy today bankrolls the cure for your disease tomorrow, the industry argument goes. But as development costs balloon to an estimated $800 million for a single medicine, drug companies can't simply raise prices to compensate.

In the United States , they face armies of angry consumers and public officials.

In Europe , where most governments cover the cost of health care, bureaucrats dictate drug prices that are generally lower than in the United States -- much to the dismay of the U.S. pharmaceutical industry.

The prospect of increasing drug prices in the United Kingdom would be good news for American drug companies.

"Traditionally, the American group has always argued the case for less financial control. Deregulation is good for innovation and good for holding prices down," said Christopher Mockler of the American Pharmaceutical Group, which represents 10 U.S.-based companies doing business in the United Kingdom .

U.S. Food and Drug Administration Commissioner Mark McClellan recently told a group of industry executives he believed other industrialized countries need to "share the burden" of the cost of discovering and developing drugs.

"Americans, who account for a fraction of prescription drug use worldwide, will pay for about half of all pharmaceutical spending worldwide. By contrast, citizens in the world's third-largest economy, Germany , paid less than 5 percent," McClellan said.

Delicate negotiations have begun in Britain , the world's second-largest hub of drug research. During the next few weeks, British regulators will decide whether to review 5-year-old guidelines that effectively control drug prices by capping the profits pharmaceuticals companies can earn. The re-evaluation could give drug companies more leeway by next year to raise prices, and possibly lead to complete pricing freedom.

For the British drug industry, the stakes are high. "One of the reasons the British government is considering scrapping price controls is because they're losing research and development jobs to the United States," said Robert Goldberg, who follows the industry for the Manhattan Institute, a conservative think tank.

British drug company GlaxoSmithKline, for example, has moved much of its most innovative research activities to the United States .

"The United States has been racing ahead of Europe as a whole," Mockler said. "Twelve years ago, America was behind Europe in terms of global sales, innovation discovery and research and development. Today, it's the reverse."

A British health department spokesman said the government aims to foster a successful, innovative pharmaceuticals industry.

"Our pricing policies are therefore intended to provide incentives where possible for research and innovation. Unlike most continental European countries, we offer freedom of pricing for major new products and generous research and development allowances," he said.

Though the United Kingdom accounts for only 4 percent of pharmaceutical sales worldwide, it hosts about 10 percent of the research and development. The government credited the drug sector with providing 65,000 jobs directly, exporting $15 billion during 2001 and spurring university research and the biotech industry.

John Patterson, an AstraZeneca executive who is president of the British drug industry group, said the review of regulations could set a model leading other European countries to allow drug companies to make more money by raising prices.

"It could have a major effect" elsewhere, since Great Britain exports $17 billion in drugs a year and helps set a standard that other countries use to set prices.

Britain already gives drug companies more control of prices than any other country in Europe . While the government sets firm limits on profits earned by each company, it allows prices of individual drugs to fluctuate. Drug companies may take away a 21 percent profit.

But after accounting for research costs, earnings are far lower, Goldberg said. Actual profits are 6 percent, compared with about 9 percent in the United States , he said.

In the United States , drug companies set prices according to what the market will bear. While the industry prefers the American system, it has led during recent years to widespread consumer dissatisfaction about climbing prices, especially as more life-lengthening drugs for chronic conditions have become available.

The debate about drug prices in the United States pits free-market advocates against those who favor more government control of prices. In one camp, people like McClellan argue that if all industrialized countries lifted their price controls, the drug industry would be healthier and produce more cures. On the other hand, groups such as Public Citizen argue the U.S. government should use its bulk buying power to keep prices down, just as other countries do.

British deregulation won't necessarily cause price increases, said Ben Irvine, who studies the industry for the think tank Civitas. He said the ready availability of generic drugs would provide enough competition to hold down prices of patented drugs in England . Irvine , who supports deregulation, said such a development in the United Kingdom could set a model for the rest of Europe .

"If they see that prices don't skyrocket, I would expect that they may well begin to start relaxing price control systems and relax the regulation of supply and demand," he said.