The world's biggest drug makers have for years enjoyed rich premiums for their medicines in the U.S. market. Those days may be coming to an end.
Companies like Pfizer Inc and AstraZeneca have grown dependent on higher U.S. prices to generate profits as generic rivals to their best-selling medicines enter the world market, Europe's government-run health plans clamp down on spending and sales growth in emerging markets stutters.
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Now President Barack Obama's health reform law will bring more scrutiny of spending on drugs and medical care in the United States. As a result, healthcare experts say, downward pressure on drug prices will begin to mount within three to five years.
That not only presents a risk to the robust profits generated by the industry, but could influence the amount of money companies chose to invest to develop innovative medicines.
Drugmakers' reliance on the U.S. market "is the greatest risk to the sector," said Rajiv Kaul, portfolio manager of Fidelity Investments Select Biotechnology Portfolio. "Healthcare pricing is going to get tougher. It would be foolhardy to think otherwise."
The generic threat has already made drugmakers more dependent on the premiums they can charge for newer medications, widening the gap between branded drug prices in the United States and the rest of the world.
Research group IMS reported on Wednesday that in 2012, U.S. spending on drugs fell for the first time in more than 50 years - down 1 percent to nearly $326 billion - due to a new wave of cheaper generic drugs that are taking away sales from blockbuster brands like Lipitor and Plavix.
But U.S. sales of prescription drugs still account for more than a third of worldwide sales, compared with a share of around 24 percent for Europe.
When it comes to brand-name medications, U.S. prices rose nearly 11 percent in 2011, compared with flat prices in Canada, and declines of 3 percent in France and more than 4 percent in Switzerland, according to the Canadian government's latest international price review.
The price variations become clearer when studying individual drugs. Switzerland's Roche sells a month's supply of cancer medication Avastin at about $8,800 in the United States, compared with 2,577 pounds ($3,978) in the U.K. and 6,800 Swiss francs ($7,177) in Switzerland.
In 2012, the United States accounted for 44 percent of global Avastin sales of 5.76 billion Swiss francs ($6.08 billion), compared with 27 percent for Western Europe.
"The U.S. is at the stage now that they (drugmakers) are not suffering that much, compared to Europe," said Silvia Ondategui-Parra, a partner at Ernst & Young's life sciences division in Barcelona. "But things will be changing there (the U.S.) in the next two years clearly."
LESS TOLERANCE FOR PRICE VARIATIONS
Obama's Affordable Care Act takes full effect next year, and includes $100 billion in excise taxes and discounts on medications that the drug industry agreed to pay over 10 years. The law's requirement that all Americans have health insurance means that consumers, their employers and insurers will look more closely at the value of medical care to reduce costs.
In recent years, the switching of an increasing percentage of the burden to employees by companies - through higher co-payments and increased deductibles - has had a similar impact, making people increasingly conscious of healthcare costs.
Adding to the pressure, a U.S. deficit crisis is prompting cuts to the government's Medicare and Medicaid health plans for the elderly and poor.
"Over the intermediate term it doesn't look good for the industry. We will be facing enormous healthcare cost containment pressure in this country," said Joel Hay, professor, pharmaceutical economics and policy at the University of Southern California. "Big pharma will then have less and less resources to plow back into research and development."
It will mean less tolerance for wide variations in pricing for the same drugs. The wholesale U.S. price for a 100 milligram tablet of diabetes drug Januvia, the top-seller at Merck & Co, is $8.20, according to the company. The Common European Drug Database lists the same pill at $1.52 euros ($1.99) in Austria.
A 2011 European Parliament study found that the price in the United States for a basket of 150 pharmaceutical products was about double the level seen in European Union member countries.
"In the U.S., manufacturers have the ability to set prices at launch and then increase them," said Neil Grubert, an analyst at market research firm Decision Resources. "In most other markets, that is not the case. Prices are negotiated at launch."
European austerity measures are picking up. Germany said earlier this month that its medical cost-benefit agency would review prices for a range of older brand-name drugs, including diabetes and arthritis treatments.
To take up the slack, Big Pharma has focused on boosting sales in emerging markets like China and Brazil - where living standards and use of medical services are on the rise - but results so far have been underwhelming.
The latest blow to Western pharmaceutical firms came last month. India's Supreme Court dismissed a bid by Swiss drugmaker Novartis to win patent protection for its cancer drug Glivec, known as Gleevec in the United States.
Government and private health plans in every country are now looking for stronger evidence that medications are worth the cost in terms of improving people's health and lowering other types of spending, such as hospital stays.
"Everyone is getting much more rigorous about the value proposition," said Terry Hisey, head of the life sciences team at consulting firm Deloitte.
High U.S. prices for brand-name drugs have spurred calls for drugs to be imported from neighboring Canada, where prices on patented medicines are set by a review board. U.S. lawmakers have so far rejected such measures, citing safety and other concerns.
"The U.S. is still a market that rewards innovation, some people would say handsomely - relative to others most handsomely," said Martin Reeves, managing director at Boston Consulting Group. "But it is not really a sustainable equation."
($1 = 0.77 Euros)
($1 = 0.9474 Swiss francs)
($1 = 0.6477 British pounds)
(Reporting By Deena Beasley; Editing by Michele Gershberg)