Healthcare System and Drug Regulatory Overview

Pharmaceutical Key Trends 2011 Healthcare System and Drug Regulatory Overview
Cost-containment and regulatory pressures intensify

Reference Code: HC00062-004 Publication Date: 03/2011
Healthcare expenditure is growing fast driven by aging populations, an increasing prevalence of chronic diseases, expanding government healthcare coverage, and use of expensive drugs. Also, as a result of the economic downturn, healthcare funding is under scrutiny by governments in developed markets which are looking to pay down their debts. Consequently, healthcare reforms in EU and Japan focus on containing costs, without impacting quality of service. Ongoing measures include pricing and reimbursement cuts, bolstering generic usage, as well as other cost cutting tools, with the outcome largely negative for branded pharma. In the US, although the health reform law may well extend health insurance coverage and increase government involvement in healthcare, costs are expected to escalate. Also in the short-term, discounts and rebates will negatively impact US sales affecting companies with a strong US focus the most. Furthermore, pharmacovigilance issues and the need for greater transparency in terms of regulatory processes are straining the relationship between regulators and pharma. However, reforms in the emerging markets which concentrate on improving the quality and coverage of healthcare provide opportunities for pharma, particularly generics manufacturers. Nevertheless, as healthcare access expands and quality improves, funding pressures increase ultimately leading to the introduction of cost-containment measures. Coverage: the US, Japan, France, Germany, Italy, Spain, the UK, Australia, Brazil, Russia, India, and China
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About the Healthcare Strategic Analysis Team

Datamonitors Strategic Analysis team, led by Alistair Sinclair, includes both analysts and senior analysts. The teams educational backgrounds span a variety of science- and business-based degrees (BSc, MSc, and PhD) from universities in the UK and abroad, in addition to prior experience in bioinformatics, pharmaceutical consulting and medical market research. The team focuses upon providing in-depth strategic insight through syndicated modules covering the following key areas: Socioeconomic Analysis Analysis of a countrys population demographics, economic wealth, disease burden, level of industrialization, and political structure. Regulatory Analysis Insight into a countrys healthcare system, drug regulation, drug pricing, drug reimbursement, and intellectual property position. Sales Analysis Sales data regarding the size of a countrys prescription pharmaceutical market (segmented by retail vs. hospital setting, Anatomical Therapeutic Chemical classification, leading prescription drugs, and by leading internationally and domestically headquartered companies. Expiry Analysis Assesses a countrys generics and biosimilars landscape in terms of regulatory issues, level of penetration, key players, and degree of brand erosion following patent expiry. Industry Infrastructure Analysis Overview of geography-specific R&D and manufacturing infrastructure for the leading pharmaceutical companies operating in a given country, including key metrics (employees, expenditure, operational sites) and geography-specific M&A analysis. Countries profiled in 2011 include: the US, Canada, Japan, Australia France, Germany, Italy, Spain, the UK, Turkey Brazil, Mexico, Russia, India, China, South Korea. Together with the Pharmaceutical Key Trends 2011 modules, the Strategic Analysis team will be producing more than new 80 modules in 2011, together with updates in line with Datamonitor Healthcare's Modular & Continuous production platform. For inquiries about the content of this report, please contact Alistair Sinclair at asinclair@datamonitor.com
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HC00062-004/Published 03/2011 Page 2
Executive Summary
EXECUTIVE SUMMARY Introduction

Healthcare expenditure is growing fast driven by aging populations, an increasing prevalence of chronic diseases, expanding government healthcare coverage, and use of expensive drugs. Also, as a result of the economic downturn, healthcare funding is under scrutiny by governments in developed markets which are looking to pay down their debts. Consequently, healthcare reforms in EU and Japan focus on containing costs, without impacting quality of service. Ongoing measures include pricing and reimbursement cuts, bolstering generic usage, as well as other cost cutting tools, with the outcome largely negative for branded pharma. In the US, although the health reform law may well extend health insurance coverage and increase government involvement in healthcare, costs are expected to escalate. Also in the short-term, discounts and rebates will negatively impact US sales affecting companies with a strong US focus the most. Furthermore, pharmacovigilance issues and the need for greater transparency in terms of regulatory processes are straining the relationship between regulators and pharma. However, reforms in the emerging markets which concentrate on improving the quality and coverage of healthcare provide opportunities for pharma, particularly generics manufacturers. Nevertheless, as healthcare access expands and quality improves, funding pressures increase ultimately leading to the introduction of cost-containment measures.
Executive Summary
Strategic scoping and focus

This report provides an overview of the healthcare and drug regulatory systems for the 12 major markets (the US, Japan, France, Germany, Italy, Spain, the UK, Australia, Brazil, Russia, India, and China). It includes an overview of healthcare expenditure, insight into the recent and on going healthcare reforms, assesses the regulatory issues impacting pharma, and examines the key pricing and reimbursement controls across the 12 major markets. The report has been structured as follows: An executive summary. An overview of healthcare expenditure in the 12 major markets. Insight into the major reforms of healthcare systems in the developed and emerging markets. An assessment of the regulatory issues that are affecting global pharma markets. Analysis of the key pricing and reimbursement controls that are affecting pharma, including price and reimbursement cuts, cost effectiveness analysis, risk sharing, and price negotiation. The bibliography N.B. This report is produced in two parts: 1. Word document: contains key conclusions and a summary of the current and future market opportunities and threats, supported by strategic case studies to provide insight into potential market strategies; 2. PowerPoint executive presentation: shares Datamonitors key insight into the market with supporting data and recommendations.
Executive Summary
Key findings
Key growth drivers and resistors facing healthcare payers and pharma
Aging populations, the growing prevalence of chronic disease, greater use of expensive treatments, and expanding public healthcare coverage in markets such as the US are stretching existing healthcare resources. Healthcare payers are also feeling the impact of the global economic downturn through reduced funding via taxation in response to rising unemployment. As a result, payers are introducing a number of cost-containment strategies such as reducing healthcare budgets (at least in real terms), implementing pricing and reimbursement cuts, and bolstering generic uptake. These measures, together with the increasingly tough regulatory environment, all have a negative impact on the pharma industry. Furthermore, branded pharma is set to lose approximately $100bn in sales due to the patent cliff and resultant generic erosion of branded sales during 201015, while the industry is also feeling the affect of the global economic downturn which has restricted out-of-pocket spend on healthcare in countries such as the US. However, the industry is implementing a number of strategies to drive sales and profitability going forward: product innovation, diversification and cost-containment (Figure 1). Figure 1: Key growth drivers and resistors facing healthcare payers and pharma
Rising healthcare costs Aging patient populations Growing prevalence of chronic diseases Greater use of expensive treatments Expanding public healthcare coverage Global economic downturn Governments look to pay down debts Reduced out-of-pocket spend Patent cliff $100bn* in lost branded sales due to generic erosion during 201014 Biosimilar uptake set to accelerate
Cost-containment and regulatory pressures intensify Reducing healthcare budget Pricing and reimbursement cuts Driving generic uptake Growing regulatory scrutiny
Pharmas strategic responses
Strategies to drive profitability Innovation Diversification Cost savings
1 = Growing patient populations stretches existing healthcare resources 2 = Economic downturn puts pressure on payers through reduced funding via taxation as a result of growing unemployment 3 = Economic downturn results in less out-of-pocket spend on healthcare (e.g. in the US), thereby impacting Pharma 4 = The patent cliff and erosion of branded drug sales directly impact Pharma 5 = Cost-containment strategies implemented by payers negatively impact Pharma * = Sales loss for the top 50 global pharma companies in the US, Japan, France, Germany, Italy, Spain and the UK A B = A has a negative impact on B
Source: Datamonitor
DATAMONITOR
Executive Summary
Healthcare expenditure
The proportion of public contribution to healthcare is greater in the developed markets (74%) as compared to the emerging markets (46%). US healthcare expenditure as a proportion of gross domestic product (GDP) is the highest of the 12 markets analyzed, and as a result of the recently passed US healthcare reform law, the government will foot an even larger proportion of the total healthcare bill in the future. While in Europe, governments have begun to implement austerity measures as a result of the recession that will see a reduction (in real terms) in healthcare expenditure. Although the BRIC countries (Brazil, Russia, India, and China) have lower health expenditures as a proportion of GDP relative to the developed markets, public healthcare spend is increasing as governments make healthcare a bigger priority.
Healthcare reforms
In response to the growing healthcare pressures facing governments and payers, numerous countries are reforming their healthcare systems, ultimately to provide better treatment and to contain costs. The main aim of healthcare reforms in Japan and the EU are to contain costs, without impacting quality of service. Governments in these markets are therefore turning to solutions such as pricing and reimbursement cuts, driving up generic usage, insurance and hospital reforms, and decentralization strategies. However, the outcome of such reforms ultimately has a negative impact on branded pharma. Reforms in the emerging concentrate on improving the quality and coverage of healthcare, funded through greater government expenditure as well as through growing private insurance coverage. Such reforms provide opportunities for pharma, particularly for generics manufacturers. Nevertheless, as healthcare access expands and quality improves, funding pressures increase, leading to the introduction of cost-containment. The exception however is the US, where although the health reform law may well result in extended health insurance coverage and increase government involvement in healthcare, costs are expected to escalate.
Executive Summary
Figure 2 summarizes the positive, negative, and neutral impacts which reforms have on the pharmaceutical industry. Figure 2: Healthcare reforms can have positive or negative effects on pharmaceutical sales
Reforms seen as negative

Reduction in healthcare expenditure Strategies include hospital reforms in order to contain costs and insurance reforms to transfer greater healthcare costs onto individuals to rein in spending Pricing and reimbursement cuts Have an adverse effect on pharma sales. Driving generic uptake Driving greater erosion of off-patent branded drug sales
Reforms seen as neutral

US Healthcare Reform Pharma: short-term sales dip followed by mid-term sales growth increase in discounts and rebates but larger sales volume from more insured people but long-term negative impact due to intensifying cost-containment pressures Private insurers: mixed impact more customers overall but harsher competitive environment Individuals: mixed impact more affordable insurance for low earners but cost may be transferred to others
Reforms seen as positive

Expanding healthcare services Building more hospitals, improving local access to healthcare, and improving the quality of medical training Improving regulatory structure Reforms intended to strengthen pharmaceutical regulation and to align with international standards Expanding health insurance Improving access to poorer often rural communities
Source: Datamonitor
DATAMONITOR
Regulatory issues
Pharmacovigilance issues and the need for greater transparency in terms of regulatory processes are straining the relationship between regulators and pharma. The US Food and Drug Administration (FDA) is placing an increased emphasis on safety controls, while greater focus on pharmacovigilance in the EU brings mixed blessings for pharma. Also, while greater collaboration between the FDA and European Medicines Agency (EMA) will ultimately be beneficial for pharma through the streamlining of development and approval requirements, thereby reducing costs, in the short term it could lead to broadening of approval restrictions across multiple markets. Branded biologics in the US are eligible to receive 4 years' data exclusivity and 12 years' market exclusivity. This means that once the biosimilar pathway is up and running, biosimilars developers will be able to submit their application 4 years after the original products approval (once the 4 years' data exclusivity is up), well in time for launch once the 12-year period has lapsed, provided there are no patent issues. However, the issue of exclusivity is currently under further debate in the US by a number of House of Representative members. President Obama stepped into the argument when in February 2011 he announced that he wished to shorten market exclusivity to 7 years from 12 years, thus reducing the timescale for biosimilars to enter the US market. Clarification as to the meaning of exclusivity periods with reference to FDA reviews is expected in the near future.
Executive Summary
In the emerging markets, corruption is common, with lengthy patent reviews, compulsory licenses and inadequate patent protection factors which continue to act as a disincentive for international pharmaceutical companies to launch innovative products there. Figure 3 illustrates the market and data exclusivity processes in the US and the EU. Figure 3: Market and data exclusivity for New Drug Applications and Biologic License Applications in the US and the EU
US: Original drugs Market and data exclusivity 5 years 3 years 6 months
Generic application after 4 years if application contains a certification of patent invalidity or noninfringement (Paragraph IV filing)*
Abbreviated NDAs or No 505b2 applications receive 3 additional years
Pediatric exclusivity is an additional 6 months
US: Original biologic drugs Market and data exclusivity 6 months
12 years
Manufacturers of biologic drugs get at least 12 years exclusivity
As with NDAs, 6 months pediatric exclusivity is included
EU: Original drugs Data exclusivity 8 years Market exclusivity 2 2 years years 1 year*
Branded product receives new license
Generics application
Generics launch
* = Additional market exclusivity if new indication is registered in first 8 years d
NDA: New Drug Application
Source: Datamonitor
DATAMONITOR
Executive Summary
Pricing and reimbursement

As healthcare expenditure continues to grow, governments in many countries across the EU, as well as in Australia and Japan, are turning to drug price cuts and reimbursement restrictions to reduce their expenditure as part of austerity measures. Also countries, including France, Japan, and Germany, are increasing the usage of cost-effectiveness analysis in their evaluations of new drugs, although this is often perceived by pharma as a barrier to rewarding innovation. In the future, drug price negotiations between manufacturers and regulatory authorities or insurers may become the norm rather than the exception for pharma, making it harder for companies to obtain reimbursement, as well as impacting sales through pricing pressures. Already pharma are utilizing risk-sharing agreements in order to gain market access for novel drugs that would otherwise unlikely be reimbursed. In the US, discounts and rebates are the main issue facing branded pharma. Healthcare reform measures enacted in 2010 included the 50% discount on branded drugs in the Medicare Part D coverage gap. This has already saved seniors $38m in the first 2 months of 2011 alone (Taylor, 2011b). Together with the increased Medicaid discount which has also impacted US pharma, these measures are expected to result in a 13% drop in US sales in 2010, with this forecast to double in 2011, impacting companies with a high proportion of US sales the most. However, the medium-term outlook is positive for pharma. In order to provide greater healthcare coverage and service, governments in emerging markets are increasingly utilizing price cuts in to contain costs. However, in order to drive sales of off-patent brands in these markets, a number of pharma companies are voluntarily cutting their drug prices to stimulate volume uptake.
Executive Summary
Figure 4 summarizes the range of pricing and reimbursement pressures that are negatively impacting pharma in the developed markets. Figure 4: A range of pricing and reimbursement pressures are negatively impacting pharma in the developed markets
Price cuts
2010 saw price cuts in Japan, Australia, France, Italy, Germany and China Both branded and generic drugs affected Reduce profits for Pharma
Reimbursement cuts
French government assigned 110 drugs to a new lower reimbursement level in 2010 Reimbursement of prescription drugs based on the cheapest versions in Italy
US healthcare reform
Rise in minimum Medicaid branded drug rebate from 15.1% to 23.1% 50% discount on Medicare drugs for seniors in the Part D coverage gap
Pricing and reimbursement pressures
Growing price negotiation

Could make it harder for companies to obtain reimbursement Increases cost-cutting pressures Germany introduced new price negotiation requirements in January 2011 Value-based pricing system to be implemented from 2014 in the UK may involve an element of pricing negotiation
Greater use of pharmacoeconomics

Support for comparative effectiveness research in the US, strengthened through healthcare reform IQWIG in Germany has started to use cost-effectiveness analysis in its evaluations France has pledged to speed up its cost-benefit evaluations of new drugs
IQWIG = Institute for Quality and Efficiency in Healthcare (Institut fr Qualitt und Wirkschaftlichkeit Im Gesundheitswesen)
Source: Datamonitor
DATAMONITOR
Executive Summary
Related Reports
Datamonitor (2010) UK Pharmaceutical Market Overview, June 2010, DMHC2608 Datamonitor (2010) Italy Pharmaceutical Market Overview, June 2010, DMHC2619 Datamonitor (2010) Australia Pharmaceutical Market Overview, June 2010, DMHC2646 Datamonitor (2010) Japan Pharmaceutical Market Overview, July 2010, DMHC2622 Datamonitor (2010) Brazil Pharmaceutical Market Overview, August 2010, DMHC2647 Datamonitor (2010) US Pharmaceutical Market Overview, September 2010, DMHC2621 Datamonitor (2010) China Pharmaceutical Market Overview, December 2010, DMHC2648 Datamonitor (2010) Russia Pharmaceutical Market Overview, December 2010, DMHC2657 Datamonitor (2010) India Pharmaceutical Market Overview, December 2010, DMHC2660 Datamonitor (2010) Germany Pharmaceutical Market Overview, December 2010, HC00002-001 Datamonitor (2010) France Pharmaceutical Market Overview, December 2010, HC00002-002 Datamonitor (2010) Spain Pharmaceutical Market Overview, December 2010, HC00002-003
Upcoming related reports

Datamonitor (2011) Pharmaceutical Key Trends 2011 Biosimilar Market Overview, HC00062-006 Datamonitor (2011) Pharmaceutical Key Trends 2011 Drivers and Resistors, HC00062-002 Datamonitor (2011) Pharmaceutical Key Trends 2011 Generics Market Overview, HC00062-007 Datamonitor (2011) Pharmaceutical Key Trends 2011 Pharmaceutical Industry Infrastructure Overview, HC00062-008 Datamonitor (2011) Pharmaceutical Key Trends 2011 Prescription Pharmaceutical Market Sales Overview, HC00062-005 Datamonitor (2011) Pharmaceutical Key Trends 2011 Socio-demographic and Economic Overview, HC00062-003
Table of Contents
TABLE OF CONTENTS
About Datamonitor Healthcare About the Healthcare Strategic Analysis Team Executive Summary Introduction Strategic scoping and focus Key findings Key findings Related Reports Upcoming related reports Healthcare Expenditure Healthcare expenditure is growing fast Healthcare Reforms Healthcare reforms focus on improving access and cutting costs The main aim of healthcare reforms in the EU and Japan is to contain costs Healthcare reforms in emerging markets will positively impact pharma Healthcare reforms in the US will largely have a neutral impact on pharma Healthcare systems globally are converging towards a similar model Several key markets are decentralizing healthcare decision-making to increase efficiency Regulatory Issues Regulatory changes have a largely negative impact on pharma Developed markets exhibit a stable intellectual property environment The intellectual property environments in the emerging markets are seen as inadequate Pricing and Reimbursement Key global pricing and reimbursement controls Pricing and reimbursement cuts were key elements included in austerity measures in many developed markets Pricing pressures are also felt in the emerging markets Raised cost-effectiveness barriers lead to reimbursement restrictions Risk-sharing is becoming a viable option for both payers and industry, particularly in Europe Price negotiation may be the way of the future Bibliography 2 2 3 3 4 5 5 11 11 14 14 21 21 22 27 30 38 41 44 44 49 53 57 57 59 71 75 80 87 90
Table of Contents
Publications and online articles Datamonitor reports Appendix Exchange rates used in this report About Datamonitor Disclaimer 90 102 103 103 104 105
Healthcare Expenditure
HEALTHCARE EXPENDITURE Healthcare expenditure is growing fast

Table 1 summarizes the impact of the global economic downturn on the 12 major markets (the US, Japan, Australia, France, Germany, Italy, Spain, the UK, Brazil, Russia, India, and China). In most markets, overall total healthcare expenditure increased from 2006 to 2009. Table 1: Total healthcare expenditure, 200609 ($bn)
Total health expenditure ($bn)
2006
2007
2008
2009
US France Germany Italy UK Australia Spain Brazil Japan Russia China India
2,239 272 343 176 169 43 101 109 379 24 139 36
2,400 283 353 183 178 45 106 117 385 31 158 38
2,549 280 367 193 190 47 113 122 344 37 176 40
2,685 304 396 210 235 52 123 140 317 49 188 43
Source: Datamonitor Country Statistics Database, 2010
DATAMONITOR
There are several factors driving up healthcare expenditure across the markets analyzed: An aging population This is undoubtedly putting pressure on healthcare systems, particularly in developed markets. As life expectancy increases so too does the number of elderly people, driving the up the prevalence of age-associated diseases which place perhaps the highest burden on healthcare systems. Growing prevalence of lifestyle diseases There are high and growing morbidity and mortality rates associated with conditions such as cardiovascular disease and type 2 diabetes in most markets analyzed. These are attributable to the rise in obesity that has been observed in developed as well as emerging markets over the past few decades. This in itself has been driven by changes in Western society including reduced physical activity, alterations in work patterns, transportation methods, food production, and diet. These "lifestyle diseases", as they have become known, place significant burdens on state and private medical providers. Growing use of expensive drugs and technology The advent of new medical technologies and biologic drugs are also contributing to rising healthcare costs as well as necessitating a higher spend on physician and clinical services (Congressional Budget Office, 2008).
Expanding government healthcare coverage The expansion of healthcare coverage, both in the US, which is set to take place as a result of the healthcare reform measures currently being undertaken, and in the emerging and growth markets, are contributing to the healthcare expenditure rises. In India, the government has launched a policy to build more hospitals, improve local access to healthcare, and improve the quality of medical training (Ministry of Health & Family Welfare, 2009), while under Chinas Opinions on Advancing Healthcare Reform and the Implementation Plan on Advancing Healthcare Reform 20092011, the Chinese government has pledged to spend CNY850bn ($125bn) on healthcare reforms between 2009 and 2011. One of its aims is to increase the number of private hospitals and development of hospitals and clinics, particularly in small and rural communities. Rising healthcare expenditure is also exacerbated by the impact of the global economic downturn, which has put further pressure on healthcare systems, primarily through reduced funding through taxation as a result of growing unemployment (Figure 5). Figure 5: Factors driving up healthcare expenditure across the major developed and emerging markets
Source: Datamonitor
DATAMONITOR
The proportion of public contribution to healthcare is greater in the developed as compared to the emerging markets
The average spend on healthcare as a percentage of gross domestic product (GDP) for the 12 major markets was 8.6% in 2008 (WHO, 2011). The US spent the largest proportion of GDP on healthcare, totaling 16.0% of its GDP in 2008 (WHO, 2011), which increased to between 17.618.8% in 2009 (Young, 2011; The Economist Intelligence Unit, 2010). Other developed markets spent between 8.1% (Japan) and 11.1% (France) during 2008, while the emerging and growth markets (with the exception of Brazil) spent between 4.0% and 5.2% (India and Russia, respectively) (Figure 6). Figure 6: Healthcare expenditure indicators in the US, Japan, Australia, five major EU markets, and the BRIC nations, 2008
Health expenditure as a proportion of GDP (%)
18 16 14 12 10 8 6 4 2 0
ce a an y na C hi pa n ia in US UK zi l ly us si st ra l Fr an Sp a er m Br a Ja In d
Page 16
I ta
Government health expenditure Private (private insurance plans) expenditure

GDP: gross domestic product
Au
Private (out of pocket) expenditure
Source: Datamonitor, OECD Stat Extracts, 2009; WHOSIS, 2010
DATAMONITOR
In 2008, the average public expenditure as a proportion of total health expenditure was 74% in the US, five major European markets, Japan and Australia combined (WHO, 2010), reflecting the dominance of public systems in these countries, which serve the healthcare needs of the majority if not all of the population. Private healthcare in these markets tends to be supplementary to the public healthcare system so comprises a lower proportion of overall health spend. The US is the exception, where public and private insurance expenditure is equal (51.6% versus 48.4%, respectively, in 2009) (Young, 2011).
HC00062-004/Published 03/2011
ia
In Europe, the balance of power is in the hands of large national payers. This has led to less favorable pricing arrangements and more restrictions for pharma as compared to in the US which boasts the highest drug prices in the world. Meanwhile, although the BRIC countries (Brazil, Russia, India, and China) have lower health expenditures as a proportion of GDP relative to the developed markets, public healthcare spend is increasing as governments make healthcare a bigger priority. Indeed, Indias public healthcare expenditure increased from 19.6% in 2006 to 28% in 2008 (WHOSIS, 2010). Table 2 compares governmental, private (out-of-pocket), and private (private health insurance plans) expenditure on healthcare as a proportion of GDP in the 12 major markets analyzed in 2008. France had the highest proportion of governmental healthcare expenditure, reflecting its well-developed public healthcare system, while Brazil had the highest out-of-pocket expenditure, as a result of its high out-of-pocket payments for the use of private healthcare services by the wealthy. Table 2: The proportion of governmental and private expenditure on healthcare in the 12 major markets as a proportion of GDP (%), 2008
Country
Government health expenditure as a proportion of GDP
Private (out of pocket) expenditure as a proportion of GDP
Private (private insurance Total healthcare plans) expenditure as a expenditure as a proportion proportion of GDP of GDP
US France Germany Italy UK Australia Spain Brazil Japan Russia China India
7.4 8.8 8.0 7.0 7.5 6.0 6.3 3.7 6.6 3.4 2.0 1.1
1.9 0.8 1.4 1.7 1.0 1.5 1.8 2.7 1.3 1.5 2.1 2.6
6.6 1.6 1.0 0.3 0.6 1.3 0.6 2.0 0.3 0.3 0.2 0.3
16.0 11.1 10.4 9.0 9.0 8.8 8.7 8.4 8.1 5.2 4.3 4.0
GDP = gross domestic product
Source: OECD Stat Extracts, 2009; WHOSIS, 2010
DATAMONITOR
The US has the highest healthcare spend in the world

US healthcare expenditure as a proportion of GDP is far higher than in any other developed market, as previously discussed. Government healthcare expenditure as a proportion of GDP was 7.4% in the US in 2008, on par with that in other developed markets. However, while government contribution in France, Germany, Italy, Spain, the UK and Australia covers an average of 77% of total healthcare expenditure, it only accounts for around half (51.6% in 2009) of the cost of healthcare in the US (Young, 2011), which points to an astonishing level of inefficiency in the US system (AT Kearney, 2009). Figure 7 summarizes the reasons why healthcare costs are high in the US, including the fragmentation of the insurance system and the high participation of private for-profit organizations that lead to high non-medical costs, as well as high physician fees among others. Figure 7: A range of factors are contributing to high healthcare costs in the US
For-profit organizations well represented in the healthcare system vs mostly public organizations in the EU
Extensive use of costly emerg ency care by the un insured High administrative costs
Fragmented system redu cing the possibility of cutting costs by efficiencies of scale
High healthcare costs
High ph ysician fees partly resulting from growing medical malpractice insurance fees High expenditure for individuals with low deductible and low copayment fees resulting from disincentive to cut costs and lack of gatekeepers
DATAMONITOR
High cost of end-of-life care
Reimbursement and payment in efficiencies

Source: Datamonitor
As a result of the recently passed US healthcare reform, the government will foot an even larger proportion of the total healthcare bill in the future. Government healthcare spending in the US is already outpacing that of private insurers; indeed, for the first time, government expenditure in 2009 was higher than of private insurers. In fact, government spending on Medicaid and Medicare in 2009 (versus 2008) rose six times faster than that spent by private insurers: the government spent $373.9bn on Medicaid (a 9% increase over 2008) and $502.3bn on Medicare (a 7.9% rise in spending versus 2008). This was attributed to a greater number of US citizens requiring public assistance. The recession caused an additional 3.5 million people to seek treatment through Medicaid as unemployment reached 10%, while 6.2 million fewer people were enrolled in private health insurance (a 3.2% decline) (Young, 2011). Furthermore, costs are not only predicted to increase as a result of the US healthcare reforms; by 2019 US healthcare spend is forecast to comprise 19.6% of US GDP, up from 18.8% in 2009, but are also expected to increase faster than
originally anticipated, at 6.3% per year over the next decade rather than at 6.1% as initially predicted (The Economist Intelligence Unit, 2010). As a result, improving healthcare coverage in the US will be at the expense of containing the growth of healthcare costs.
Europes austerity measures will see a real-term reduction in healthcare expenditure

Governments in Europe have begun to implement austerity measures as a result of the recession that will see a reduction (in real terms) in healthcare expenditure. France is a key example of this, with President Nickolas Sarkozy having announced plans to reduce healthcare expenditure growth to 2.9% in 2011 (Mimosas, 2010). In the UK, while the National Health Service (NHS) budget is to be increased from 104bn ($161bn) in 2010 to 114bn ($176bn) over the next 4 years (a 2.3% annual increase), the 10bn ($156bn) rise actually translates into a cut in real terms of around 42bn ($65bn) between 2010 and 2014 (The Pharma Letter, 2010b).
Public healthcare systems are underfunded in the emerging and growth markets
In the emerging markets, where public healthcare systems are underfunded, private healthcare expenditure accounts for a higher proportion of overall heath expenditure. In India, for example, public health expenditure accounted for only 28.0% of the country's total healthcare costs in 2008, reflecting the very basic level of healthcare provided by the government. Indeed, health insurance in India covered just 11% of the population in 2007 (Bhattacharjya and Sapra, 2008). In Brazil, China and Russia, government expenditure accounted for 44.0%, 46.5% and 65.4% of total healthcare spend in 2008, respectively. Nevertheless, public healthcare expenditure in these markets is growing, driven by the fast economic growth of such markets and as governments prioritize healthcare through the implementation of reforms in order to expand healthcare access. Furthermore, with the expanding and aging populations in addition to growing prevalence of chronic diseases associated with old-age and more Westernized lifestyles, governments have been forced to react accordingly and spend more on healthcare. For example, the Brazilian government spent BRL47.8bn ($24.3bn) in 2008, compared to BRL27.8bn ($14.1bn) in 2003 (Shah, 2009), while Indias public healthcare expenditure rose from 19.6% in 2006 to 28.0% in 2008 (WHOSIS, 2010). In China, while total health expenditure has risen over the past 2 decades, so too has per capita health expenditure, although healthcare expenditure as a proportion of GDP remains low. Worryingly, government healthcare expenditure remains below the level required to improve healthcare services in China (WHOSIS, 2010). In order to address this problem, the Chinese government recently embarked on a wide-ranging healthcare system reform (Opinions on Advancing Healthcare Reform and the Implementation Plan on Advancing Healthcare Reform 20092011), focusing on wider healthcare coverage and improved healthcare service provision. In addition, as of October 2010, the New Rural Cooperative Medical System (NRCMS) covered 883 million Chinese among the rural population, while the Urban Resident Basic Medical Insurance (URBMI) for urban non-workers and the Basic Medical Insurance System (BMI) for urban workers together cover 400 million people (Ministry of Health, 2010). This means that more than 96% of the Chinese population is now covered by basic healthcare insurance. However, despite improving economies, the emerging markets like the developed markets, are under pressure to contain costs, leading to implementation of strategies such as price cuts that are impacting pharma companies operating in such markets.
resulting in high out-of-pocket expenditure

As a result of the low (albeit growing) government contribution to healthcare expenditure in the emerging markets, out-ofpocket spend remains high. However, out-of-pocket spending is falling as observed in China, India, and Russia during 200608 (from 30.0% to 28.3% in Russia; from 53.9% to 49.0% in China; and from 75.6% to 64.4% in India [WHOSIS, 2010]), driven by increased government healthcare expenditure. This indicates that out-of-pocket expenditure will continue to drop in line with Western trends, as the public healthcare provision in these countries continue to improve, opening up other market segments besides the affluent and middle classes. Figure 8: Proportion of government and private health expenditure vs personal disposable income in the US, the UK, France Germany, Brazil, Russia, China, Turkey, South Korea and Mexico, 2009
Source: Economic Intelligence Unit 2009 and WHOSIS, 2010
DATAMONITOR
Healthcare Reforms
HEALTHCARE REFORMS Healthcare reforms focus on improving access and cutting costs
In response to the growing healthcare pressures facing governments and payers, numerous countries are reforming their healthcare systems, ultimately to provide better treatment and to contain costs. In developed markets which already have a high standard of healthcare, such reforms tend to focus on reducing costs (often negatively impacting pharmaceutical sales), whereas developing markets are concentrating on improving the quality and coverage of healthcare, providing opportunities particularly for generics manufacturers. The exception, however, is the US, where although one aspect of the ongoing healthcare reforms is to contain costs, the other key aim is to provide almost-universal healthcare coverage. A number of countries are also implementing decentralization strategies which have both positive and negative aspects for pharma as well as other key stakeholders. Figure 9 summarizes the positive, negative, and neutral impacts which reforms have on the pharmaceutical industry. Figure 9: Healthcare reforms can have positive or negative effects on pharmaceutical sales
Reforms seen as negative

Reduction in healthcare expenditure Strategies include hospital reforms in order to contain costs and insurance reforms to transfer greater healthcare costs onto individuals to rein in spending Pricing and reimbursement cuts Have an adverse effect on pharma sales. Driving generic uptake Driving greater erosion of off-patent branded drug sales
Reforms seen as neutral

US Healthcare Reform Pharma: short-term sales dip followed by mid-term sales growth increase in discounts and rebates but larger sales volume from more insured people but long-term negative impact due to intensifying cost-containment pressures Private insurers: mixed impact more customers overall but harsher competitive environment Individuals: mixed impact more affordable insurance for low earners but cost may be transferred to others
Reforms seen as positive

Expanding healthcare services Building more hospitals, improving local access to healthcare, and improving the quality of medical training Improving regulatory structure Reforms intended to strengthen pharmaceutical regulation and to align with international standards Expanding health insurance Improving access to poorer often rural communities
Source: Datamonitor
DATAMONITOR
Healthcare Reforms
The main aim of healthcare reforms in the EU and Japan is to contain costs
In the EU and Japan, healthcare expenditure is rising due to the aging population, the growing prevalence of chronic (often lifestyle) diseases, and the more frequent use of expensive biologic therapies. Simultaneously, as a result of the recent economic downturn, governments are looking to pay down their debts and, as a result, healthcare funding is under increased scrutiny. Furthermore, this is exacerbated by rising unemployment and falling tax contributions. Consequently, the main aim of healthcare reforms in Japan and the EU are to contain costs, without impacting quality of service. Governments in these markets are therefore turning to solutions such as pricing and reimbursement cuts, driving up generic usage, insurance and hospital reforms, and decentralization strategies. However, the outcome of such reforms ultimately has a negative impact on branded pharma. Healthcare reforms in the EU and Japan have the following impacts on pharma:
Reduction in healthcare expenditure Strategies include hospital reforms in order to contain costs and insurance reforms to transfer greater healthcare costs onto individuals to rein in spending
Pricing and reimbursement cuts Have an adverse effect on pharma sales. Driving generic uptake Driving greater erosion of off-patent branded drug sales. Figure 10: Government responses to rising healthcare costs
Source: Datamonitor
DATAMONITOR
Healthcare Reforms
France is reforming hospital management to reduce costs

Reducing expenditure in state hospitals is one way in which healthcare costs and national public deficits can be cut in developed markets. In 2009, President Nickolas Sarkozy introduced a series of proposals to reform hospital management in France by reducing costs in state hospitals. President Sarkozy asked hospitals to hire more business managers and operate more like private companies, and has also announced plans to reduce healthcare expenditure growth to 2.9% in 2011 (Mimosas, 2010). However, the proposals were met with a public backlash as critics argued that the reforms would put too much focus on profit rather than patient care, and could also impact pharma sales in the hospital sector. Meanwhile, France is also currently changing to a fee-for-service system in its state hospitals in the hope that it will be easier for the government to ensure money is being spent efficiently. This compares to the old system of providing hospitals with annual lump sum payments (Gauthier-Villars, 2009).
Germany is transferring cost of healthcare onto individuals to rein in spending

Since 2004, the German government has engaged in a series of healthcare reforms aimed at helping sustain the quality of the healthcare system despite mounting pressure from an aging population. The first reform in 2004 was collectively known as the GMG (Gesetz Zur Modernisierung der Gestetzlichen Krankenversicherung, or GKV modernization legislation). This strategy aimed to increase quality in the healthcare system and particularly in hospitals and ambulatory care. In 2004, the government also introduced minimum volume requirements for complex procedures such as transplantations, thus requiring hospitals to provide this number in order to be reimbursed, which helped improve quality of care and bring down costs. However, in order to reduce costs further the health insurance system required further reform, and so the Act for Strengthening Competition in Public Health Insurance (GKV-WSG, by its German acronym) was passed in 2007, this time targeting the health insurance sector. This had some positive effects for patients in creating universal health coverage for the first time. It also had a positive effect on insurers, who benefited from the injection of increased competition; a key part of the reforms was the introduction of a government-run central sickness fund, into which all Gesetzliche
Krankenversicherung (GKV; Germanys universal healthcare system) contributions have been paid since January 2009.
The central fund then filters money to the individual sickness funds (Krankenkassen). Insurance companies with older members receive higher fees than those with younger members. However, in July 2010 the government raised health insurance premiums to 15.5% of gross pay from 14.9% in an attempt to tackle its healthcare account deficit (Buergin, 2010). Additional financial pressure will be placed on workers if the new reforms of the statutory health insurance system proposed by the government in February 2010 go ahead. As a result, the current state contribution system will be replaced with a
Kopfpauschal (per-capita package price) flat-rate premium charge whereby everyone in the system pays the same amount
instead of the current income-based contributions system. Under this proposal, employer health insurance contributions would be frozen at the current rate and insurance policyholders would pay any extra costs of future increases in health insurance premiums. Employees would potentially pay a minimum flat rate of around 110 ($146) and family policies would be abolished (Henning, 2010).
Healthcare Reforms
Another negative effect on citizens is that extra contributions incurred in cases of future increases in health insurance premiums would only secure basic health coverage, with insurers allowed to share additional charges for value added services, and the two-class health insurance system, already regarded by many as unfair, would be emphasized more under this reform.
Italy has been engaged in a raft of healthcare reforms

Italy has made a number of reforms to its Servizio Sanitario Nazionale (SSN, the country's national health service) over the past 15 years to improve its healthcare system. In May 2010, like several other key markets, Italys government felt the need to reduce pharmaceutical expenditure and consequently passed a series of measures seeking to achieve an estimated 1.2bn ($1.6bn) reduction in pharmaceutical expenditure during 201012, as part of its 24bn ($32bn) austerity package (Adams, 2010b; Bruce, 2010b). Reform measures include:
Price tenders organized by the Italian Medicines Agency (AIFA) for the supply of a number of generics and offpatent brands to be reimbursed by the SSN (which will include no more than four equivalent generics).
Reimbursement of prescription drugs will be based on the cheapest versions. A proposed price cut of 12.5% from 2011 will affect generic drugs and off-patent drugs that did not maintain temporary price cuts in 2009. These measures are expected to increase the level of generic substitution in Italy.
Prices cuts on pharmaceuticals that fail to meet efficacy criteria in pay for performance (risk-sharing) programs Wholesaler margin cuts from 6.65% to 3.64%, saving 400m ($531m). Allowing certain hospital medicines to be distributed through the "territorial system", via pharmacy chains and direct distribution which is expected to save a further 600m ($796m). For more info please see the Pricing and Reimbursement Chapter of this report.
Spains recent healthcare reforms have focused on pricing and reimbursement issues
From 2004 to 2010, most reforms in Spain have concentrated on introducing cost-saving initiatives through major changes in the pricing and reimbursement system. In May 2010, the Spanish government unveiled an austerity package of measures designed to cut the countrys drug expenditure by discounting the prices of drugs not included in the reference pricing system (i.e. patented medicines) by 7.5% from August 2010 (4% for orphan drugs). The aim is to save the health system around 1.3bn ($1.7bn), 1bn ($1.3bn) of which is expected to come from medicine price cuts (Bruce, 2010h). The cuts followed reductions in generic and off-patent drug prices by up to 30% in May 2010 (Taylor, 2010g).
UK primary care trusts will be phased out

There are currently plans in the UK to reform the way in which the National Health Service (NHS) is run by making it more patient-led, focusing on healthcare outcomes in order to reduce management costs. Reforms planned for April 2011 hand over power from primary care trusts (PCTs) to commission services and treatments to general practitioners (GPs), who are expected to form consortia, with all PCTs to be phased out by 2013. The draft legislation, the Health and Social Care Bill, published in January 2011, stated that the reorganization is expected to generate savings of 5bn ($7. 7bn) by 201415
Healthcare Reforms
and 1.7bn ($2.6bn) per year thereafter (Bruce, 2011c). By 2014, all hospitals will be foundation trusts and all will be entitled to leave public ownership but will still provide public services (Ramesh, 2010). Reforms to the current pricing system in the UK are also on the agenda, with the expected replacement of the current pharmaceutical pricing regulation scheme with a value-based pricing system in 2014. The Department of Health will begin developing the system, in collaboration with pharmaceutical companies, in April 2011. Under the new proposals, the value of new products will be assessed and their benefits compared with the benefits that could be gained if the funds were used elsewhere in the NHS. The government will set a range of thresholds (maximum prices) reflecting the different values that medicines offer. The proposals will see the National Institute of Health and Clinical Excellence continuing to produce guidelines and making cost-effectiveness evaluations, but it will no longer decide on whether or not drugs will be reimbursed by the NHS. This would be welcome news to pharma, although questions on the full repercussions of the reform remain while the details are finalized. The new system also seems to imply the use of pricing and reimbursement negotiations between the Department of Health and drug manufacturers, which will be seen as a significant negative to the pharmaceutical industry, which currently enjoys free pricing of drugs in this market.
An aging population has necessitated cost-containment measures in Japan

Reforms in Japan have mainly been focused on containing healthcare costs associated with the elderly population. In April 2008, the Elderly Healthcare Security Act split the previous long-term care insurance into two parts:
Early-stage elderly Insurance (for individuals aged 6574 years, otherwise known as the Health Insurance for the Young-Old).
Late-stage elderly Insurance (for individuals over 75 otherwise known as the Elderly Healthcare System for the OldOld). The new system covers approximately 13 million people, including around 2 million who used to be dependents of their children and did not have to pay health insurance premiums. One aim of the new system was to reduce healthcare costs by making participants more aware of them. However, it may well result in a greater financial burden on pensioners who will have to bear the cost of new insurance premiums from pension payments that are not increasing. Some older people may even forego visiting their physicians because of the financial burden (The Japan Times, 2008). Nevertheless, due to continued pressure as a result of rising healthcare costs among the elderly, the government indicated in October 2010 that it would remove the current insurance system for the over 75s and start a new program for this group in fiscal 2013. As part of a new round of reforms, there are proposals to double the co-payment made by the elderly aged 7074 years, to 20%, based on the total cost of treatment, including drugs and consultation fees (Haydock, 2010b). While the above reforms might not have much of a direct impact on pharma directly, other recent changes to the drug pricing system in Japan have spelled bad news to drugs manufacturers. The following major changes are expected to take place (Scrip, 2009; Pharma Japan, 2010):
Healthcare Reforms
Companies must develop innovative drugs for indications with unmet medical needs which are not available in Japan or pay a penalty
Combination drugs are to be priced at 80% of the sum of prices of individual drugs in the combination Current prices are set at the sum of the National Health Insurance (NHI) prices of the combined drugs Changes to generic and biosimilar prices to encourage uptake Long-listed brands and their generic competitors to be subject to a 2.2% average price reduction Changes to average overseas price calculation to bring down prices of branded drugs at launch
Healthcare Reforms
Healthcare reforms in emerging markets will positively impact pharma

While healthcare reforms in developed markets are focused largely on containing costs, reforms in the emerging and growth markets concentrate on improving the quality and coverage of healthcare, funded through greater government expenditure as well as through growing private insurance coverage. Such reforms provide opportunities for pharma, particularly for generics manufacturers. Nevertheless, as healthcare access expands and quality improves, funding pressures increase, leading to the introduction of cost-containment. Key aims of healthcare reforms in emerging markets include the following:
Expanding healthcare services Building more hospitals, improving local access to healthcare, and improving the quality of medical training
Improving regulatory structure The Chinese State Food and Drug Administration (SFDA) issued a new regulation in January 2009 called Requirements on Special Approval of New Drug Registration, while the 2009 Russian reforms intended to strengthen pharmaceutical regulation and to align with international standards and obligations of clinical trial regulation
Expanding health insurance Improving access to poorer often rural communities Figure 11 shows the key aims of healthcare reforms in Brazil, India, Russia, and China Figure 11: Expansion of healthcare provision is top of the agenda for Brazil, Russia, India, and China
Russia
Reimbursement program in 2005 led to better access to drugs 2011 modernization plan to: - improve the mandatory health insurance system - provide better preventative care - boost availability of domestically produced drugs
China
Insurance coverage extended to include at least 96% of its 1.3 billion population by 2011 Increase number of healthcare facilities Improve access to drugs
Expanded access to healthcare services and treatments
Brazil
Expansion of healthcare services under the Family Health Program (Programa Sade da Famlia) Government investment in healthcare through the Basic Care Package
India Higher sales volume Growing sales of high value drugs

Expanded access to drugs in both urban and rural areas Build more hospitals and improve local access to healthcare Increase public healthcare expenditure to 2-3% of GDP
Over time growing cost-containment pressures leading to price cuts, reimbursement restrictions and growing generics use GDP: gross domestic product
Source: Datamonitor
DATAMONITOR
Healthcare Reforms
India plans to expand healthcare services

Access to healthcare is poor across both urban and rural areas in India, with only 11% of the population covered by health insurance in 2007 (Bhattacharjya and Sapra, 2008), and remains predominantly funded out-of-pocket. Nevertheless, government funding is improving up from 19.6% in 2006 to 28% in 2008 (WHOSIS, 2010). Other improvements being implemented in India include the following:
Expansion of healthcare services The government has launched a policy to build more hospitals, improve local access to healthcare, and improve the quality of medical training.
Increasing health insurance coverage The 200910 government budget allocated $76m for a health insurance scheme to provide health cover of $745 for every employee and their family who falls below the poverty line, while the 201011 budget extended coverage to an additional 20% of the population covered by the National Rural Employment Guarantee Act program (Ministry of Health and Family Welfare, 2009).
More financial support for mental health In February 2010, the federal government approved INR4,740m ($95m) to tackle the human resource crisis derailing the National Mental Health Program. However, the Ministry of Health and Family Welfares (MHFW's) National Urban Health Mission established to improve the health of the poor living in urban areas has reportedly delayed implementation of its urban health strategies. As such, implementation is not expected until after 2012, due to the MHFW prioritizing roll-out of its rural healthcare strategy, the National Rural Health Mission (Sinha, 2010). This will lead to delays in the intended improvements to healthcare in the cities in India, suggesting that progress is slow on improving inequalities in healthcare across India.
Healthcare continues to be a priority for Brazils government

In its effort to expand healthcare coverage and reduce inequalities, the Brazilian government introduced the Family Health Program (Programa Sade da Famlia, PSF) in 1993, which provides a range of healthcare services to families in their homes, in hospitals, or in clinics. As of 2010, the program has been expanded nationally and has been implemented in 95% of Brazilian municipalities, with over 55% of the population (over 85 million people) now covered (Harris, 2010). Brazils healthcare system could also benefit from promises made by President Dilma Rousseff to prioritize improvements to Brazils state healthcare system (Bruce, 2011a).
Russia rolls out its 2020 healthcare plan

To help address Russias growing mortality rate and improve access to medicines and health insurance across the entire population, the government passed a long-term concept of healthcare development through 2020 reform in 2008, which contained a set of healthcare targets to be achieved by 2020. The government plans to start work on this in 2011 and aims to extend the average life expectancy from the current 63 years to 75 years by 2020 (Shishkin and Vlassov, 2009). A major objective of the healthcare plan is to establish a proactive healthcare system, aimed at prophylaxis and early detection of diseases and out-patient therapy (Bykov, 2009). Some specific targets to be achieved, which are largely designed to modernize the healthcare system, include (Parfitt, 2010):
Modernization of the mandatory health insurance system
Healthcare Reforms
Increased use of information technology Installation of new equipment at oncology centers to ensure greater detection of early-stage cancers Increasing the populations access to high technology medical services from 25% to 80% by 2012 Creation of an improved blood service Boosting availability of more domestically produced medicines in Russia Optimization of paramedic care for victims of traffic accidents Promotion of healthy lifestyles. A major aim of the governments 2020 reform as listed above is to improve the mandatory health insurance system by shifting the decision-making process away from employers and regional authorities in favor of empowering. Consequently, in October 2010, Russian Prime Minister Vladimir Putin announced proposals to raise mandatory health insurance tax paid by companies to 5.1% from 2011, which will generate an additional RUB460bn ($14.6bn), which will be allocated to modernizing medical institutions in Russia, in addition to the RUB24bn ($762m) from the government (RIA Novosti, 2010). Under the reform, regional governments will pay additional sums as part of standard insurance premiums for non-working people, which will be used to help cover part of the costs for laboratory tests and in-patient meals.
China is making strides in improving health insurance coverage

The State Council in January 2009 approved the Opinions on Advancing Healthcare Reform and the Implementation Plan on Advancing Healthcare Reform 200911. Under this reform, the Chinese government has pledged to spend RMB850bn ($125bn) on healthcare reforms between 2009 and 2011, including RMB331.8bn ($49bn) from the central government, with the remainder from local governments (Wen Jiabao, 2009). Key reforms include:
Merging the three public healthcare schemes (New Rural Cooperative Medical System, Basic Medical Insurance System for Urban Workers, and Basic Medical Insurance System for Urban Non-workers) into one.
Increasing the number of private hospitals and development of hospitals and clinics particularly in small and rural communities.
Reform of hospital funding, removing the reliance on drug sales, with government agencies taking a greater role in negotiation with healthcare providers.
Offering 1.9 million training sessions for village and township medical clinics and urban community medical institutions between 2009 and 2011, as part of a plan to encourage and train general physicians to work in rural areas.
Ensuring that all urban and rural residents are covered by basic healthcare services. By the end of October 2010, the three public health insurance schemes covered 1,233 million Chinese citizens, accounting for more than 90% of the total population (Ministry of Health, 2010).
Healthcare Reforms
Healthcare reforms in the US will largely have a neutral impact on pharma

The main drivers of the ongoing US healthcare reform process are the already high but also growing number of uninsured individuals, and the continued fast-paced growth of healthcare costs that are unsustainable in the long term. However, while the health reform law may well result in extended health insurance coverage, and increase government involvement in healthcare, it may fail to control escalating healthcare costs, leading potentially to even faster healthcare cost inflation. The key reform measures and their impact on individuals, generics companies, private insurers, and branded pharma are summarized in Figure 12. Figure 12: Key healthcare reform measures in the US and their wide-ranging impacts
Key reform measures Individuals and society
More affordable insurance for low earners and unhealthy individuals but cost may be transferred to other individuals Increase in the number of insured Healthcare expenditure growth unlikely to be contained Increased insurance coverage through a combination of measures including individual mandates and premium subsidies Restrictions on private insurers, including ban on pre-existing condition exclusion and cap on cost-sharing
Private insurers
More customers overall, but with a higher representation of less healthy and older individuals Harsher competitive environment and lower profitability Drive towards consolidation and cost cutting
Medicare Part D donut hole closure
Generics companies
Volume growth from the increase in the number of insured and continued drive for higher generics use Losing out on longer biologics exclusivity and ban on pay-for-delay Lower incentive to use generics resulting from Medicare Part D donut hole closure
Positive impact Negative impact
Branded Pharma
Medicare Part D donut hole discounts and increased Medicaid rebates Positive impact from the volume growth resulting from more insured individuals, Medicare Part D donut hole closure and long exclusivity for biologics But greater cost-containment pressures and drug discounts Limitations on Pharmas marketing practices
Biosimilars approval pathway giving a 12-year exclusivity to original biologics Sunshine provisions requiring disclosure of financial agreements between Pharma and healthcare organizations and physicians
Mixed impact
Source: Datamonitor
DATAMONITOR
Healthcare Reforms
Despite the uncertainty surrounding the health reform passage, branded pharma was keen for the reform to go through rather than face uncertainty and the potential introduction of much less favorable legislative changes. However, unlike the rest of the developed and emerging markets, in general it can be argued that the healthcare reforms will have a neutral outcome on pharma, with the short-term pain of healthcare reform being offset by medium-term gain. The most negative provisions will have an immediate impact, and are expected to result in a 13% drop in US sales in 2010, with this forecast to double in 2011, impacting companies with a high proportion of US sales the most (Jack, 2010). However, the medium-term outlook is positive for pharma. In the long term, however, pharma will experience further negative impacts from the reform due to the intensification of the cost-containment measures. Specifically, greater government participation in healthcare financing, compounded by the impetus for private insurers to cut costs in order to maintain profitability, will lead to more intense cost-containment pressures. However, these pressures are already present in the US even in the absence of healthcare reform (Figure 13). Figure 13: Increased pressure on private insurers and government programs to cut costs will negatively impact US pharma in the long term
No pre-existing condition exclusion, no rescinding of coverage
Medical loss ratio limit, no lifetime or annual coverage limits
Higher government expenditure
Medicaid rebates Insurers profitability hit hard Comparative effectiveness research Donut hole discount Medicare Payment Advisory Board
Limit benefits (restricted by law from 2014) Tougher formulary placement
Restrict provider networks
Pressure on providers and suppliers to cut costs
Find ways to reduce spending
Lower drug prices Tougher formulary placement Greater use of generics
Lower drug prices Price negotiation Greater generics use
Private insurers
Government programs
Source: Datamonitor
DATAMONITOR
Healthcare Reforms
However, the health reform law as it stands is not expected to lead to lower healthcare costs. Therefore, a likely future scenario will involve the introduction of incremental legislative change designed to contain healthcare costs by more extensive nationalization of healthcare delivery, the end result being a convergence towards a European model of socialized healthcare. Together with more stringent restriction of access to medical services and treatments including drugs, these measures would inevitably result in a contraction of the US pharma market. The short-term versus medium- to long-term effects of the reform on pharma are explored in Figure 14, together with strategies which pharma can implement to maximize drug sales. Figure 14: Cost-containment pressures on pharma in the US will intensify in the long term
Medium-term impact Long-term impact Cost-containment pressures leading to greater use of gatekeepers, treatment rationing Generics volume uptake near maximum Faster biosimilars uptake then expected Pharma strategies
Reform measures
Higher sales volume Increased health insurance coverage
Higher generics use Some biosimilars use
Lifecycle management more important but strategies less effective
Support for comparative effectiveness research but results not to be used to restrict services Pricing pressure from payers Medicare drug discounts and increased Medicaid rebates
Comparative effectiveness research has limited impact
Comparative and cost effectiveness research used for reimbursement decisions More pricing pressure from payers Medicare price negotiation Introduction of tools to encourage substitution with biosimilars Drug reimportation could be allowed leading to lower sales and downward price pressure
Better pharmacoeconomic data to support value proposition
Discounts and higher rebates offset by volume growth
Grow volume at a cost of lower price
12 years original biologics exclusivity
Longer patent protection for biologics
Development of biobetters / branded pharma enters the biosimilar arena
No drug reimportation from Canada
No undercutting by parallel trade or pressure to decrease prices
Source: Datamonitor
DATAMONITOR
Healthcare Reforms
Healthcare reform has already had an impact on pharma in 2010

Certain healthcare reform measures have already been enacted (in 2010). For example, seniors reaching the Medicare Part D coverage gap were entitled to a $250 rebate in 2010, while the major change to Medicare Part D will be the 50% discount required for brand-name drugs in the coverage gap in 2011 a move which saved seniors $38m in the first 2 months of 2011 alone (Taylor, 2011b). The increase in Medicaid discount from 15.1% to 23.1% in 2010 has also impacted US pharma. As a result, a number of pharma companies have already stated that sales losses in 2010 were partly due to these measures, with the industry having to wait until 2014 before it sees the upside to the reforms, primarily the expansion of the insured population. Figure 15 lists the key healthcare reform measures most relevant for the pharmaceutical industry in 2010. Figure 15: Timeline of key healthcare reform measures in the US, 2010
2010 Insurance Reforms

Temporary national high-risk insurance pool established to provide health coverage to individuals with pre-existing conditions until 2014 Dependent coverage expanded for adult children up to age 26 Ban lifetime coverage limits on dollar value of coverage Ban insurers from rescinding coverage expect in cases of fraud Ban pre-existing condition exclusion for children Medical loss ratio of at least 85% for large group plans and 80% for individual and small group markets Establishment of a process for reviewing insurance rate increases
Medicare
$250 rebate to Medicare beneficiaries who reach the Part D coverage gap in 2010
Medicaid
States have the option to cover childless adults and expand coverage for other eligibles Medicaid drug rebate for brand name drugs increased from 15.1% to 23.1% (17.1% for clotting factors and drugs approved for exclusive pediatric use), 13% for generics, extend rebate to Medicaid managed care plans
Other
FDA is authorized to approve biosimilars and original biologic manufacturers are granted 12 years of market exclusivity Support comparative effectiveness research by establishing a non-profit Patient-Centered Outcomes Research Institute
Source: Datamonitor
DATAMONITOR
Healthcare Reforms
Figure 16 lists the key healthcare reform measures most relevant for the pharmaceutical industry in 2011. Figure 16: Timeline of key healthcare reform measures in the US, 2011
2011 Medicare
Require pharmaceutical manufacturers to provide a 50% discount on brand-name prescriptions filled in the Medicare Part D coverage gap and begin phasing-in federal subsidies for generic prescriptions filled in the coverage gap
Other
Impose new annual fees on the pharmaceutical manufacturing sector in the form of excise tax
2013 Insurance Reforms

Create the Consumer Operated and Orientated Plan (CO-OP) program to foster the creation of non-profit, member-run health insurance companies to offer qualifying health plans
Medicare
Begin phasing-in federal subsidies for brand-name prescriptions filled in the Medicare Part D coverage gap to reach 25% in addition to the 50% manufacturer brand-name discount
Medicaid
Increase Medicaid payments for primary care doctors for 2013 and 2014
Other
FDA is authorized to approve biosimilars and original biologic manufacturers are granted 12 years of market exclusivity Support comparative effectiveness research by establishing a non-profit Patient-Centered Outcomes Research Institute
Source: Datamonitor
DATAMONITOR
Healthcare Reforms
Figure 17 lists the key healthcare reform measures most relevant for the pharmaceutical industry from 2014. Figure 17: Timeline of key healthcare reform measures in the US from 2014
2014 Individual and Employer Requirements

Require all US citizens and legal residents to have qualifying health coverage or pay a penalty Impose a fee for qualifying employers not offering health insurance coverage whose employees receiving federal premium tax credits Require employers with more than 200 employees to automatically enroll employees into health insurance plans offered by the employer.
Insurance Reforms
Creation of state-based American Health Benefit Exchange and Small Business Health Options Program Exchanges (non-profit or government run) through which individuals and small businesses (less than 100 employees) can purchase qualified coverage Require guaranteed issue and renewability and allow rating variation based only on age (limited to 3 to 1 ratio), premium rating area, family composition and tobacco use. Provide subsidies for out-of-pocket limits for those with incomes up to 400% FPL Limit deductibles for health plans in the small group market Creation of an essential health benefit package Permit states the option to create a Basic Health Plan for uninsured individuals with incomes 133200% FPL Provide premium credits and cost sharing subsidies for individuals and families with incomes 133-400% FPL who purchase insurance through exchanges Impose fees on the health insurance sector
Medicare
Establishment of an Independent Payment Advisory Board comprised of 15 members with the remit of submitting legislative proposals containing recommendations to reduce growth in Medicare spending if spending exceeds a target growth rate
Medicaid
Expansion of Medicaid to all non-Medicare eligible individuals under age 65 with incomes up to 133% FPL
2015 and later Other

Impose an excise tax on insurers of employer-sponsored health plans with aggregate values exceeding $10,200 fore individuals or $27,500 for family coverage (effective from 2018) FPL = federal poverty level
Source: Datamonitor
DATAMONITOR
Healthcare Reforms
Will the healthcare reform law be repealed?

Now that the Republicans are in control of the House of Representatives (since January 2011), they are in a stronger position to fight for repeal of the healthcare reform. However, while a total repeal is unlikely, Republicans could also adopt different strategies to slow down healthcare reform implementation, through lobbying and litigation on a state-by-state basis, or through affecting financing of the implementation through the appropriations bills that release funding for each year. In order to achieve this, however, they either need control of both the House and Senate, or to win over several Democrats (Lambert, 2010a). For example, a judge in Virginia has already ruled a key element of the law that which obliges people to purchase health insurance as unconstitutional. Elsewhere, 20 states have together filed a lawsuit that argues that making people buy health insurance goes beyond the reach of the Commerce Clause of the Constitution (which grants the federal government authority to regulate commerce between states). However, the lawsuit is unlikely to reach the US Supreme Court for this year, while a federal court in California has already dismissed the lawsuit (Lambert, 2010c). Also, in late January 2011, the House Republicans voted to repeal the healthcare reform law in a 245-189 majority (winning over three Democrats) (Yin, 2011c). That said, the repeal is largely symbolic, since even if it were passed the Senate would likely meet with a Presidential Veto. Meanwhile, a bipartisan bill put forward in 2011 proposes to allow states to opt out of certain requirements of the federal healthcare reform law in 2014 instead of 2017, if they meet minimum coverage benchmarks. States could apply for waivers from some of the obligations of the reform, including the employer penalty for not providing coverage, the individual mandate, the standards for a basic health insurance policy and the health insurance exchange structure. However, states would have to demonstrate that their coverage would meet the reform laws minimum coverage and affordability requirements. As such, the proposal would give more conservative states free reign to try more market-based methods, while more liberal states that do not find the law bold enough could try public options (Yin, 2011b) In response to continued repeal efforts by Republicans, Democrats are fighting in defense of the reform, pointing out that its benefit to patients is already apparent. The Democrats stated that undoing the law would increase the number of uninsured and put insurers back in control of health insurance, allowing them to increase premiums at will, ultimately leading the federal budget deficit to grow more quickly (Yin, 2010f). Furthermore, the US governments Department of Health and Human Sciences argues that a repeal would represent a large step backwards, stating that it would add $1 trillion to the deficit over the next 10 years and deny coverage to 32 million US citizens. However, according to the non-partisan Congressional Budget Office, a repeal would add an estimated $230bn to the deficit between 2012 and 2021, although the Republicans argue that these estimated costs are flawed because the reform legislation was misleading. The Congressional Budget Office believes that attempts to cut the deficit and repeal the health reform are contradictory (Yin, 2011d). While Pharmaceutical Research and Manufacturers of America (PhRMA) does not believe a repeal will take place, it does, however, appreciate some aspects that it would address: specifically those that negatively impact pharma. For example, it would like to see the Medicare Payment Advisory Board removed, as it presents a future threat to free drug pricing in the US. Also, it would like to see the removal of the provision that requires businesses to file tax forms on transactions worth over $600. However, PhRMA does acknowledge that it may be difficult to remove some aspects of the health reform law without inadvertently causing the entire reform to collapse (Staton, 2010). This is particularly the case for the insurance coverage mandate, which is expected to be beneficial for pharma sales.
Healthcare Reforms
Potential impact of healthcare reform on pharmaceutical sales

While many factors will determine the financial impact of proposed US health reforms on the branded pharma industry, including how healthcare reform law will be interpreted, Datamonitor has developed a crude quantitative model depicting how the pharma market could be affected. The model demonstrates that imposed discounts and rebates, in addition to raised industry fees, will lead to a short-term market dip that will be offset by the increased sales volume resulting from the newly insured individuals from 2015 onwards. The base case model indicates that pharma companies revenues in the US will suffer in the first 45 years after the reform enactment due to increased Medicaid rebates and Medicare Part D donut-hole discounts, measures that will be effective immediately or soon after passage of reform law. However, from 2015 onwards, revenues will rise, driven mainly by the increase in the number of insured and the resulting increased drug consumption. Interestingly, the downsides of the reform will hit pharma at the worst time, amid a patent cliff that will also have a negative impact on the US branded pharmaceutical market. Figure 18: Base case scenario in the US: short-term pain is offset by medium-term gain under health reform (non-elderly population accounts for 66% of the total pharmaceutical market)
205 200 195 Sales ($ billion) 190 185 180 175 170 165 2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total US nonelderly market under reform
Total US nonelderly market without reform
Source: Datamonitor, PharmaVitae Explorer, January 2010, company-reported information
DATAMONITOR
Healthcare Reforms
Healthcare systems globally are converging towards a similar model
Over the past few decades, driven by increasing demand and patient expectations, as well as use of more expensive therapies and services, healthcare expenditure growth has become unsustainable: a situation that is also exacerbated by the global economic downturn that has led to a squeeze on public purses, creating a healthcare funding crisis. As a result, developed markets are transitioning decision-making power from physicians to payers (although in the UK, this trend will be reversed going forward), which now have to make some very difficult and often unpopular decisions regarding patient access to services and new treatments. Several key markets in Europe utilize strict pharmacoeconomic guidelines when evaluating the cost-effectiveness of new treatments, and as a result have decided to not to fund certain new expensive biologic drugs that extend life of cancer patients by just a few months. For example, the National Institute for Health and Clinical Excellence (NICE) rejected Avastin (bevacizumab; Roche) for metastatic breast cancer in 2011 and Herceptin (trastuzumab; Roche) for gastric cancer in 2010. However, where the UK is concerned, this could change in the future as physicians start to take the decision-making away from NICE. This has led to the introduction of risk-sharing agreements (seen across Europe, the US, and Australia) between payers and pharma as a means for such expensive treatments to gain market access. Similarly, patient top-up fees are also an option to balance patient access and payer budgets and are already in operation in several countries such as France and, to an extent, the UK. Such moves signal the way of things to come, namely the shift of both more cost and responsibility for healthcare onto patients (in terms of taxes, insurance premiums, co-pays, and direct out-of-pocket costs) as well as private health insurers. In effect, going forward, there will be a greater convergence between different healthcare models of today, namely the largely publicly funded healthcare systems of Europe with the predominantly privately funded US healthcare system, with major change set to take place over the next 10 years (PM Live, 2011). Nevertheless, public healthcare systems will remain focused on providing core services and those that are seen as most cost-effective or serving the needs of the larger proportion of the population. Decisions of which services will be covered will be driven by what provides the best value as well as which services individuals can or will want to pay for out-of-pocket. Many of those decisions will be driven by different societal views of what is acceptable or expected in different countries. The expected convergence of healthcare systems in Europe, the US, and the emerging markets are shown in Figure 19.
Healthcare Reforms
Figure 19:
Healthcare systems in Europe, the US and emerging markets are likely to converge
Europe
Mainly publicly funded healthcare Private health insurance complements the public health system Low out-of-pocket expenditure Payers have growing decisionmaking power Moderately empowered patients
Emerging markets
Underdeveloped but growing public healthcare systems Nascent private health insurance High proportion of out-of-pocket expenditure Upper and middle class patients are more empowered
Future model
Mix of public and private funding for healthcare Medium out-of-pocket expenditure Empowered patients Payers have key decision-making powers but physicians and patients needs also need to be addressed Treatment value key for reimbursement (within a treatment pathway) Disease management programs and personalized medicine have an advantage
US
Mainly privately funded healthcare Private insurance has a major role but public healthcare provision set to grow under healthcare reform Medium out-of-pocket expenditure Payers have growing decision-making power but physicians are still independent Empowered patients
Source: Datamonitor
DATAMONITOR
Closes payer-pharma relationships set to evolve

With the influence of payers set to grow even further, pharmas relationship with them will also intensify, with payers increasingly consulted on the development of a companys portfolio and pipeline. This will have a dual purpose: firstly it will allow pharma companies to prioritize projects and make go, no-go decisions based on payers needs and preferences. Secondly, it will help payers plan expenditures for treatments and services that will become available in the future. As such, there will be greater transparency between pharma and payers particularly regarding evidence to support a drugs value
Healthcare Reforms
proposition that will drive reimbursement decisions. In fact, some companies are already engaging in closer relationships with payers. GlaxoSmithKline, for example, has showcased its pipeline to a number of payers in an effort to gain a better insight into their needs and shape its pipeline strategy accordingly (Whalen, 2008). Furthermore, the current trend towards drug price negotiation (between pharma and payers) is expected to continue. However, pricing decisions will increasingly look to integrate the cost and value of the whole treatment package, such as outpatient costs for infusions and nurse support, rather than simply covering the cost of the drug.
Disease management will become central to payer decisions

Disease management will become central to payer decisions, and companies able to offer such comprehensive treatment solutions will have an advantage. Recognizing this, Roche (building upon its "twin-pillared" structure of pharmaceuticals and diagnostics) acquired US-based diagnostics company Ventana Medical Systems in 2008, thereby enhancing its ability to deliver personalized healthcare solutions to fit with its long-term growth strategy, while Novartis is set to acquire Genoptix, a laboratory that offers personalized diagnostic services (Sutton, 2011). In fact, twinning diagnostics with therapies (targeted therapies) designed to work in specific patient populations will continue to be attractive to payers as they present lower risk in terms of investment.
Pharma will need to manage both patient and payer expectations

With greater cost of healthcare to be footed by patients, the current patient empowerment trend is also expected to continue, with patients taking greater interest and responsibility in their healthcare choices, including drug treatments. Consequently, going forward, pharma will have to consider not only physician and payer needs and expectations, but also patient preferences. However, due to the differing needs of these stakeholders, managing expectations will not be an easy task.
Healthcare Reforms
Several key markets are decentralizing healthcare decision-making to increase efficiency

Another key reform strategy among many healthcare systems, particularly in Europe, has been improving efficiency and performance through decentralization: transferring more authority and power from central bodies which have traditionally managed most aspects of healthcare to the smaller, regional centers. The decentralized bodies are generally either publicly operated institutions (tax-funded countries), non-profit private bodies (such as sickness funds in social health insurance markets), or profit-making, publicly listed companies. This is intended to reduce bureaucracy and make healthcare systems more dynamic and able to respond to both national and local agendas (European Observatory on Health Systems and Policies Series, 2007). However, the European Observatory on Health Systems and Policies Series (2007) has stated that countries may need to consider recentralizing since it is becoming more apparent that certain pressures can only be adequately addressed centrally by national bodies. This raises questions as to whether decentralization may just be a trend of the moment rather than a permanent fixture. Figure 20 shows the major drivers of decentralization of healthcare systems and how these can impact on both pharma and patients in positive and negative ways. Figure 20: Key drivers and consequences of healthcare system decentralization
Key drivers of decentralization
Improving healthcare system efficiency and performance by handing responsibility to smaller organizations
Cost savings can be achieved by removing unnecessary bureaucracy
More dynamic, local decision making
Greater choice for patients (e.g. UK proposals to form GP consortia to commission services for patients)
Consequences
Care becomes more patient-specific as it can be tuned to patients needs and patients have more choice Better quality and more malleable health services A negative reimbursement decision does not impact a whole country
Inequalities in treatment provision Risk of lack of coordination and efficiency Risk that patients will shop around, which can increase burdens on the best healthcare facilities, thus lowering their quality and efficiency Fragmented pricing and reimbursement system
Positive
Negative
GP: General Practitioner
Source: Datamonitor
DATAMONITOR
Healthcare Reforms
UKs decentralization strategy has raised concerns regarding inequality of access to healthcare services
In the UK, the impending devolution of powers from the primary care trusts (PCTs) and the National Institute for Health and Clinical Excellence (NICE) to general practitioners (GPs) heralds a major change in terms of management of frontline services. Under the reform proposals, general practices will be required to form consortia when commissioning services for their patients, utilizing their allocated government funds, calculated on a per patient basis. Like most decentralization strategies, this is intended to save costs by removing unnecessary bureaucracy, provide more choice to patients, and adapt healthcare services to local patients needs (Noir, 2010). The existing 152 PCTs will be replaced by 300350 GP consortia nationwide (Ireland, 2011). However, there are fears that the strategy will lead to massive inequalities in treatment provision across the UK, an exacerbation of postcode prescribing that NICE was tasked to remove. In fact, a recent survey has shown there is a great variation in the uptake of NICE-approved medicines between PCTs, a situation that the industry and other stakeholders believe may only become worse following decentralization (Bruce, 2011b). There is also the risk that patients will "shop around" for services, although patient satisfaction with a GP may not necessarily correlate with the advice or treatment they receive (Noir, 2010), as well as potentially creating a higher workload burden and thus longer waiting lists for proffered physicians. From a pharma industry perspective, the dissolution of PCTs and strategic health authorities (STAs) means that companies will have to target many more stakeholders in the future with regards to drug reimbursement issues, since reimbursement decisions will be made on a local basis. This will increase the complexity and burden of achieving market access for a given drug within the UK, with pharma likely to now have to consider repopulating its primary care sales forces following the recent cuts in size. However, on the positive side, a negative reimbursement decision in one region will not necessarily impact the whole country.
Italy has already devolved many powers to regions causing inequality in access to care and treatments
In contrast to the UK, Italy already has a system of decentralized healthcare provision in place. The Servizio Sanitario
Nazionale (SNN, the country's national health service) has become increasingly decentralized since 1997, with many of the
Ministry of Healths responsibilities having been devolved to the 20 regional governments. This has given the regions powers to ensure that healthcare policy is delivered and to distribute financial resources to a network of local health authorities (Aziende Sanitarie Locali; ASL) and hospitals. Regional health departments have the power to adopt their own additional quality standards, to set their own reimbursement rates, to decide which hospitals should receive public funds, and to withhold reimbursement if hospitals did not meet the required standards (Stancati, 2010). However, the devolution of such responsibilities has led to the evolution of a number of regional disparities in Italy. For example, while the northern regions have been assertive in exploiting their independence, most of the southern regions have trailed behind in their reforms and face a shortage of own-source resources (European Observatory on Health Systems and Policies, 2009). Fewer treatments as well as fewer hospital beds (1.3 fewer than in the North in 2002) are available in the South, which critics claim leads to the poorest people receiving the poorest standard of healthcare (Stancati, 2010; Maio et al., 2002). Decentralization also presents a challenge in terms of drug pricing and reimbursement, since regions develop their own formularies and drug prescribing groups, providing a further level of complexity for pharma (Kars 2006). Furthermore, in addition to the Italian Medicines Agency (AIFA) list of centrally approved medicines, each region has its own separate drug
Healthcare Reforms
list, with variation in drug access between hospitals even within a region (Galbraith, 2010a). Nevertheless, the central and regional governments and autonomous provinces have recently agreed to make innovative drugs available to all patients as soon as the reimbursement decision is made, helping reduce delays in drug access in poorer regions (Taylor, 2010f).
Brazil, Russia, and China are also engaging in decentralization strategies

Decentralization strategies are not just limited to developed markets. In efforts to improve healthcare, emerging markets have also sought to devolve responsibilities on a regional basis. In Brazil, an ongoing decentralization strategy has given regional and local systems varying levels of managerial responsibility and financial autonomy (Elias and Cohn, 2003). However, like Italy, there are disparities in healthcare coverage in Brazil and despite efforts to address geographical and financial inequalities, the lack of access to healthcare for a significant proportion of Brazilians remains a serious challenge. Similarly, Chinese healthcare regulatory bodies are also fragmented and decentralized, with multiple government (both central and regional) administrations and institutions involved in different aspects of industry regulation, leading to a lack of coordination and efficiency. Following the break up of the Soviet Union, Russias healthcare system was also exposed to a new decentralized administrative structure, with the country divided into federal, regional (oblast-level) and municipal (rayon-level) administrative levels. This has led to significant disparities in the distribution of physicians and healthcare facilities with heavily populated urban centers having better access to healthcare as well as poor access to healthcare for the poorer regions of society. More recently, however, in 2010, there were signs that regional disparities could be ironed out, since local governments had to draft modernization programs for their regions and submit them to the Ministry of Health by October 1, 2010, with the approved programs receiving funding made available from the 2% ($16bn) increase in health insurance premiums. Modernization will involve: bringing regional healthcare infrastructure into line with the population size, disease incidence, and mortality patterns; upgrading equipment; providing better information technology systems such as electronic patient records; and improving the provision of treatments covered by the mandatory health insurance to patients (Bailey, 2010b).
Regulatory Issues
REGULATORY ISSUES Regulatory changes have a largely negative impact on pharma

Pharmacovigilance issues and the need for greater transparency in terms of regulatory processes are straining the relationship between regulators and pharma, ultimately increasing drug development and approval processes, in addition to placing further emphasis on post-approval drug monitoring at the expense of pharma.
Heightened safety concerns continue to impact pharma

A heightened focus on drug safety in the US and EU continues to have an impact on drug developers, and nowhere are delays more prominent and the impact on drug approvals more apparent than in the US. Powers given to the US Food and Drug Administration (FDA) by the FDA Amendments Act of 2007, including rights to require post-marketing safety studies and Risk Evaluation and Mitigation Strategies (REMS), are increasingly impacting on pharma. As the FDA and the drug developers grapple with these new requirements, it is taking longer to approve drugs, despite more funding and expanded capacity at the agency. Figure 21 shows how growing regulatory pressures are negatively impacting on pharma. Figure 21: Pharma has had to grapple with growing regulatory pressures
Heightened focus on drug safety may lead to more enforcement actions, market withdrawals and longer approval times
Closer collaboration between regulators in different markets could lead to spread of approval restrictions
Regulatory burdens have negative consequences for Pharma
Greater focus on pharmacovigilance may increase costs and bureaucracy and lead to more drug withdrawals and restrictions
Source: Datamonitor
Increased transparency of regulatory processes may result in regulators toughening up on Pharma to prove their public service
DATAMONITOR
For drugs already launched and available in the US, the FDA is not afraid of clamping down on companies that promote offlabel prescribing. Indeed, a greater number of enforcement actions could come about in 2011 (Moskowitz, 2010). In
Regulatory Issues
addition, the pharmacovigilance system, known as Sentinel (Sutter, 2009), will add to the growing regulatory burden on pharma companies, since developers are required to increasingly navigate hurdles not only before they secure approval, but also post-approval.
The FDA is placing an increased emphasis on safety controls

The FDA is tightening safety controls, with new rules on safety studies for diabetes drugs placing pressure on pharma. Concerns about the increased cardiovascular risk with diabetes drug Avandia (rosiglitazone; GlaxoSmithKline) prompted the FDA to require new consent forms for patients and new standards for doctors when writing prescriptions (Carroll, 2010; Maugh and Zajac, 2010). Furthermore, the US Congress introduced a bill titled the Drug Safety Enhancement Act in 2010, which should give the FDA the authority and resources to adequately carry out its regulatory functions. If passed, the bill will allow the FDA to (Taylor, 2010c):

create an up-to-date registry of all drug facilities generate funding for increased good manufacturing practice (GMP) inspections for branded and generic drugs require parity between domestic and foreign inspections prohibit entry of drugs that limit, delay, or deny FDA inspections prohibit drugs that lack safety documentation require manufacturers to have knowledge on the supply chain and mitigate security risks throughout the chain prohibit false or misleading reports to the FDA provide strong new enforcement tools such as mandatory recall authority protect those who bring attention to important safety information require unique identification numbers for drug establishments and importers to improve the FDAs ability to identify parties involves in a serious situation more quickly Greater emphasis on drug safety is also apparent in the emerging markets. For example, in February 2009, Brazil introduced a pharmacovigilance system in order to improve adverse event reporting for drugs already on the market, and for the first time outlined the procedures and responsibilities required of pharma companies when reporting adverse events (ANVISA, 2009). However, the pressing need for greater transparency of the regulatory processes and decisions is straining the regulatormanufacturer relationship, with the regulators increasingly needing to be seen as taking a hard line with the pharma companies to prove their public service. Consequently, pharma is put under increasing scrutiny with a tightening grip on marketing practices requiring them to change their promotional models.
Greater focus on pharmacovigilance in the EU brings mixed blessings

Pharmaceutical companies have to some extent welcomed new EU pharmacovigilance obligations, which came into effect on January 1, 2011. Companies and member states are required to report suspected adverse reactions to the EU
Regulatory Issues
pharmacovigilance database, EudraVigilance, which will then forward reports to the member states where the adverse event occurred. This means that the periodic safety report which companies are required to submit to EudraVigilance now requires analysis of a drugs risk/benefit profile rather than lists of individual case reports already submitted to EudraVigilance. This is intended to improve the detection and reporting of adverse drug reactions in the EU. In addition, marketing authorization holders will only need to submit key elements from the pharmacovigilance system they set up for their products rather than detailed descriptions of the system, thus saving companies time (Schofield, 2010a). However, pharmaceutical companies still have reservations about other aspects of the new EU pharmacovigilance system. For example, the European Commission (EC) will have powers to force companies to perform post-authorization safety and efficacy studies, either during or post-product approval, so that the product can be better assessed in medical practice. For obvious reasons, the pharma industry would prefer this not to become routine, and rather it be used in exceptional circumstances. Companies also face conducting further monitoring for specific products, including all drugs with a new active substance and biological products, including biosimilars. This will certainly increase costs and workload for both pharma companies and regulators, and could in turn be reflected in high industry approval fees. However, the provisions are not expected to significantly impact pharma until mid-2012, when they will become compulsory, although member states have the option of implementing the provision now (Schofield, 2010b). The EU pharmacovigilance obligations form part of new legislation that has been adopted by member states, which is the first part of the pharmaceutical package to be approved. Another part of the legislation includes the adoption of a new Pharmaceutical Risk Assessment Committee at the European Medicines Agency (EMA), which will analyze signals of new risks or changes to benefit/risk balance and issue recommendations to change, suspend, or revoke marketing applications which will then forward results to the Committee for Medicinal Products for Human Use for its opinion and decision. The new legislation also states that steps will be taken to make it easier for patients and healthcare professionals to report suspected adverse reactions to medicines and the commission will analyze the readability of patient information leaflets and summaries of product characteristics and potentially draw up proposals for improving their layout and content (Schofield, 2010b).
Collaboration between the FDA and EMA is intensifying

In response to the ever-increasing globalization of drug development and manufacturing, the FDA and its European counterpart, the EMA, are continuing to strengthen their ties. In September 2010, the two regulators extended signed confidentiality agreements that they first signed in 2003, and as a result they now share the following information (PM Live, 2010b):

good clinical practice (GCP) inspection reports of clinical trial sites drafts of pending laws, regulations, and guidance documents Post-marketing data and information potentially affecting public health information about defects or recalls known by one agency to have been manufactured or distributed in the other agencys territory. The emphasis of the collaboration is on harmonizing standards, sharing information, and eventually spreading the workload (e.g. inspections and other regulatory activities). In order to facilitate the collaboration, an FDA liaison official has been
Regulatory Issues
present at the EMA since June 2009, with an EMA liaison official at the FDA since January 2010. Collaboration now takes place on a daily basis, with an average of 55 interactions per month via video- or teleconferences, staff exchanges, and document exchanges (Moskowitz, 2010). Other forms of collaboration between the FDA and EMA include the pilot program to share information on GCP to ensure uniformity between clinical trials performed for marketing applications in the US and the EU (Sutter 2009). In addition, the EMA and the FDA announced in February 2010 that they were to accept a single Orphan Drug Designation Annual Report for products designated in both jurisdictions (Sharma, 2010b). While any convergence of the pathways between the two regulators could cut development times and costs, greater communication between the two regulators does not directly translate into identical approval decisions for pharma, with varying levels of acceptable risk and different legislative practices seen across the two markets. For example, while the FDA and the EMA reviewed the same data on the diabetes drug Avandia (rosiglitazone; GlaxoSmithKline), the EMA suspended the drug, while the FDA merely placed restrictions on its use (Moskowitz, 2010). Similarly, with regards to the breast cancer drug Avastin (bevacizumab; Roche) and its use in metastatic HER2-negative breast, the FDA recommended that the indication be removed after determining that the risks of the drug outweigh the benefits. Conversely, the EMA stated that Avastin will remain approved for use in combination with paclitaxel in Europe, citing evidence of clinical benefit based on progression-free survival (Evernow Publishing, 2010). As such, although the greater collaboration between regulators will ultimately be beneficial for pharma through the streamlining of development and approval requirements, thereby reducing costs, in the short term it could lead to broadening of approval restrictions across multiple markets.
EU ban on direct-to-patient communication guidelines partially relaxed

More positive news for pharma is that the European Commissions (EC) Pharmaceutical Legislation package (proposed in December 2008) included provisions for relaxation of rules for direct communication between pharmaceutical manufacturers and patients. In November 2010, after much discussion and a significant opposition from members of parliament, the European Parliament backed the ECs proposals to relax pharma-consumer communication. Manufacturers may now communicate directly with those patients who explicitly seek information, although communication must be limited to advice provided in patient information leaflets, and confined to issues of price, adverse events risk, and general disease awareness. The impetus for the change in law stemmed from a need to provide objective, high quality, non-promotional information to an increasingly empowered patient population, in a bid to protect patients from encountering misleading or poor quality information (Adams, 2010a). That said, this is offset by the fact that the rule preventing dissemination of information on prescription medicines through television and radio has now been extended to print media (previously communication through health-related publications and internet sites was allowed) (Adams, 2010a). However, critics have highlighted the absence of a clear distinction between information and advertising, fearing that it would encourage patients to demand branded drugs even if cheaper generics are available (Adams, 2010a). The final version of the proposal (that was approved in November 2010) was rephrased to clarify the distinction between information and advertising and to emphasize that companies cannot make available any promotional material on prescription drugs. The final version of the Pharmaceutical Legislation package states that companies will have to make public assessment reports publically available, and that companies provide, where appropriate, information in the form of responses to
Regulatory Issues
individual requests for information, or through health-related publications this will apply in situations such as when patients have no or limited access to the Internet. Companies can also voluntarily provide other information such as data on preclinical and clinical studies contained in the public assessment reports featured on the EU web portals that will be set up by member states. Pharma could also provide information on the disposal of unused drugs; medicine prices, and adverse reaction data, as well as information on non-interventional scientific studies of a product. However, this would need to be checked by the regulator (Schofield, 2010b). Realistically though, while the changes have fallen considerably short of US-style direct-to-consumer (DTC) advertising, and have provided manufacturers with little opportunity to promote individual drug products in the EU, manufacturers would do well to seize any concessions in this area given the historical dearth of such options in the EU.
Regulatory Issues
Developed markets exhibit a stable intellectual property environment

Figure 22 illustrates the market and data exclusivity processes in the US and the EU. Figure 22: Market and data exclusivity for New Drug Applications and Biologic License Applications in the US and the EU
US: Original drugs Market and data exclusivity 5 years 3 years 6 months
Generic application after 4 years if application contains a certification of patent invalidity or noninfringement (Paragraph IV filing)*
Abbreviated NDAs or No 505b2 applications receive 3 additional years
Pediatric exclusivity is an additional 6 months
US: Original biologic drugs Market and data exclusivity 6 months
12 years
Manufacturers of biologic drugs get at least 12 years exclusivity
As with NDAs, 6 months pediatric exclusivity is included
EU: Original drugs Data exclusivity 8 years Market exclusivity 2 2 years years 1 year*
Branded product receives new license
Generics application
Generics launch
* = Additional market exclusivity if new indication is registered in first 8 years d
NDA: New Drug Application
Source: Datamonitor
DATAMONITOR
Regulatory Issues
It is generally easier to secure patent protection in the US than in the EU

New Drug Applications (NDAs) in the US are only awarded 5 years of data and marketing exclusivity in total. As such, patent protection in the US is much more important than in Europe, since market exclusivity tends to expire before patents do. It is also easier to secure patent protection in the US, as the US Patent and Trademark Office which handles patents is generally less stringent than the European Patent Office (EPO), at least when it comes to accepting the scope of claims. This also makes the timeframe for examining applications and obtaining allowable claims in the US significantly shorter than in the EU, so that it is common to have claims allowed in the US before receiving a first examination report for the corresponding EPO application (Managing International Property, 2009). In addition, a 3-year period of exclusivity is granted for Abbreviated New Drug Applications (ANDAs) or 505(b)(2) applications. These relate to a drug product that contains an active moiety that has been previously approved, when the application contains reports of new clinical investigations (other than bioavailability studies) conducted or sponsored by the sponsor which provide a new basis for approval, such as a new strength, dosage form, route of administration, or conditions of use (US Food and Drug Administration, 2010c). Pediatric exclusivity of 6 months is added to the 5 or 3 years of new drug product exclusivity if these have been conducted in accordance with the requirements. Branded biologics in the US are eligible to receive 4 years' data exclusivity and 12 years' market exclusivity (Edwards et al., 2010). This means that once the biosimilar pathway is up and running, biosimilars developers will be able to submit their application 4 years after the original products approval (once the 4 years' data exclusivity is up), well in time for launch once the 12-year period has lapsed, provided there are no patent issues. However, the issue of exclusivity is currently under further debate in the US by a number of House of Representative members who believe that with a period of data exclusivity, the US Food and Drug Administration (FDA) could not begin a review until the 12 years is up. Such a move would delay biosimilar producers' time to market (FDA Week, 2011). The US president stepped into the argument when in February 2011 he announced that he wished to shorten market exclusivity to 7 years from 12 years (Staton, 2011), thus reducing the timescale for biosimilars to enter the US market. Clarification as to the meaning of exclusivity periods with reference to FDA reviews is expected in the near future.
The EU follows the 8+2+1 rule

In the EU, the 8+2+1 rule applies to all new chemical entities approved by any member state by any procedure. This means that such entities have 8 years of data exclusivity, with a further 2 years of market exclusivity. This 10-year exclusivity can be extended by an additional year if, during the first 8 years, the marketing authorization holder obtains an authorization for one or more indications that will bring a significant benefit compared with existing therapies. This means that companies can apply for generic authorization after year 8, but a given generic version of a drug may not be marketed until after year 10 or 11 (European Generic Medicines Association, 2010).
Japan gives branded pharma companies 8 years of data exclusivity through re-evaluation requirement
Japan has a "re-evaluation period" which serves as a form of data exclusivity protection in the absence of an explicit data exclusivity period. The period of data collection is 8 years, but generics manufacturers must wait until after the 8 years have passed before they file for approval of generic versions of drugs even if patents on the originals have expired, since they are required to submit the same data (or rely on the original data) (VOI, 2009).
Regulatory Issues
The purpose of the re-evaluation (re-examination) is to confirm the safety and efficacy of new drugs through post-marketing surveys. All drugs, including those that have completed re-examination, must undergo re-evaluation to reassess their efficacy, safety, and quality. For certain medicines, the re-examination period can be extended from the conventional 6 years to a maximum of 10 years for drugs and from 4 years to a maximum of 8 years for medical devices (JPMA, 2010). The re-examination period can also be extended for a set period not exceeding 10 years in cases where drug manufacturers include data on pediatric clinical trials.
Springboarding allows generics manufacturers to access branded drug data in Australia

Data exclusivity in Australia protects innovator brands for 5 years. However, "springboarding" is permitted, whereby a generics manufacturer accesses data lodged by the Therapeutic Goods Administration (TGA) during the data exclusivity period in order to develop a product that will be available to market immediately once the primary patent has expired. Although this was previously only allowed for patents that had been granted an extension, Australia was required to widen the springboarding provisions to cover all pharmaceutical patents in order to comply with the Australia-United States Free Trade Agreement (Finzi and Boyce, 2009). This brings Australia into line with the US, Europe, and New Zealand.
Loss of Plavix exclusivity in Germany is thought to be an exception

Despite the stability and strength of patents and exclusivity in developed markets, one exception has been the high profile case of a near generic entry in Germany in 2008, when ratiopharm (now part of Teva) and Hexal (part of Sandoz) launched a near copy of Plavix (clopidogrel; Sanofi-Aventis). Near generics products with the same active ingredient as the original drug but a slight difference in composition, usually the salt are not subject to the same regulations regarding patent infringement as they differ from the originator drug (Cleaver, 2009). In this case, ratiopharm's and Hexals versions were clopidogrel besylate while the originator (Plavix) is clopidogrel bisulphate. The applicants secured approval of their respective forms of clopidogrel through a bibliographic (established medicinal use) application from the German Federal Institute for Drugs and Medical Devices (Bundesinstitut fur Arzneimittel und Medizinprodukte; BfArM) (Datamonitor,
Pipeline and Commercial Insight: Antithrombotics, December 2010, DMHC2636). The BfArM subsequently received an
infringement notice in mid-2008 since it was believed to have broken EU Community Law. Sanofi-Aventis is appealing the ruling, but the near generics have been allowed to remain on the market (Cleaver, 2009).
The EUs move to a single patent has been held up

Divergences regarding the validity of a patent can exist between national courts and the European Patent Office (EPO), but these could be addressed with the implementation of an EU-wide patent system (formerly known as the Community Patent) which would enable pharmaceutical companies to have a unified patent on a given product throughout the EU. The move would also lead to a 10-fold reduction in the cost of an EU patent, ultimately benefiting the pharma industry. However, proposals to allow the single patent were held up in 2010 by Italy and Spain, with Italy arguing that the Italian language is being discriminated against by not being included as one of the official languages of the EU patent. On December 14, 2010, in order to break an ongoing (10-year) deadlock, the European Commission (EC) made a formal proposition that an "enhanced co-operation mechanism" be implemented to allow those European member states that agree on the implementation of a single EU patent to move forward. While the European Parliament voted in this proposal in February 2011 (Schofield, 2011), on the EU Court of Justice's announced on March 8, 2011 not to introduce a single EU
Regulatory Issues
patents' tribunal, meaning that the EU patent system remains devoid of a guaranteed litigation process, in a move that has been viewed largely as a step backwards by the pharmaceutical industry, judges, and patent professionals.
Regulatory Issues
The intellectual property environments in the emerging markets are seen as inadequate
In the emerging markets, corruption is common and enforcement of intellectual property (IP) legislation is much weaker than in developed markets. This acts as a disincentive for international pharmaceutical companies to launch innovative products there. The issues affecting IP in the emerging and growth markets are summarized in Figure 23. Figure 23: Intellectual property environments in the emerging markets are characterized by problems
Corruption and conflicts In Russia there are high levels of governmental corruption so companies are often unsuccessful in patent infringement cases In Brazil the two agencies involved in approving patent filings, ANVISA and the INPI have differing opinions which can hold up approvals Despite the new patent law, India has refused several patents due to lack of sufficient innovation
Lengthy patent reviews and shorter protection periods In Brazil it takes 7-8 years to issue a patent due to shortage of patent examiners In China there are no extensions to compensate for the 3 years filings spend in regulatory reviews
Compulsory licenses In the past, Brazil has issued compulsory licenses, which forced branded companies to make drug price cuts The threat of compulsory licenses is ongoing in India as need to ensure drug availability to rising population increases
Inadequate data protection In India there is no statutory data protection for pharmaceuticals and reformulated brands may not necessarily receive protection In China the law on data protection is ambiguous and infringement is not adequately penalized In Russia new law (On Circulation of Medicines) failed to include provisions on regulatory data protection
ANVISA = Agencia Nacional de Vigilancia Sanitaria (The Brazilian National Health Surveillance Agency); INPI = National Institute of Industrial Property
Source: Datamonitor
DATAMONITOR
Russias intellectual properly environment is characterized by corruption

The Russian Patent Law is mostly consistent with provisions of the World Trade Organizations (WTO's) Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, although enforcement by the Rospatent (Federal Service for Intellectual Property, Patents, and Trademarks) is insufficient. Furthermore, Russia has not signed up to TRIPS after a string of longstanding disputes, while the lack of data exclusivity also remains an issue (WTO, 2010). Consequently, with high levels of governmental corruption, even if an innovator company is successful in bringing the infringing party to court, there is only a small chance of success with domestic companies treated favorably. Similarly, trademark infringement is recognized, but as with patents, enforcement is limited (Thomson, 2005). Russia enacted a new federal law on the circulation of medicines (titled On Circulation of Medicines) in September 2010, which brought in a range of initiatives to improve drug quality, safety, and effectiveness. However, pharma has criticized the bill for failing to include any provisions on regulatory data protection. Pharmaceutical Research and Manufacturers of America (PhRMA) has stated that the bill should be amended so that drug applications which rely on innovator data or that refer to original products (through bioequivalence studies) are prohibited for 6 years from the marketing approval of the originator (Aisola, 2010).
Regulatory Issues
While it remains to be seen whether any improvement will be made, the pharma industry is hopeful that Russias desire to join the WTO will push it towards making the necessary changes to its overall IP environment.
Patent reviews are slow in Brazil

In Brazil, one of the main issues that branded pharma faces is the slow progress of patent reviews. It is reported that it takes 78 years to issue a pharmaceutical patent, with the delay primarily arising from a shortage of patent examiners (Managing Intellectual Property, 2007). In addition, while Brazilian statute provides data protection against unfair commercial use, it does not specify for how long, nor does it explicitly prevent regulators from using the data when approving generics or similar applications. Conversely, the same law passed in December 2002 provides data protection for pharmaceuticals for veterinary use, agrochemicals, and related products for 10 years for new chemical entities and 5 years for known compounds (Rizzotto, 2009). Moreover, the drug regulatory agency Agencia Nacional de Vigilancia Sanitaria (Anvisa) rather than the National Institute of Industrial Property (INPI) has the powers to make a final approval (or rejection) on pharmaceutical patent filings based on its judgment of patentability. In reality, however, there is a severe conflict between the two agencies and they often refuse to collaborate, particularly over how to assess applications for patents on incremental innovations (Shadlen, 2009). INPI tends to favor incremental innovations, which are frequently lifecycle management strategies employed to maximize the commercial potential of a branded drug and also to stimulate pharmaceutical investment, while Anvisa has a rather different perspective. Being a government body and focused on containing healthcare costs, it believes that incremental innovations are not inventions but discoveries that are intrinsic to the original molecule and should therefore not be patentprotected. Thus the agencies often refuse to collaborate, particularly over how to assess applications for patents on incremental innovations (Shadlen, 2009). Also, since 2002, the law in Brazil has exempted regulatory officers from having to check whether a drug is still covered by a patent in Brazil, and so Anvisa has unwittingly issued several market authorizations for generics, resulting in patent infringements (PhRMA, 2009). Another cause for concern for pharma is the fact that Brazil has reserved the right to issue compulsory licenses in cases of national emergencies. This threat gives the Brazilian government considerable leverage to achieve substantial savings, even on patented drugs. A case in point is the difficulties the government had in covering the costs of antiretroviral therapies and its subsequent resorting to threatening to issue compulsory licenses as a means of negotiating antiretroviral prices. In May 2007, after unsuccessful negotiations on the price of Sustiva (efavirenz; Merck & Co.), Brazil decided to issue a compulsory license on this drug and to import a generic version of the drug from India (although it later decided to source the drug from a domestic company). In a further blow to Merck & Co., Brazil began producing generic efavirenz in 2009, which resulted in a price reduction of efavirenz of 93%. Before the generic product was available, Sustiva represented around 12% of the costs of antiretroviral expenditures in Brazil. These costs dropped to 3.9% with the introduction of the generic (Junior, 2010).
Indian law does not contain statutory data protection

Law in India does not contain any statutory data protection for pharmaceuticals, with the existing legal provisions regarded as inadequate. Consequently, India has been subject to significant pressure from countries such as the US and the EU regarding data exclusivity, especially since it is signed up to the TRIPS agreement. The countries argue that after the changes to patent law that took place in 2005, India has an obligation to incorporate data exclusivity in its domestic
Regulatory Issues
legislation. However, in a positive turn of fate for pharma, Indias government has recently started to consider including a range of "TRIPS-plus" provisions in the countrys intellectual property rights regime, as part of the proposed EU-India free trade agreement. This would allow the EU patent holders more favorable intellectual property rights provisions on areas including supplementary protection certificates, data exclusivity, patent linkage, and dilution of standards of patentability. However, the proposals, which the EU plans to finalize in 2011, have been met with criticism by key ministries in India, including Indias commerce and health and family welfare ministries, and the department of industrial policy and promotion. The ministries are concerned about the impact that implementing data exclusivity in India would have on the entry of generic drugs, and state that it would delay competition and hence put back the price reduction on drugs as well as prevent compulsory licenses from being able to be issued (Ghangurde, 2011). Despite improvements to the patent legislation in 2005 which saw the introduction of product as well as process patents by the Indian Patent Office, safeguards were built in to prevent evergreening (the practice of extending the patent life of a product beyond 20 years by granting secondary patents on existing products for new usages and small improvements). This means that reformulated, follow-on brands may not necessarily receive patent protection in India: a move that is detrimental to branded players, but provides a significant opportunity for domestic generics manufacturers. For example, the patent application for the antiretroviral combination drug Kaletra/Aluvia (lopinavir plus ritonavir; Abbott) was rejected in January 2011 (Ghangurde, 2011). However, it is not only reformulated drugs that are impacted, since the patent application for Glivec (imatinib; Novartis) was rejected due to evergreening (Datamonitor, Emerging Markets Series: Benchmarking
Key Countries, December 2007, DMHC2352).
In terms of compulsory licensing, the Department of Industrial Policy and Promotion is considering developing new guidelines, following multinational takeovers of Indian pharma companies, which could result in the domestic pharma industry being dominated by only a handful of companies, leading to a potential increase in drug prices. Driven by the need to ensure drug availability in India, the government is seeking input on several issues, including the use of compulsory licensing beyond emergencies, whether licenses should be issued in view of anti-competition law, and the basis for compensatory royalty payments (Taylor, 2010). Clarifying compulsory license arrangements will undoubtedly be useful for branded pharma companies, although the use of compulsory licenses in India could threaten companies in the long term, particularly if licenses are used more liberally. However, greater use of compulsory licensing is unlikely to have a sizable impact given India's track record with patent rejections. The guidelines would also mention possible profit controls for drugs. These would certainly be more painful and would threaten branded pharmaceutical companies' expansion strategies into emerging markets. It is also possible that the increased threat of using compulsory licensing may be used to leverage lower prices for drugs for certain indications (e.g. cancer, HIV/AIDS) from the industry.
China is not yet affording adequate data protection for new chemical entities
China in recent years has taken steps to improve its legal framework and made amendments to its IP laws and regulations to comply with the TRIPs initiative. However, despite a stronger statutory protection, China continues to be a haven for counterfeiters and drug pirates (Strait Times, 2010). Patent terms in China begin at the date of filing and not the date of issue, and it takes around 3 years for a patent application to be processed, although there are no extensions to compensate for the time spent in regulatory review resulting in a shorter period of protection (Chemistry and Industry, 2007). Furthermore, one of the State Intellectual Property Offices (SIPOs) requirements causing particular concern to US and European businesses is that if foreign
Regulatory Issues
companies performing R&D in China plan on submitting a first-to-file patent abroad, data on the product inventions will be required to be sent to the SIPO. This has created concern regarding the potential leakage of sensitive IP information during the examination process (Haydock, 2009). Article 35 of the Implementing Regulations of the Drug Administration law of August 4, 2002, provides 6 years of data exclusivity from the date of marketing approval (de Ridder and Robinson, 2010). However, there are indications that the data exclusivity protection is not provided as it is set out in law. PhRMA has asserted that the State Food and Drug Administration (SFDA) allows non-originator applicants to submit published materials and reference regulatory decisions made by foreign regulatory agencies as justification for approval which both infringes data exclusivity and leads to approval of drugs without full dossiers (PhRMA, 2009). This results from the fact that for class 3 drugs (drugs new to China but marketed elsewhere), published studies rather than full clinical dossiers are sufficient for approval, effectively allowing companies to circumvent the data exclusivity provision (VOI, 2009). Furthermore, in January 2010, China adopted a new regulation surrounding compulsory licensing, allowing domestic pharmaceutical companies to make generic versions of innovator drugs (for domestic use and export) without the permission of the patent holder for public health purposes (China Daily, 2010). More worryingly for the pharma sector, new provisions allow any entity (given certain conditions) to petition the SIPO to grant a compulsory license 3 years after a patent has been granted (IHS Global Insight, 2010a). Nevertheless, Datamonitor believes this regulation will have limited impact on multinational companies for the time being, given the fact that compulsory licenses have never been issued in China, perhaps due to lax intellectual property rights. Meanwhile, on a positive note, several drugs manufacturers in the US signed a public/private sector agreement with China known as the Healthcare Partnership Program in 2011, which aims to bring about long-term co-operation between China and the US, and foster interactions between regulators in these countries in terms of research, regulation, training, and increasing accessibility to healthcare services in China. The program will involve 12 US companies and is expected to provide opportunities to promote US exports as well as highlight the importance of the public-private collaborations to improve healthcare (Taylor, 2011a). However, the US has been clear on its message to China that IP needs to improve, and has voiced its concerns on IP rights infringement and counterfeiting. As such, this latest deal shows that China is committed to making improvements going forward.
Pricing and Reimbursement
PRICING AND REIMBURSEMENT Key global pricing and reimbursement controls

In an effort to control costs, a number of pricing and reimbursement controls used are currently employed across various markets as summarized in Figure 24. Figure 24: Key global pricing and reimbursement controls
US Japan Australia France Germany Italy Spain UK Brazil Russia India China
Pricing tools Profit controls Reference pricing Price cuts, free zes and ceilings Discounts and rebates Pricing negotiations Reimbursement tools Patient co-pays Formulary positive/negative lists Volume limitations Pharmacoeco nomics Risk-sharing Over-the-counter (OTC) switching Pharmacist substitution Budget caps Generic-name prescribing
Source: Datamonitor
DATAMONITOR
Pricing controls
In an effort to control costs, a number of pricing controls used are currently employed across various markets:
Profit controls These limit the amount of profit a company can make per product or within a specified period of time. If the limit is exceeded, the firm may have to either compensate the government or accept a price cut.
Reference pricing Internal reference pricing is the average drug price in a therapeutic class, while external reference pricing is the average price of a drug across several countries.
Price cuts, freezes and ceilings Price cuts are direct cuts in the price of drugs, whereas price freezes occur when a drug remains at the same price for an agreed period of time. Price ceilings come into force when a drug reaches a predetermined sales estimate at which point the price is then reduced.
Discounts and rebates Where pharma companies offer discounts and rebates to payers. Pricing negotiations Drug price negotiations between manufacturers and regulatory authorities or insurers.
Reimbursement controls
Payers have also initiated a number of reimbursement controls to manage pharmaceutical spending. These include the following:

Patient co-pays Patients pay for a proportion of their prescription. Formulary positive/negative lists Positive lists include drugs that receive some level of reimbursement, negative listed drugs receive no reimbursement.
Volume limitations Limits the overall volume of drugs prescribed, through the setting of pre-established volume limitations based on a set price-volume agreement.
Pharmacoeconomics Cost-effectiveness analysis of a drug and how it fits within a given payers budget. Risk-sharing A form of conditional therapeutic coverage that entails a contractual agreement between a payer and a healthcare supplier or manufacturer, based on a "guaranteed" outcome resulting from the treatment. If the outcome is achieved the payer will pay, if not, the pharmaceutical company refunds the payer for the cost of the drug.
OTC switching Switching a branded prescription drug to one of over-the-counter (OTC) status. Pharmacist/automatic substitution Pharmacists must substitute a prescription for a branded drug for an identical cheaper generic where possible without consent of the prescribing physician.
Budget caps Setting limited budgets for drug expenditure which if exceeded may trigger a payback from the manufacturers.
Generic-name prescribing When physicians are encouraged to prescribe generic drugs rather than branded drugs.
Pricing and reimbursement cuts were key elements included in austerity measures in many developed markets
As healthcare expenditure continues to grow, governments in many countries across the EU, as well as in Australia and Japan, are increasingly turning to drug price cuts and reimbursement restrictions to reduce their expenditure as part of austerity measures. However, in the US, while drug price cuts are not the issue, rebates are under the healthcare reform, measures enacted in 2010 included the 50% discount required for brand-name drugs in the Medicare Part D coverage gap. The increased Medicaid discount has also impacted US pharma since 2010. Figure 25: A range of pricing and reimbursement pressures are negatively impacting pharma
Price cuts
2010 saw price cuts in Japan, Australia, France, Italy, Germany and China Both branded and generic drugs affected Reduce profits for Pharma
Reimbursement cuts
French government assigned 110 drugs to a new lower reimbursement level in 2010 Reimbursement of prescription drugs based on the cheapest versions in Italy
US healthcare reform
Rise in minimum Medicaid branded drug rebate from 15.1% to 23.1% 50% discount on Medicare drugs for seniors in the Part D coverage gap
Pricing and reimbursement pressures
Growing price negotiation

Could make it harder for companies to obtain reimbursement Increases cost-cutting pressures Germany introduced new price negotiation requirements in January 2011 Value-based pricing system to be implemented from 2014 in the UK may involve an element of pricing negotiation
Greater use of pharmacoeconomics

Support for comparative effectiveness research in the US, strengthened through healthcare reform IQWIG in Germany has started to use cost-effectiveness analysis in its evaluations France has pledged to speed up its cost-benefit evaluations of new drugs
IQWIG = Institute for Quality and Efficiency in Healthcare (Institut fr Qualitt und Wirkschaftlichkeit Im Gesundheitswesen)
Source: Datamonitor
DATAMONITOR
By August 2010, pharmaceutical companies were already starting to feel some negative effects of the austerity measures that had been adopted. Pharma companies which rely on Europe for a larger portion of their incomes such as Bayer, Merck KGaA, UCB, and Almirall are seen as most at risk from recent price cuts, and the industrys biggest companies are also likely to experience lower revenues. The head of the pharma unit at Novartis, David Epstein, stated that he expects Novartis to suffer from the combined effects of the cuts in Spain and Greece in its 2010 second-half revenues, while GlaxoSmithKline expects its European sales to fall by at least 3% for the next year or two (McConaghie, 2010). Elsewhere, Bristol-Myers Squibbs CEO James Cornelius estimated a 6% sales dip in 2011 due to pricing pressures (Euro Pharma Today, 2011). The price cuts implemented in 2010 are summarized in Table 3. Table 3: Examples of price cuts and rebate measures in major developed markets, 201011
Country
Price cuts
US Japan Australia France Spain Italy Germany
50% discount on branded drugs for seniors in the Medicare Part D coverage gap Average 5.57% biennial reimbursement price cut in April 2010. Long-listed products with generic competition subject to further 2.2% average reduction 23% average price cuts on Formulary 2 drugs from December 2010 Price cuts through the 1020% reimbursement band in September 2010 to exceed 10% for angiotensin II receptor antagonists, erythropoietins, anti-TNF alpha antibodies and high-dose statins Austerity package announced in May 2010 to cut patented drug prices by 7.5% by August 2010 (4% for orphan drugs). Generic and off-patent drug prices were cut by up to 30% in May 2010 Prices of off-patent and generic drugs to be cut by 12.5% from 2011 Rebate on non-reference priced drugs raised to 16% (retrospective from August 2009 until December 2013)
TNF = tumor necrosis factor
Source: Bruce, 2010b; Jacobs, 2010; Taylor, 2010a; Paris and Docteur, 2008; Pharmaceutical Benefits Pricing Authority, 2009; Haydock, 2010a
DATAMONITOR
Patent-protected drugs are spared by Italian price cuts but off-patent and generic drugs suffer
In Italy the government has introduced several price cuts on fully reimbursable drugs (both branded and generic) since 2002. Price cuts have also been implemented through sales limitations, which impose a proportional price discount on drugs with a higher than average expenditure level. In 2005, a 10% discount was applied to 56 selected substances, because sales of these drugs grew faster than the market (VOI, 2009). More recently, in May 2010, Italys government passed a series of measures seeking to achieve an estimated 1.2bn ($1.6bn) reduction in pharmaceutical expenditure during 201012, as part of its 24bn ($32bn) austerity package. Measures include: price tenders organized by the Italian Medicines Agency (Agenzia Italiana del Farmaco; AIFA) for the supply of a number of generics and off-patent brands to be reimbursed by the Servizio Sanitario Nazionale (SSN, Italy's national health service); reimbursement of prescription drugs based on the cheapest versions; and a proposed price cut of
12.5% from 2011 which will affect generic and off-patent drugs (Bruce, 2010b). The pharma industry is particularly concerned that reimbursement will be based on the cheapest version of a given drug, fearing that it will favor generics players. As a result, this move may drive some branded companies out of business as well as restrict the choice of drugs available through the SSN. In addition, plans were made in July 2010 to slash the prices of drugs that have emerged from a pay for performance (risk-sharing) program in 2011 on the basis that the medicines cancer treatments and expensive biologics had not demonstrated the effectiveness that pharma had claimed they would. The Italian government launched the program in order to obtain post-marketing efficacy information to assess cost-effectiveness and efficacy. Under the scheme, drugs are priced according to 2-year studies in a Phase IV setting and if the results of these studies are that the drugs are less efficacious than claimed the government will cut prices. Initially, drugs firms will see reductions of 2030% off listed prices and medicines could then be further reduced by 3040% depending on the outcome of the efficacy studies which are yet to be undertaken (Adams, 2010b). For more information on price cuts in Italy, please refer to Datamonitor's report Italy Pharmaceutical Market Overview (June 2010, DMHC261).
Austerity measures in France impact both prices and reimbursement rates

France is under pressure to confront its mounting budget deficits and consequently, in June 2010, the government announced plans to reduce the healthcare expenditure bill for 2010 by an extra 600m ($796m). One of the ways in which it plans to do this is by reimbursement cuts through the newly introduced 1020% reimbursement band. The new reimbursement band was introduced in April 2010, with the government assigning 110 drugs that were reimbursed at the 35% level and regarded of low therapeutic value to a new level of 1020% reimbursement (Taylor, 2010a). The cut was expected to lead to savings of around 150m ($199m) (HIS, 2010a). Furthermore, as part of the austerity measures announced in 2010, from January 2011, the government plans to reduce the reimbursement rates of a number of drugs specifically, those for medicines with a moderate medical benefit from 35% to 30%, which is expected to affect nearly 1,000 drugs (Sukkar, 2010c). The French government also adopted proposals to implement drug price cuts as part of the 2011 social security funding bill. The draft social security financing law (Projet de Loi de Financement de la Scurit Sociale, or PLFSS) was announced on September 28, 2010, and was passed in November 2010 (IHS, 2010d). The governments measures include price cuts of innovative and generic products, a greater encouragement of generics drug use and a change in reimbursement rates. It is expected that 500m ($664m) in savings will be generated from price cuts imposed on generic players, innovators, and wholesalers, although at the moment it is not clear how the savings will be split between the three groups. The price cuts will be negotiated on an individual basis between manufacturers and The Economic Committee on Healthcare Products (CEPS; Comit Economique Des produits de Sant ) (Sukkar, 2010a), and therefore it is expected that the larger generics companies with the greatest bargaining power (and also the ability to lower prices due to economies of scale) will be the main benefactors. Nevertheless, the price cuts will harm all generics producers in France, due to the already low prices of generics (at least 50% below the brand price on generic entry). The government also plans to further encourage physicians to prescribe generics by providing financial incentives which, while benefitting generics manufacturers, would hurt branded pharmaceuticals (Sukkar, 2010c).
Spains price cuts impact both branded and generic medicines

In May 2010, the Spanish government unveiled an austerity package designed to provide healthcare savings of around 1.3bn ($1.7bn). One of the main measures was to cut the countrys drug expenditure by discounting the prices of drugs not included in the reference pricing system (i.e. patented medicines) by 7.5% from August 2010 (4% for orphan drugs). The move is expected to create savings of 1bn ($1.3bn) (Bruce, 2010c, Taylor, 2010). The entire supply chain is expected to be affected by the discounts: pharmaceutical firms will discount manufacturers' selling prices by 7.5%; wholesalers will then apply the same discount; and pharmacies will also apply a 7.5% discount to the retail price (Bruce, 2010d). An additional 300m ($398m) is expected to be reined in through changes to the production and dispensing of single-dose treatments, for example by making it possible for patients to buy the exact dose that they need (Taylor, 2010). Previous cuts introduced in May 2010 included the reduction in generic and off-patent drugs prices by up to 30% (Taylor, 2010g, Bruce, 2010a). The Spanish Ministry of Health stated that these discounts would be proportional to the amount of time a product had been on the market, with larger cuts imposed on drugs that have been on the market for longer (Bruce, 2010a). These austerity measures led to an outcry by the pharmaceutical industry, which argued that they would spell serious trouble, threatening jobs, forcing manufacturing facilities to close, and stifling innovation, with turnover predicted to fall by 20%. Pharmaceutical companies stated that they wanted co-payments for drugs already very low in Spain to be increased instead (Taylor, 2010a). However, by July 2010, the Ministry of Health was already seeing a positive result from the branded price cuts, with a 6.2% drop in the amount the government paid for each prescription compared with June 2009, with the average prescription cost at 12.70 ($16.85), down from 13.50 ($17.91). The SNSs pharmaceutical expenditure was also down by 2.8% to 1.0bn ($1.4bn) compared with June 2009, despite the fact that the number of prescriptions increased by 3.8% (Bruce 2010e). A cost-cutting measure contained in the health ministrys most recent January 2010 pricing order created around 20 new reference pricing groups (affecting 20 active ingredients) in order save around 500m ($664m) a year. Over 200 presentations of the following active ingredients were affected: atorvastatin, fluvastatin, levocetirizine, irbesartan, galantamine, pramipexole, prednisone, and tizanidine. The prices of 160 existing reference groups were also updated in the order, which affected more than 6,000 presentations (Bruce, 2010e). Another 78 products that were not subject to reference pricing did, however, experience price reductions by 20% if they were funded by the state, had been on the market for over 10 years, and a less expensive generic competitor had been authorized in another EU country. Manufacturers were told to apply price reductions by March 1, 2010 (Bruce, 2010e). For more information on price cuts in Spain, please refer to Datamonitor's report Spain Pharmaceutical Market Overview (December 2010, HC00002-003).
Germanys new law focuses on containing the growth of spending on patent-protected drugs
Public drug spending increased by 5.3% in 2009 (versus 2008) to 32bn ($42bn), of which the main contributor was the growth in usage of patented drugs, growing by 8.9% (200809) compared to a 2% decline in value for drugs under discounted contracts (generics and off-patent drugs included in the reference pricing system) (IHS, 2010c). In order to contain costs, the German government passed a new law, Entwurf des Gesetzes zur Neuordnung des Arzneimittelmarktes
(AMNOG), in June 2010 introducing higher rebates and price freezes, and expected to result in a 1.2bn ($1.6n) saving in 2011 as part of a 2.4bn ($3.2bn) package (IHS, 2010d). The law came into force on January 1, 2011 (IHS, 2010f). Table 4: Annual savings to be made from Germanys new law Entwurf des Gesetzes zur Neuordnung des
Arzneimittelmarktes
Measures
Insurance market
Annual savings ($bn)
Forced rebated contract of 16%, 30-year price freeze Forced rebate contracts of 16% on ambulatory treatments Forced rebate contracts of 16% for private health insurance and funding support Increases in pharmacy discount to 2.05 ($2.72) per package of prescription drugs in 201112 Additional wholesaler discounts of 0.85% in 2011 Forced rebates on vaccines, prices based on international reference pricing Competitive price of cytostatic drugs
GKV (Statutory) GKV PKV (Private) GKV GKV and PKV GKV and PKV GKV
1.59 0.27 0.27 0.27 0.27 0.40 0.13
Total savings
3.18*
GKV = Gesetzliche Krankenversicherung; PKV = Verband der Privaten Krankenversicherung; * = numbers do not sum due to rounding
Source: IHS, 2010d
DATAMONITOR
The new law has increased rebates on patent-protected drugs from 6% to 16% (retrospective from August 2010 through December 2013) on every medicine sold to health insurance funds which is not included in the reference pricing system. The law also introduced a 3-year price freeze from August 2010 through December 2013 on all pharmaceutical prices (based on August 2009 prices) (IHS, 2010c). The main aim of the price freeze is to stop pharma companies from increasing prices of drugs in order to offset the new 16% rebate (Kermani, 2010). Although this is a negative development for pharma companies operating in Germany, discounting rather than price cutting means that the list price will remain the same, and that drug prices in other countries will not be directly impacted by the move. . In addition, a forced rebate contract of 16% for non-reference priced drugs used in ambulatory treatments (a measure added in the second part of the AMNOG law) is expected to generate an additional 0.2bn ($0.3bn) in savings for wholesalers and pharmacies. Wholesalers will experience a 3.15% mark-up as of 2012 and a 30% increase in mandatory pharmacy discounts to 2.05 ($2.72) per package of prescription drugs (in 201112). The Federal Union of German Associations of Pharmacists believes that mandatory discounts for pharmacists amounted to 1.1bn ($1.5bn) in 2009, with pharmacies only saving 850m ($1.1bn) owing to forced rebates on generics. Pharmacy budgets will be stretched further going forward as mandatory pharmacy discounts will increase, contrary to discounts obtained from wholesalers, which are expected to be limited (IHS, 2010d). Although rebates and price freezes have helped control costs they do not discriminate between more and less costeffective or clinically effective drugs, something that may change in the future with greater use of pharmacoeconomic evaluations and price negotiations (discussed in later sections of this report).
For more information on Germanys new law, please refer to Datamonitor's report Germany Pharmaceutical Market
Overview (December 2010, HC00002-001).
Australias changing reimbursement landscape puts pressure on local generics sector

The Pharmaceutical Benefits Scheme (PBS) is Australias drug reimbursement system, funded by the federal government (through Medicare Australia) and patient co-payments. As a result of latest PBS reform measures passed in November 2010, as part of the Memorandum of Understanding (MoU), the Australian government expects to make cost savings of A$1.9bn ($1.7bn) from 201011 to 201415 through a range of statutory price reductions and the expansion and acceleration of the existing price disclosure program (Commonwealth of Australia, 2010). Proposed statutory price reductions as part of the PBS reforms, effective as of February 1, 2011, include (Sukkar, 2010b):

an increase of the 12.5% price reduction upon equivalent brand listings (generic entry) to 16% an additional 2% price reduction to all drugs that were in Formulary 2A (F2A) (reference date October 11, 2010) an additional 5% price reduction to all drugs that were in Formulary 2T (F2T) (reference date October 11, 2010) Furthermore, on December 1, 2010, the F2A and F2T drug formularies merged into the F2 and price disclosure became mandatory for all F2 drugs. The Expanded and Accelerated Price Disclosure policy increased the existing price disclosure program from 162 to over 1,600 drugs. Additionally, the weighted average disclosure-related price reduction will be a minimum of 23% during the price disclosure cycle of December 1, 2010, to April 1, 2012 (the Australian Department of Health and Ageing, 2007; the Australian Department of Health and Ageing, 2010).
Figure 26 illustrates the changing structure of the PBS formularies since its establishment until 2011. Figure 26: Organization of the Pharmaceutical Benefits Scheme formularies in Australia, 19482011
PBS formulary 1948 All PBS-listed prescription pharmaceuticals Section 100 Pharmaceuticals requiring special supply arrangements
F1 formulary Single-brand pharmaceuticals 2007 F2A formulary
F2 formulary Pharmaceuticals for which there is at least one additional products that is considered clinically interchangeable at the patient level (including generics) F2T formulary High pharmacy trading terms (>25%) and heavily discounted
Section 100 Pharmaceuticals requiring special supply arrangements
Low pharmacy trading terms (<25%) and low discount
F1 formulary 2011 Single-brand pharmaceuticals
F2 formulary Pharmaceuticals for which there is at least one additional products that is considered clinically interchangeable at the patient level (including generics)
Section 100 Pharmaceuticals supplying special supply arrangements

DATAMONITOR
Source: Datamonitor
Furthermore, in May 2010 the government decided not to form any new therapeutic groups during the 4-year period of the MoU unless it believes that a sponsor is seeking to list a minor variation of one of its already-listed drugs, and where the Pharmaceutical Benefits Advisory Committee (PBAC), using the evidence available to it, forms a view that the new drug offers no meaningful clinical advantage over the existing drug and is interchangeable on an individual patient basis (Commonwealth of Australia and MA, 2010). The government also promised to provide sponsors with reasonable notice of its intention to form any new group and seek sponsor comment prior to the determination of such a group. In passing the bill into legislation, certain amendments were imposed, including (Pharma in Focus, 2010):
government report on examination of any barriers to generic market entry caused by inappropriate use of intellectual property rights due by June 30, 2011
biannual government discussions with the Pharmacy Guild of Australia, the National Pharmaceutical Services Association, the Generic Medicines industry Association and MA on the impacts of reforms and any consequent issues
biannual reports to parliament on the affordability of, and access to, prescription medicines monitoring of the dispensing of medicines under the co-payment threshold (from April 2012)
investigation by the Pharmaceutical Benefits Advisory Committee (PBAC) into whether rosuvastatin (Crestor/Visacor; AstraZeneca) and simvastatin (genericized) should be included in the statins therapeutic group
The impact which these intended reforms will have on various stakeholder groups is discussed in Figure 27. Figure 27: Impacts of PBS reforms on stakeholder groups in Australia, 2011
Positive impacts of PBS reform Ensured period of policy stability allows forward planning F1 formulary unaffected by statutory price cuts Ensured period of policy stability allows forward planning Generics
Negative impacts of PBS reform Price cuts to products coming off patent
Innovators
Price cuts to all products in F2 formulary Price disclosure means some product prices may drop below profitable levels Price disclosure increases administrative burden
No significant positive impact
Price disclosure will devalue existing inventory each adjustment cycle Community Service Obligation funding pool no longer covers costs Greater use of manufacturer direct-topharmacy distribution
Wholesalers
Pharmacists Patients Prescribers Government
No significant positive impact Prices of many medicines will be lower No significant positive impact Expected savings of A$1.9bn ($1.7bn)
Reduction of revenue margins Minimal risk of supply interruptions No significant negative impact Potential increase to administration costs in short-term
PBS = Pharmaceutical Benefits Scheme
Source: Datamonitor, Reforms to the Pharmaceutical Benefits Scheme in Australia, February 2011, HC00060-002
DATAMONITOR
For more information on Australias drug reimbursement system, please refer to Datamonitor's report Australia
Pharmaceutical Market Overview (August 2010, DMHC2646).
Japan continues to focus on drug price cutting as its main cost-containment measure
Like other markets, Japan has also implemented a number of cost-saving measures. Every 2 years, Japan cuts the prices of drugs on its reimbursement in an attempt to reduce the national drug expenditure, with the latest biennial price reduction in April 2010 cutting average drug prices by 5.75%. The cuts are expected to generate the savings necessary to fund the 1.74% increase in physicians fees introduced in April 2010. Although average price cuts are not very high, more expensive drugs may experience more severe cuts. For example, in 2008, Epogin (epoetin beta; Chugai) saw its price reduced by 18%, while in 2010 the worst hit were Glivec (imatinib; Novartis), Tasigna (nilotinib; Novartis), Sprycel (dasatinib; BristolMyers Squibb), and Herceptin (trastuzumab; Roche/Chugai) with price cuts of 12%, 15%, 15%, and 18%, respectively (Haydock, 2010a). 2010 also saw the introduction of new pricing rules bringing substantial changes to the pricing system; while there was some good news for pharma, the majority of the changes have a negative impact on pharma companies operating in Japan (Figure 28). Figure 28: Drug pricing reforms in Japan bring mainly bad news for pharma
Source: Scrip 100 , 2009b; Pharma Japan (2010)
DATAMONITOR
The good news was that drugs will not be exposed to price cuts if they have been listed for 15 years or less, have no generic competition, and have a percentage difference between their current reimbursement and market price which is below the average of all products in the tariff. In total, 303 products will be exempt from having their prices changed, representing just under half of the 624 of products reviewed under the new criteria (Haydock, 2010). However, premiums for the development of new innovative drugs will be removed if a manufacturer fails to meet the timeframe given for regulatory filing without any prior justification. The Japanese regulatory authority introduced the
measure to speed up the development of drugs or treatment of indications unavailable in Japan, since drugs have tended to launch there much later than in other major markets. Consequently, this measure will benefit Japanese patients, and will also have a positive impact on companies profits, as a result of earlier drug launches (IHS Global Insight, 2009a). While price premiums will benefit companies with mostly innovative drugs in the early stages of their lifecycles, companies with mature products will be impacted the most as a result of the price cuts. Moreover, changes to the pricing of long-listed products, coupled with the drive to increase generics uptake, are slowly driving this rather conservative market towards the drug expiry dynamics typical of the other major markets, limiting the commercial longevity of drugs in Japan. For more information on price cuts in Japan please refer to Datamonitor's report Japan Pharmaceutical Market Overview (July 2010, DMHC2622).
US pharma companies are impacted by higher rebates and discounts, but escape Medicare drug price negotiation
The US healthcare reform signed into law in March 2010 led to an immediate rise in the minimum Medicaid drug rebate that firms have to offer on branded drugs from 15.1% to 23.1% of the average manufacturer price (AMP) for single or multiple source innovator drugs, and from 11% to 13% for generic drugs. This measure is expected to cost the pharma industry $38.1bn over 10 years (201019), but its impact will ramp up as Medicaid is expanded to include all low income individuals from 2014 (CBO, 2010). In fact, a number of pharma companies have already disclosed sales lost in 2010 partly due to this measure (see below). Drugs hit the hardest are those found on Medicaid Preferred Drug Lists in state Medicaid programs, such as: antiretrovirals, atypical antipsychotics, angiotensin receptor blockers (ARBs), ARB/diuretic combinations, angiotensin modulator/calcium channel blockers, some antidepressants, respiratory agents (e.g. bronchodilators, glucocorticoid/bronchodilators), anti-tumor necrosis factors (TNFs), erythropoiesis-stimulating agents (ESAs), hepatitis C agents (interferons alpha), diabetes agents, statins, platelet aggregation inhibitors, proton pump inhibitors (PPIs), and stimulants, such as treatments for attention deficit hyperactivity disorder (ADHD). Although pharma companies could decide to increase prices to offset the rebate, the rebate system allows above-inflation price increases to be offset by an additional rebate. Furthermore, in order to close the donut hole, a progressive incremental increase in Medicare drug coverage to 25% in 2019, together with a 50% discount branded drugs for seniors in the Medicare Part D coverage gap, will reduce coinsurance to 25%, equal to the same level as during initial coverage. These measures have a dual effect on branded pharma in the US:

The discount reduces revenues as drug prices are halved. Lower financial burden on seniors (seniors saved $38m in the first 2 months of 2011 alone (Taylor, 2011b)) are leading to a rise in sales volume in the donut hole and more individuals will reach catastrophic coverage. Drugs classes most likely to be affected by the donut hole discount include high-cost drugs and those used to treat chronic diseases, since those beneficiaries are most likely to reach the donut hole. Such drugs include those for the treatment of rheumatoid arthritis, multiple sclerosis, Alzheimers disease, depression, diabetes, hypertension, congestive heart failure, dyslipidemia, and some cancers.
Initially, while the co-insurance level is still high, the net impact on pharma will be negative. However, the decrease in coinsurance will drive sales volume as costs will be less of a deterrent from filling prescriptions, while as more patients reach catastrophic coverage (when no discount is required) this will lead to higher sales. Moreover, it could lead to better coverage and greater access to branded drugs for those seniors enrolled in Medicare in 2011, although this is expected to contribute to the $18bn in costs associated with closure of the donut hole (Taylor, 2011b). Avalere Health estimates that a third of Part D drug plans are offering gap coverage in 2011, a 20% increase over 2010, while those plans covering branded drugs through the gap will increase by a factor of three (Lillis, 2010), ultimately having a positive impact on pharma. Overall, a 13% drop in sales was expected as a result of the reform measures in 2010, and this is forecast to double in 2011 (Jack, 2010):

Eli Lilly expected its US revenue to be reduced by up to $400m in 2010, growing to $700m in 2011 Pfizer expected a $300m hit in 2010, tripling to $900m in 2011, and $800m in 2012 GlaxoSmithKline expected its revenue to be hit by $300m in 2010 In general, companies that are expected to be hit hardest are those with the highest level of exposure to the US market (higher proportion of revenues derived from the US). While these measures will have a net negative impact on pharma revenues, the branded industry has at least escaped a measure that would have introduce price negotiation for drugs provided under the Medicare program. Nevertheless, the health reform requires that an independent payment advisory board be established in order to find ways to reduce healthcare spending. Furthermore, although the board is not allowed to reduce coverage, it is not explicitly forbidden to introduce Medicare drug price negotiation. Consequently, this presents a threat to pharma, and the industry is concerned that the board has been given too much power and that it could potentially introduce measures that might be detrimental for the industry without the need for additional legislative steps. For more information on the US healthcare reform, please refer to Datamonitor's report US Pharmaceutical Market
Overview (September 2010, DMHC2621).
Pharma shows a strong reaction to price cuts in certain markets

Pharma appears to be fighting back against the pricing restrictions at least in some countries; 11 manufacturers have filed lawsuits against the Czech Republics health ministry over its setting maximum drug prices, and 20 more companies could do the same (Taylor, 2011a). The industrys willingness to fight back was also seen with its reaction to the price cuts that took place in Greece in April 2010, which saw discounts ranging from 3% to 27%. The Greek industry association, the Hellenic Association of Pharmaceutical Companies (SFEE), wrote to Prime Minister Papandreou arguing that the measures were catastrophic and would lead to domestic drug shortages and fuel further parallel trade, as well as have knock-on effects in other European countries that use Greece for reference pricing such as Turkey (The Regulatory Affairs Journal, 2010; Bridgehead International, 2009). As a result, a number of pharma companies such as Leo Pharma and Norgine threatened
to withdraw pharmaceutical products (The Regulatory Affairs Journal, 2010). In response to mounting pressure, the Greek government in June decided against its initial planned 25% average price reduction for insulin products after Novo Nordisk announced that it would not sell its newer insulin products at the new prices but would maintain their original higher prices instead (Sukkar, 2010a). As such, strategies pharma companies could consider adopting in markets such as Greece where significant price cuts are implemented include the following:

delay any proposed brand launches in countries which impose price cuts until further notice prepare to withdraw high value products from the market if price cuts go ahead consider wider use of direct-to-pharmacy supply chain strategies to reduce parallel trade utilize dual pricing structures to reduce impact of parallel trade out of markets which introduce price cuts prepare for sales of key brands to be impacted across Europe Despite successes in these relatively small European markets, pharma may be less likely to react so strongly in the major global pharma markets, choosing instead to maintain good relationships with the government and payers, and lobbying key decision makers to influence decisions and future reform measures which may negatively impact the pharma industry.
Pricing pressures are also felt in the emerging markets

Pricing pressures are also being felt in the emerging and growth markets. In order to provide greater healthcare coverage and service, governments in emerging markets are increasingly utilizing price cuts in to contain costs. However, in order to drive sales of off-patent brands in these markets, a number of pharma companies are voluntarily cutting their drug prices to stimulate volume uptake.
Brazil is widening free access of drugs to patients

The prices of medicines in Brazil are regulated by the Brazilian government under a price control mechanism which was introduced in 2000, although this is regarded by pharma as a major barrier to trade (Knowledge Ecology International, 2010). The current system bases price adjustments on the general inflation rate in the preceding 12 months plus a variable component based on the generic market share on a therapeutic class basis. Price adjustments take place annually on March 31 each year, and in 2010, the Medicines Market Regulation Chamber (Cmara de Regulco do Mercado de
Medicamentos; CMED) increased the maximum prices of medicines by an average of 4.6% according to three distinct
bands of 4.45%, 4.64%, and 4.83%, which were based on the level of generic penetration for separate therapeutic categories (Pharma and Healthcare Insight, 2010). In March 2009, however, pharma had to contend with the introduction of a new 25% discount on the ex-manufacturer price of certain new drugs sold in the public system. This applied to medicines used to treat human immunodeficiency virus (HIV), cancer and long-term chronic diseases, and products derived from blood (Anvisa, 2010). While these measures have had a significant negative impact on companies marketing such drugs, in the long run the move may well translate into higher volume and therefore sales within the public health system that may offset the price cut. In addition, as of February 14, 2011, several treatments for hypertension and diabetes have been made available to patients for free through a governmental scheme ("Aqui Tem Farmcia Popular") that sees the government paying 90% of the medicines and the patient paying just 10%. The health ministry wants to see companies cover the 10% patient co-payment in the form of a discount, while the government continues to pay the remaining cost. Generic and largely off-patent medicines are also affected. Some companies have deemed the discounts on already low-priced medicines too harsh. Again, however, the widened access to medicines that these moves bring about could increase sales volumes for companies (Bruce, 2011d).
China introduces tighter pricing controls on foreign pharmaceuticals

In the past, only domestically produced drugs were subjects to price reductions in China. The Chinese pricing authority, the National Development and Reform Commission (NDRC), enforced more than 20 rounds of price reductions for domestically manufactured medicines between October 1997 and May 2007, generating a saving of RMB55bn ($8.1bn) for Chinese consumers (Zhou, 2007). However, in November 2010, China announced that it would cut the retail prices of internationally manufactured drugs. As a result, 174 medicines including antibiotics and medicines used to treat heart disease face an average price cut of 19% from December 12, 2010 in a move that would save around RMB2bn ($300m) a year. Companies affected include Bristol-Myers Squibb, Eli Lilly, Merck & Co., Novartis, Pfizer, and Roche. Drugs impacted the most by this move include the hypertension and congestive heart failure drug Capoten (captopril; Bristol-Myers Squibb) with a 35% price cut and Rocephin (ceftriaxone; Roche) with a 30% cut (Taylor, 2010e).
In June 2010, the NDRC issued an open letter to all stakeholders in Chinas healthcare industry, including all governmental institutions and private healthcare players, inviting them to an open consultation regarding its upcoming New Methods and Regulations on Drug Prices (Methods) (NDRC, 2010). The Methods is an extension to the Opinions of the Chinese Communist Party Central Committee (CCPCC) and the State Council on Deepening the Health Care System Reform (NDRC, 2009). According to the Methods, there will be three different ways of drug pricing: government pricing, government guided pricing, and market-adjusted pricing (Figure 29). However, the consultation letter on New Methods and Regulations on Drug Prices, while benefiting multinational branded pharma companies, was met with criticism from local pharmaceutical companies, especially traditional Chinese medicines manufacturers. Figure 29: Three ways of drug pricing in China
Source: NDRC, 2010; Datamonitor
DATAMONITOR
Furthermore, in May 2010 it was reported that an official from NDRC indicated that the country may move to improve its current pricing model through introduction of pharmacoeconomic assessment and introduction of international reference pricing (with countries such as South Korea and India used as references). However, such policies would undoubtedly be a negative development for the branded sector in the country. Also, the introduction of a reference pricing system may raise the need for strategic evaluation of the market in the Asian region as a whole (IHS Global Insight, 2010b).
Russia has increased its drug price controls

Responding to spiraling drug prices, in August 2009 the Russian government issued a draft decree, On Enhancement of State Regulation of Prices of Essential Medicines, to regulate prices of drugs on the Essential Drugs List (EDL) and to set mark-up limits (GalbraithWight, 2010). The new provisions came into effect in January 2010 when the government declared that all drugs included on the EDL must have their maximum prices and trade mark-ups registered. Manufacturers are also required to annually registrater the maximum factory price calculated according to the Ministry of Healths methodology, or otherwise pay a penalty for not complying. Under the new registration process, Roszdravnadzor (Russias medicines licensing body) registers ex-manufacturer prices for domestically manufactured medicines and prices are declared to customs for imported drugs. Roszdravnadzor also has the authority to overrule prices which it believes are too high.
Importantly, wholesale and retail mark-ups recorded by local authorities must together not exceed 30% of the registered price in their regions, substantially lower than previously. However, the changes have not been met with approval by Pharmaceutical Research and Manufacturers of America (PhRMA), which has complained that the methodologies contained in the bill differ substantially from current global practices (Knowledge Ecology International, 2010). There is also concern that capping drug prices will make it unprofitable to produce vital and essential medicines, which could cause drug shortages. Others point out that fixing prices on an annual basis does not take several key issues into account, including: inflation; rising prices of active pharmaceutical ingredients (APIs); spending on modernization to meet good manufacturing practice (GMP) criteria and business development; and growing energy and transport bills. As a result, manufacturers may have no choice but to raise the prices of more innovative drugs not included on the EDL, impacting patient access and ultimately drug sales (Bailey, 2010a).
India threatens to expand drug pricing controls

Attempts have been made to introduce pricing controls in India but have been unsuccessful so far. There were 354 medicines on the National List of Essential Medicines (NLEM) as of 2009, but only 45 are scheduled drugs under the Drug Price Control Order, since the scheduled drug list was based on the National Essential Drugs List in use between 1979 and 1995. Consequently, the National Pharmaceutical Policy 2006 proposed bringing all 354 drugs in the NLEM under the price control (National Pharmaceutical Pricing Authority, 2009). However, there is strong opposition from the pharmaceutical industry to the inclusion of all 354 NLEM drugs for obvious reasons. Even if all the drugs in the NLEM are brought under price control, nearly 60% of the 300 top-selling medicines responsible for 90% of retail sales in India will remain outside the scope of the NLEM (Shergill, 2010).
Branded pharma adopts flexible pricing strategies to capture emerging markets growth
In order to drive volume uptake (and therefore sales) in the emerging and growth markets, international pharma companies are adopting strategies such as launching off-patent drugs (often at a discount), branded generics (bearing the acquiring companys name/logo), and local brands owned or licensed by the acquiring pharma company. Pharma is also volunteering to make price cuts. For example, GlaxoSmithKline announced in 2010 that it would cut the prices of 35 brands, including Avamys (fluticasone furoate) and Avodart (dutasteride), in Indonesia, following its decision to cut the prices of 28 drugs in the Philippines in 2009 by between 30% and 50%. This strategy paid off for GlaxoSmithKline: after dropping the price of its cervical cancer vaccine by 60% in the Philippines, it experienced a six-fold rise in monthly drug volumes. The company also plans to introduce a "microfinance scheme" in both Indonesia and the Philippines to further extend coverage (Cooper, 2010). Similarly, Pfizer in early 2010 announced that it was launching its eCard program, a discount card in Russia, in order to reach 500,000 Russian patients over the course of year, with plans to expand the program to Mexico, Brazil, and Venezuela. The program aims to increase access to drugs that were previously unaffordable for many people. In addition to the expected increase in sales volume, the company also uses the card system to collect patient information such as the time between when a prescription is filled and when it can be refilled, with refill reminders sent if needed. However, the program has received criticism. In the Philippines, for example, while 2.2 million patients use Pfizers eCard, the company has been accused of discriminating against poorer patients since cards are mostly distributed by medical sales reps that
visit expensive hospitals. Consequently, there is the problem of which 500,000 Russian patients will benefit from the discount (Raymond, 2010). However, companies will still be wary of going too far in offering tiered or preferential pricing schemes. According to David Brennan, CEO of AstraZeneca: The risk around tiered pricing is that the middle-income markets might then want to reference price against Central Africa, and that is not something we are going to support (Hirschler, 2010). Nevertheless, with mounting pressure to increase access to medicines for chronic diseases in addition to malaria, AIDS, and tuberculosis, it seems likely that pharma will continue to make price cuts in the emerging markets.
Raised cost-effectiveness barriers lead to reimbursement restrictions

As previously discussed, it is increasingly difficult for pharmaceutical companies to gain market share, particularly for high value drugs. Gaining positive guidance from the National Institute of Health and Clinical Excellence (NICE) in the UK continues to be a major challenge for manufacturers of expensive biologic drugs, and while Germanys Institute for Quality and Efficiency in Healthcare (Institut fr Qualitt und Wirkschaftlichkeit im Gesundheitswesen; IQWiG) has also embraced the use of cost-effectiveness (although not yet to the same extent as in the UK), it nevertheless signals a further step towards control of healthcare costs in Germany. Furthermore, France is also taking strides towards utilizing pharmacoeconomics, as are insurance companies and pharmacy benefit managers (PBM) in the US, while companies operating in Japan complain that innovation is not being adequately rewarded and that there are too many hurdles to achieve high-value innovation premiums.
The UK is a difficult market to access for expensive therapies

In the UK, NICE determines whether a drug is sufficiently cost-effective to be used by the National Health Service (NHS), the primary prescriber of prescription-only drugs in the UK. Even though free pricing exists in the UK for now, if NICE deems the drug is not sufficiently cost-effective, companies may have to lower their price in order to gain NICE approval. NICEs evaluation includes significant pharmacoeconomic (PE) analysis. Because of the important role that pharmacoeconomics play in the UK, NICE sets the standard globally for the use of pharmacoeconomic analysis in health technology assessments. From a drug developers perspective, this makes it important to be able to justify the drug in pharmacoeconomic terms. Incorporating pharmacoeconomic-focused analysis and research into clinical trials can be complex and time-consuming, and in many cases it can be difficult to predict whether the analysis will result in a favorable opinion from NICE. Nevertheless, it is central to securing a successful UK launch if a drug is selected for NICE assessment, as well as having more far-reaching effects, because NICE decisions are widely viewed and analyzed by pricing and reimbursement bodies in other countries. Indeed, since NICE guidance is sometimes available before a drug has gained approval elsewhere, some countries take NICE decisions into account when evaluating new therapies. However, NICE has recently received a substantial amount of negative press and criticism from pharma and elsewhere for failing to judge a number of innovative anticancer drugs as sufficiently "cost-effective" to be prescribed on the NHS, and thus the body has been charged with being too focused on cost-containment rather than cost-effectiveness, as well as failing to be transparent in its proceedings. The result is that cancer drug uptake has been slow in the UK, as reflected by an analysis that was presented in November 2010 at the International Society for Pharmacoeconomics and Outcomes Research (ISPOR). The study found that while in 2007, one in three new drugs was recommended by NICE, in 2009 this had dropped to just one in 10, with only one out of 23 cancer treatments appraised receiving a full approval in 2009 (PMLive, 2010). To help improve access to cancer drugs, the UK government has pledged to make improvements in the delivery of innovative cancer drugs to the patients who need them. One incentive is a new cancer drug fund in the UK scheduled to be rolled out from April 2011. Reportedly, 200m ($309m) per year will be allocated to the fund, and it will be up to regions to decide how to allocate the fund. It is hoped that this will bring the UK up to the average level of provision in Europe for newer, more expensive cancer medicines. However, Datamonitor analysis indicates that with the current number of cancer
drugs that have not been approved by NICE, this fund will only be sufficient to scratch the surface. In 2009, the UK cancer drug market was worth $1.5bn, compared to $4.3bn in France or $2.5bn in Italy, which have similar populations (Datamonitor, Commercial Insight: Top 20 Cancer Therapy Brands, September 2010, DMHC2661). Cancer drug expenditure also falls below the level seen in Spain, where the population is smaller. Therefore, cancer drug access is set to stay below that in other countries at a similar stage of economic development, despite the new funding. Doctors will be allowed to use the fund to prescribe drugs that have not been approved by NICE, while those that have been will continue to be funded from the NHS budget. Pharmaceutical companies may see this as an opportunity to obtain higher prices for their drugs, but the Department of Health is urging regions to ignore drugs that companies refuse to submit to NICE. Critics have pointed out that since the fund can be used to pay for drugs rejected by NICE, it will undermine the institutes role. However, the role of NICE is set to change in any case with the introduction of value-based pricing from 2014, and while it will still carry out the cost-effectiveness evaluation of new drugs, it will no longer be able to ban use of drugs on the NHS, instead largely having an advisory role, although the exact details of this (beyond advising clinicians on most effective treatments and quality standards) are set to be determined at a later date. Nevertheless, it is still expected to be central to the UKs drug access route. Moreover, by 2013 Strategic Health Authorities and primary care trusts will be phased out and replaced by general practitioner (GP) commissioning consortia, raising additional concerns regarding decision-making and postcode lotteries.
It is becoming increasingly difficult to obtain a high price for new drugs in France
In France, it can be difficult to achieve a good rating on the Service Medical Rendu (SMR) or Amelioration de Service Medical Rendu (ASMR) scales, which determine the reimbursement level for a given drug. Reports have stated that the ASMR evaluation has become restrictive and unpredictable, making it harder to ensure that France recognizes innovation. Only a few patented pharmaceutical products fall under the most favorable ASMRs (level IIII), with most products falling under the ASMR IV or V categories (PhRMA, 2009). There were 31 approvals for new drugs or expanded indications in 2008, but only 10 were given ASMR I status (La Tribune, 2009). Nevertheless, the possibility of obtaining high prices for innovative drugs makes France an attractive market for the early commercialization of innovative candidates, but still behind Germany. France is also taking strides towards improving and focusing more on pharmacoeconomics, as seen by the Haute Authorite
de Santes (HAS) pledge in early 2009 to: (IHS, 2009a):
speed up its cost-benefit evaluations of new drugs work more closely with its international counterparts conduct long post-market analyses for newly approved medicines allow pricing to play a greater role in the guidance it issues on new medicines, rather than just focusing on therapeutic benefit HAS also pledged to spend no more than 90 days on each new drug evaluation, with a maximum of 12 months for reviewing a drug class as a whole by 2011 (IHS, 2009a). In July 2008, HAS also set up a committee, the Economic and Public Health Specialist Committee (Commission Evaluation Economique et de Sant Publique; CEESP), which has the remit of complementing medical opinions issued by HAS committees for drugs, medical devices, and procedures with
community benefit assessment. The committee, consisting of 25 members across various backgrounds (economics, ethics/philosophy, social sciences, patient representatives, general practitioners, and specialists) is in charge of multiple technology appraisals (MTAs) and public health guidance (scoping validation methods) (Rochaix, 2010). These initiatives should strengthen the role and position of HAS as the drug watchdog in France, although to date, it is not clear what impact its new focus on pharmacoeconomics will have on drug manufacturers in France. However, with the need to reduce national drug spending (in order to help contain rising healthcare costs), pharmaceutical companies can expect it to become more difficult to secure a high reimbursement level for their products going forward, although for truly innovative products, this should still be possible. On the upside, HAS has declared that it is committed to a more direct communication with the pharma industry, which should increase transparency and reduce time taken for reimbursement decisions.
Achieving premium drug pricing in Japan is difficult

Difficulty in achieving reward for innovation is not simply a problem in Europe. Companies operating in Japan have also complained that innovation is not being adequately rewarded and that there are too many hurdles to achieving high value innovation premiums, with few drugs having been awarded this status. This, combined with price cuts, will hurt the pharma industry in the long term due to small return on investment from the Japanese market, which could in turn stifle R&D initiatives. As discussed earlier, manufacturers that develop new drugs for indications which are as yet untreated in Japan can be eligible to price such drugs at a premium. However, premiums for the development of new innovative drugs will be removed if a manufacturer fails to meet the timeframe given for regulatory filing without any prior justification. The Japanese regulatory authority introduced the measure to speed up the development of drugs or treatment of indications unavailable in Japan, since drugs have tended to launch there much later than in other major markets. Consequently, this measure will benefit Japanese patients, and will also have a positive impact on companies profits, as a result of earlier drug launches (IHS Global Insight, 2009a).
Germany is using cost-effectiveness in its drug evaluations

Germany has embraced the use of cost-effectiveness, though not yet to the same extent as in the UK. The relative fragmentation of the system, with numerous sickness funds, has allowed pharmaceutical manufacturers to adopt a range of strategies aimed at boosting their sales, with the most innovative involving payer contracting combined with additional services. Also, the Institute for Quality and Efficiency in Healthcare (Institut fr Qualitt und Wirkschaftlichkeit im
Gesundheitswesen; IQWiG), founded in 2004, has the remit of making recommendations for clinical use based on
pharmacoeconomic assessments, and since 2007 has had the legal right to use cost-effectiveness analysis of drugs in its evaluation. In early 2010, IQWIG finally revealed that it will use efficiency frontier analysis to determine the cost-effectiveness of a drug, based on Australia's Pharmaceutical Benefits Advisory Committee (PBAC) methods. Under the new system, drugs that are deemed not to provide any benefit over existing treatments are not subject to further analysis and their reimbursement level is set using reference pricing. On the other hand, drugs that have no real alternatives are excluded from the assessment and are reimbursed at the proposed price. It has been reported that of the 30 benefit reports on drugs
produced by IQWIG so far, only one in five has shown additional benefit, and could thus undergo the health economic evaluation (Sukkar, 2010b). Even though IQWIGs approach is less severe for the pharmaceutical industry than NICEs system in the UK, in that it does not impose an absolute cost-effectiveness threshold, it nevertheless signals a further step towards control of the healthcare costs in Germany. Drugs providing little or no improvement over existing therapies, such as me-too drugs, are likely to be most affected and may struggle to achieve desired reimbursement levels, especially when generic versions are available. However, this is already seen in practice with reference groups and formulary placement in Germany. IQWiG is yet to issue any cost-effectiveness assessment on drugs. Only two such health economic evaluations have been initiated and are yet to be completed: these have been referred to IQWiG by the Federal Joint Committee (Gemeinsamer
Bundesausschuss; G-BA) and are a comparison of clopidogrel with aspirin and a study of a group of antidepressants. The
referral was made in December 2009, with results expected in 2011 (Sukkar, 2010b). Introduction of the new price negotiation rule will strengthen IQWiGs role since all new drugs will need to be assessed. However, there are concerns regarding the speed at which IQWiG will be required to carry out such assessments. At the moment, it takes the institute around 18 months to assess a drugs clinical effectiveness and another 18 months to assess its cost-effectiveness. Under the new rules, the institute will have to produce at least an early assessment after 3 months, which despite a staffing increase may be a tall order (Sukkar, 2010d). For pharma companies, the new benefit assessment rule means that they will need to be ready with dossiers for products under review as well as understand what data will be required for the assessments, all in rather a short timeframe. The pharmaceutical industry also believes that the method by which new treatments are compared to old ones for which headto-head trials may not be available is unfeasible as the commissioning of new studies necessary to generate comparability data would augment costs and involve considerable time. An additional criticism stems from IQWiGs lack of comparison across indications as this may lead to different reimbursement standards for different indications (Kifmann and Neelsen, 2010). Furthermore, pharma is also concerned that efficiency frontier analysis is just another step that will slow down the process of innovation in Germany and make it a less attractive place for pharmaceutical R&D. AstraZeneca was reported to have stated that it wanted the process to be better defined, and the rules of the procedure clarified, in order to create a clear framework and foster transparency for everyone involved. Other pharmaceutical companies are still mulling over the developments. Meanwhile, the cost of filing a dossier, at 3,750 ($4,976), though not of huge significance to Big Pharma, will likely impact small- to medium-sized companies to a greater degree (Kermani, 2011). Since the additional benefit evaluation process excludes orphan drugs, this may further stimulate companies to develop novel drugs for orphan indications, which is obviously beneficial to patients. However, the G-BA is concerned that subsequent indication expansion beyond orphan diseases could be viewed as companies manipulating the authorization process. Consequently the G-BA has stated that it will not tolerate exploitation of the reimbursement system going forward (Kermani, 2011).
Comparative effectiveness analysis is starting to be used even in the US

Although pharmacoeconomic studies are used to reach pricing and reimbursement decisions in the US, the fragmented nature of the market with many different payers has resulted in patchy implementation with a lack of any unified approach, unlike that seen in countries such as Germany and the UK. Currently there are some individual institutions that are
conducting small-scale comparative effectiveness studies such as the National Eye Institutes Avastin (bevacizumab; Roche) versus Lucentis (ranibizumab; Novartis) trial (National Eye Institute, 2008). However, this is set to change following the establishment of a comparative effectiveness research institute known as the Patient-Centered Outcomes Research Institute, established under the health reform to conduct research into the clinical effectiveness of medical treatments. However, any findings reached by such a center are not to be construed as mandates, guidelines, recommendations for payment or coverage, and quality-adjusted life years are not to be used in its research. Datamonitor expects it to have an influence on federal, state, and private payers, and therefore despite the aversion towards medicine restrictions, the US pricing and reimbursement landscape is set to shift towards an increasing emphasis on cost-effectiveness. In addition, some pharmacy benefit managers (PBM) are turning to their own comparative effectiveness research. In October 2009, Medco Health Solutions launched its own head-to-head study comparing Plavix (clopidogrel; SanofiAventis/Bristol-Myers Squibb) to newly launched Effient (prasugrel; Ell Lilly). With Plavix nearing the end of its patent life, the possibility of savings prompted the cost-conscious PBM to identify which was better value for money: treating patients with Effient or generic clopidogrel. With Plavix showing poor efficacy in 25% of patients with a genetic mutation in the CYP2C19 gene required to metabolize the drug, the study goes beyond the head-to-head clinical trials by focusing on the population that responds to treatment with Plavix (Staton, 2009). The study will finish in 2012 in time for the company and its clients to reap additional savings, should the study demonstrate that Effient does not lead to better health outcomes in patients responding to Plavix.
Risk-sharing is becoming a viable option for both payers and industry, particularly in Europe
As it becomes increasingly challenging for pharma to obtain reimbursement and market access through public healthcare systems for expensive and often biologic therapies, risk-sharing agreements are rising in popularity in the developed markets. A risk-sharing agreement can be defied as:
Agreements concluded by payers and pharmaceutical firms to diminish the impact on the payers budget of new and existing medicines brought about by either the uncertainty of the value of the medicine and/or the need to work within finite budgets.
Adamski et al. (2010)
Risk-sharing agreements are based on a "guaranteed" outcome resulting from the treatment, be that based on financial or outcome/performance criteria. If the outcome is achieved the payer will pay; if not, the pharmaceutical company refunds the payer for the cost of the drug (Adamski et al., 2010). Such arrangements distribute the risk between the payer and the provider and represent a useful tool, particularly when there is insufficient information available on a new drug and how it will perform in the real-world setting.
Financial-based schemes These include price-volume agreements and patient access schemes. Price-volume agreements focus on controlling financial expenditure associated with prescribing the drug, with pharma companies providing refunds when treatment continues after the set budget is exceeded. Patient access schemes provide free or discounted drug access for an agreed period.
Performance-based schemes These include those where companies refund agreed costs or provide the drug free if the desired outcome is not reached. Alternatively, a price reduction takes place if the new drug does not deliver the required therapeutic efficacy targets. In view of their complexity and cost, performance-based schemes have given way to simpler, financed-based schemes which are effectively forms of flexible pricing that allow the manufacturers to give a discount without affecting the list price, thereby avoiding any knock-on price reductions in other markets as a result of reference pricing. However, despite the advantages of risk-sharing agreements for pharma, there are also a number of disadvantages as summarized in Figure 30.
Figure 30:
Advantages and disadvantages of risk-sharing agreements for pharma
Advantages of risksharing agreements

Allows manufacturers to achieve reimbursement without need for additional clinical trials, thus avoiding extra costs and delay Allows higher list price and overall global price to be maintained Encourages development of biomarkers that help target patient populations where health gain/value is greater Access to new technologies earlier means greater revenue potential for Pharma Allows better health outcomes to be achieved with the right patients being treated
Disadvantages of risksharing agreements

Perceived as another barrier to Pharma (e.g. NICE often needs pressure before it considers risk sharing schemes) High administrative burden and difficult to implement or judge success Countries may start to increasingly negotiate this way requiring further investigations in drug efficacy and value
Lower sales achieved in a given market
Other countries may require the same discount
Encourages innovation and acts as a R&D incentive
Difficult to define specific clinical outcomes for some diseases
R&D = research and development; NICE = National Institute for health and Clinical Excellence
Source: Datamonitor
DATAMONITOR
Table 5 lists some examples of risk-sharing agreements in the US, Italy, Germany, and the UK. Table 5: Examples of risk-sharing agreements in operation in the UK, Italy, the US, and Germany, 200910
Country
Year
Drug
Indication
Company
Type of risksharing agreement
Strategy
UK
2009
Stelera (ustekinumab)1
Severe plaque psoriasis
Janssen-Cilag (Johnson & Johnson) Celgene
Financebased
NHS to buy doses appropriate for patients weighing 100kg or more at the same price as those for lower-weight patients (essentially two vials for the price of one) The NHS pays for treatment for the first 2 years in patients who have received at least one prior therapy. If treatment is required after the 2 years, then Celgene will cover the costs GlaxoSmithKline will give a 12.5% discount off the list price and will pay the NHS a rebate depending on the outcome of a head-to-head trial known as COMPARZ, data of which will be available in 2012 Erbitux (cetuximab) should only be used on patients who test positive to the expression of the epidermal growth factor with the wild type KRAS gene; the company is required to pay 50% of the costs of the drug in the event that doctors see no stabilization of a patients metastatic tumor after 2 months The Italian health service fully covers the cost of drugs for the responders following assessment; manufacturers refund the cost in the case of disease progression The Italian health service fully covers the cost of drugs for the responders following assessment; manufacturers refund the cost in the case of disease progression Cigna will receive a discount on the drug if a patients blood sugar falls, while Merck & Co. gets a better placement for Januvia and Janumet on Cignas formulary Genentech introduced the annual cap for the cost of drug at $55,000 for patients below a certain income level Sanofi-Aventis and Procter Gamble agreed to reimburse insurer Health Alliance for the costs of treating fractures suffered by patients taking the medicine Novartis will refund the cost of its drug in case the treatment fails
UK
2009
Revlimid (lenalidomide)1
Multiple myeloma
Financebased
UK
2010
Votrient (pazopanib)5
Advanced renal call carcinoma
GlaxoSmithKline
Financebased
Italy
2009
Erbitux (cetuximab)2
Advanced or metastatic colorectal cancer
Merck KGaA
Performancebased
Italy
2009
Sprycel (dasatinib)2
Chronic myeloid leukemia and acute lymphoblastic leukemia HER2+ breast cancer
Bristol-Myers Squibb
Performancebased
Italy
2009
Tyverb (lapatinib)2
GlaxoSmithKline
Performancebased
US
2009
Januvia (sitagliptin) and Janumet (sitagliptin and metformin)3 Avastin (bevacizumab)3 Actonel (risedronate sodium)3 Aclasta (zoledronic acid)4
Type 2 diabetes
Merck & Co.
Performancebased
US
2009
Roche/Genentech
Financebased Financebased
US
2009
Osteoporosis
Sanofi-Aventis and Procter Gamble Novartis
Germany 2009
Osteoporosis
Financebased
Source: 1 = Datamonitor, Pricing and Reimbursement: Innovative Risk-Sharing Strategies, July 2009, DMHC2537; 2 = Adamski et al., 2010; 3 = Pollack, 2009; 4 = In Vivo, 2009; 5 = Bruce, 2010h
DATAMONITOR
UK is one of the leaders in risk-sharing agreements

There are a number of risk-sharing agreements in operation in the UK negotiated between pharma and the National Institute for Health and Clinical Excellence (NICE). Risk-sharing can often be the only way that companies can access the National Health Service (NHS) market in the face of NICEs stringent cost-effectiveness criteria. While such schemes might seem advantageous to pharmaceutical companies, in that drugs which exceed NICEs quality-adjusted life year threshold can still gain reimbursement, such agreements tend only to arise after intense pressure on NICE from both patients and pharma, and require extensive negotiation. Furthermore, even when a drug is accepted under such an agreement, it may not be deemed effective at the end of the scheme to warrant inclusion on the NHS. Despite NICEs public statement in 2010 that it would welcome risk-sharing offers from drugmakers in the wake of its refusal of Sprycel (dasatinib; Bristol-Myers Squibb), Tasigna (nilotinib; Novartis), and Afinitor (everolimus; Novartis), risksharing schemes have been criticized by various stakeholders within the NHS, mostly pharmacists, for being difficult and burdensome to administer. Moreover, they will be phased out and will be replaced by the new value-based pricing system in 2014 (Department of Health, 2010). This presents a significant threat to companies currently engaged in risk-sharing agreements, while companies proposing to enter into such an agreement before 2014 must consider their commercial attractiveness given the time and costs associated with them, and the limited time at market if and when approved. However, come 2014, the dissolution of such agreements and implementation of value-based pricing will lead to an effective list price decrease with the knock-on effects on other countries that use the UK as a reference market.
Italy has a number of performance-based risk-sharing schemes for oncology drugs

In Italy, there is no specific legal framework for risk-sharing agreements. Instead, agreements are negotiated on an individual basis between the Italian Medicines Agency's (Agenzia Italiana del Farmaco; AIFA) pricing and reimbursement committee and the drug sponsor, during the pricing and reimbursement negotiation procedure at the suggestion of the AIFA Oncologic Working Group. While the terms of individual risk-sharing agreements differ, they tend to follow two approaches (Gallo and Deambrosis, 2008):
The national health service pays 50% of the cost of the drug for a limited period of treatment. Thereafter, the treatment is fully reimbursed for responding patients and is withdrawn for non-responders. For example, in 2009 in Italy, Tarceva (erlotinib; Roche), Sutent (sunitinib; Pfizer), and Nexavar (sorafenib; Bayer) were provided at 50% discount from current prices for an agreed number of cycles (2 months for Tarceva and 12 weeks for Sutent and Nexavar).
The treatment is fully reimbursed for an initial period and the company pays back the cost for non-responders. For example, the cost of Sprycel (dasatinib; Bristol-Myers Squibb) and Tyverb (lapatinib; GlaxoSmithKline) are fully covered by the Italian Health Service for the responders following assessment with manufacturers refunding the costs in the case of disease progression. Agreements tend to cover a 2-year period, after which the price is renegotiated on the basis of the results of patient outcomes during the risk-sharing period. Such schemes stimulate pharma companies to develop diagnostics (e.g. biomarkers) which can be used to identify patient populations which best respond to a given therapy, thereby ensuring that
the drug can maintain an optimum price and reimbursement level. For example, Merck KGaAs risk-sharing agreement with AIFA stipulates that Erbitux (cetuximab) should only be used on patients who test positive to the expression of the epidermal growth factor with the wild type KRAS gene; the company is required to pay 50% of the costs of the drug in the event that doctors see no stabilization of a patients metastatic tumor after 2 months (Galbraith, 2010b). Alternatively, under the conditional reimbursement system in Italy, novel medicines are fully reimbursed for a limited period, during which manufacturers are required to maintain detailed registers tracking the therapies, collect epidemiological data, and obtain data on the effectiveness and safety of new drugs in practice (Adamski et al., 2010). The agreement involves a price review for each drug after 23 years of studies depending on the findings (Adams, 2010b). Italy has agreed to fully reimburse more than 25 drugs including Procoralan (ivabradine; Servier) for chronic angina pectoris, and Byetta (exenatide; Amylin), Januvia (sitagliptin; Merck & Co.) and Zomelis (vildagliptin; Novartis) for type 2 diabetes patients who are resistant to oral treatments (Adamski et al., 2010). However, results from the first set of studies are set to be published in the coming months, and there are indications that the program has found drugs less effective than originally claimed by manufacturers. As such, prices could be cut by 2030%, or even up to 40% in 2011, depending on the outcome of the studies (Adams, 2010b). This could have an impact on reference pricing, with drug prices decreasing in countries that use Italy to set their own prices. The moves point to the likelihood that countries may increasingly negotiate with manufacturers in this way, with further investigations into drug efficacy and value and thus revision of expensive drug prices becoming more common.
Risk-sharing schemes are also appearing in the US but in a fragmented manner

On the whole, risk-sharing agreements remain less common in the US than in Europe. Part of the reason for this is that state regulations and marketplace pressures mean that insurers rarely fail to fund a drug that has been approved by the US Food and Drug Administration (FDA). This reflects the poor leverage of individual health plans. Thus, skeptics remain doubtful that risk-sharing schemes are likely to work on a larger-scale in the US, which has been historically dominated by a fragmented private system. Consequently, until the roll-out of universal healthcare in the US, the uptake of risk-sharing will be simply based on financial incentives to payers for the time being. However, it is conceivable that federal and state programs may resort to such schemes in order to tackle the uncertainty surrounding a drugs efficacy and costeffectiveness. Indeed, Medicare has already implemented an approach akin to that in the form of the coverage with evidence development (CED). CED is a method of providing access to new drugs or medical treatments while generating evidence needed to determine their efficacy and thus whether unconditional coverage should be given. It is essentially a research trial during which all patients have to be registered and outcomes data collected in order to assess the efficacy at a later date. One example of a risk-sharing scheme is that between the pharmacy benefit management division of Cigna and Merck & Co. In order to control costs and increase access to Januvia (sitagliptin) and Janumet (sitagliptin and metformin) for type 2 diabetes patients, a pay-for-performance deal was signed in April 2009. The deal guarantees efficacy as well as patient compliance since Cigna receives a discount on the drug if a patients blood sugar falls, while Merck & Co. achieves a better placement for Januvia and Janumet on Cignas formulary (Pollack, 2009). In October 2010, Cigna revealed that positive results were being observed from the program; an improvement in blood sugar levels of over 5% for those continually enrolled in the program was seen, regardless of which diabetes drug patients were taking. Patients enrolled in Cignas
diabetes program were also found to be 3% more likely to have their blood sugar levels under control than those who were not in the program (Center for Health Value Innovation, 2010).
Australias risk-sharing agreements lack transparency

There are currently two main types of risk-sharing arrangements used in Australia between the pharma industry and the Pharmaceutical Benefits Pricing Authority:

price-volume agreements with price reductions for sales exceeding a pre-agreed volume rebate arrangements with repayment of costs beyond an agreed annual subsidization cap or threshold. As of June 30, 2009, there were 74 deeds of agreement in place or in development (Pharmaceutical Benefits Pricing Authority, 2009). The managed entry scheme, introduced as part of the Pharmaceutical Benefits Scheme (PBS) reforms in January 2011, is a form of risk-sharing agreement, which allows companies to seek a conditional PBS listing for drugs that are still awaiting cost-effectiveness data, but which serve patients with a clinical need. This scheme will cut patient access delays to drugs that would not otherwise receive positive recommendations on first submission. However, it is likely to only apply to a small number of pharmaceuticals seeking listing in the F1 formulary (which includes drugs that are not interchangeable on an individual patient basis with therapeutically equivalent products). In fact, managed entry to the PBS has already been used to some extent in Australia. One example is Tracleer (bosentan; Actelion), which was approved for various pulmonary hypertension indications by the Therapeutic Goods Administration (TGA) in 2002, 2006, and 2009. Tracleer was PBS-listed in 2004, with an expected cost to the PBS of A$28m ($25m) over the first 4 years (the Australian Department of Health and Ageing, 2004). However, the PBS listing was subject to a risksharing agreement whereby the drugs future price would be proportionate to the mortality of patients treated with Tracleer under the PBS. Actelion funded a Bosentan Patient Register to evaluate survival outcomes over 3 years, which is maintained by an independent party in order to maintain impartiality. Continuing access to the medication is dependent on the response over the previous 6 months. Survival data will be used by the PBS to re-evaluate the cost-effectiveness of the drug and adjust its reimbursed price accordingly (Trueman et al.; 2010). However, in general, information on the existence of special pricing arrangements is not easily located within the public domain and often not mentioned at all on the PBS (Robertson et al., 2009). Even where a special pricing arrangement is identified, there is no detail available on the nature of the arrangements in place. While the lack of transparency may be blamed for inflated drug prices in other countries, it is beneficial for companies that enter into such deals as it effectively prevents other payers from requesting similar discounts.
Risk-sharing agreements with individual sickness funds are used to boost market share in Germany
Pharma companies in Germany are turning towards risk-sharing agreements or other types of innovative deal structure for their products, in order to maintain reference prices while still capturing a significant market share in the country. So far, such deals have mostly focused on more mature drugs nearing the end of their patented life, poorly differentiated brands, or those brands struggling to achieve the desired market share, since insurers do not yet have the powers to influence prescribing of patented drugs. However, with the market in several therapeutic categories becoming rather saturated, and
manufacturers finding it difficult to compete with a range of existing products, risk-sharing deals offer new avenues to boost market share. In addition to traditional rebating deals, some companies have entered into more unusual (if more creative) deals with payers. In August 2008, Wyeth (now Pfizer) with Germanys third largest payer, Taunus BKK, developed a compliance support program for its injectable rheumatoid arthritis drug Enbrel (etanercept), in order to fend off competition from Humira (adalimumab; Abbott). Under the terms of the agreement, Wyeth (now Pfizer) funds homecare visits to rheumatoid arthritis and psoriasis patients by qualified nurses, a telephone support service, and the promotion of regular patient communication. Although the company has to provide some discount on Enbrel (in addition to the service) to satisfy the legal requirement for the basis of any rebate deal between a sick fund and drug manufacturer, the support program is the focus and the main cost component, estimated to be around 500 ($663) per patient per year. However, this cost is offset by the additional sales gained by improving patient compliance, since in general, one third of injectable drug prescriptions otherwise tend to be discontinued after the first 3 months. As a result of the scheme, it was reported that Enbrel sales have grown within Taunus BKK as opposed to stagnating sales of Humira, indicating that the scheme is a success (In Vivo, 2009). Meanwhile, in 2009, Novartis entered into an agreement that is more akin to the risk-sharing agreements seen in the UK for its osteoporosis drug Aclasta (zoledronic acid) with the sick funds Deutsche Angestellten Krankenkassen (DAK) and
Barmer Ersatzkasse (BEK), which together cover around 30% of Germanys insured population. Novartis refunds the cost
of its drug in cases where the treatment fails, an agreement termed no cure, no pay. The scheme is designed to boost Aclastas market share over Sanofi-Aventiss competing drug Actonel (risedronate) and Prolia (denosumab; Amgen). Preliminary results indicate that the scheme has had a moderate impact, boosting market share within funds that utilize the scheme to 18% versus 14% in other funds (In Vivo, 2009). Novartis also offered to cap the cost of its wet age-related macular degeneration drug Lucentis (ranibizumab) for Germanys largest health insurer Allgemeine Ortskrankenkassen (AOK) and some other insurers to 350m ($464m) per year in 2009, resulting in Lucentis sales growing substantially (In Vivo, 2009).
Price negotiation may be the way of the future

Given the recent changes in Germany and the UK the introduction of new price negotiation arrangements in Germany from January 2011 and the planned role out of value-based pricing in the UK from 2014 it seems that drug price negotiations between manufacturers and regulatory authorities or insurers may become the norm for pharma in the future. As a result, this could make it more challenging for companies to obtain reimbursement for innovative products as well as impact sales through pricing pressures.
Value-based pricing in the UK to be introduced in 2014

The Pharmaceutical Price Regulation Scheme (PPRS) in the UK is due to be replaced with a value-based pricing scheme in 2014, and will apply to medicines launched after January 1, 2014, and potentially to some older medicines, subject to discussion with the industry. The proposed guidelines, set to be reviewed in April 2011, envisage different price thresholds for drugs based on the value that they deliver to the health service. Under the new proposals, the value of new products would be assessed and their benefits compared with the benefits that could be gained if the funds were used elsewhere in the UK's National Health Service (NHS). The government would set a range of maximum prices reflecting the different values that medicines offer. One option considered is to use the measure of quality-adjusted life years (QALY) as the main currency of costeffectiveness, as the National Institute for Health and Clinical Excellence (NICE) does at the moment, with the threshold expressed as a cost per QALY gained. However, rather than using one standard cost-effectiveness threshold, as is the case under the current system, a range of thresholds would be applied depending on individual products' characteristics and also taking into account additional factors (Department of Health, 2010). For instance, a basic threshold would reflect the benefits displaced elsewhere in the NHS when funds are allocated to the new drug. This would be set in the future and may differ from the current threshold of 20,00030,000 ($30,90646,359) per QALY. Higher thresholds would be applied to medicines tackling diseases with greater burden of illness (the greater the focus on diseases with unmet need or severe illnesses, the higher the threshold), medicines that demonstrate greater therapeutic innovation and improvement compared to existing treatments, and medicines demonstrating wider societal benefits. While the pharmacoeconomic evaluation would be relatively unchanged compared to NICE's existing method, the new system will ostensibly consider other factors such as societal value (e.g. impact on carers) to a greater extent, something that the current system is failing to do. Furthermore, while NICE would be the key source of advice on the relative cost-effectiveness of new medicines and the first body to analyze a product's pharmacoeconomic proposition, other aspects of value are expected to be taken into consideration for reimbursement decisions, with additional weightings decided upon by expert panels. As a result, while NICE will still carry out the cost-effectiveness evaluation of new drugs, it will no longer be able to ban use of drugs on the NHS, instead largely having an advisory role, although the exact details of this (beyond advising clinicians on most effective treatments and quality standards) are set to be determined at a later date. Nevertheless, it is still expected to be central to the UKs drug access route. Overall, the system does seem to imply the use of pricing and reimbursement negotiations between the Department of Health and drug manufacturers, similar to the new price negotiation requirement introduced only recently in Germany, although manufacturers would retain some pricing freedom. For example, if a manufacturer were to propose a price below the basic threshold, it would be accepted by the NHS. If it were above, however, then the manufacturer would need to
provide evidence showing that the drug deserves a higher weighting in terms of disease burden, therapeutic innovation, and improvement or wider societal benefit that would be reviewed by a panel of experts. For medicines that have insufficient support for their value proposition at the time of launch, a flexible approach is envisaged, with the price set according to data available at the initial evaluation. This could then later be adjusted if better evidence becomes available. However, this implies potentially lower launch prices, with companies facing uncertainty over the possibility of increasing the price at a later date. While the proposals have so far been met with industry approval, the proof will be in the final guidelines and their implementation in practice. The industry is hoping for a transparent and consistent approach developed with industry engagement. However, many concerns remain, especially regarding rewards for incremental innovation, and the fact that according to the Association of the British Pharmaceutical Industry (ABPI), value-based pricing has not been successfully implemented in any country. The ABPI is engaged in talks with the health minister, Lord Howe, in order to secure a good deal for pharma and for patients (Adams, 2010). One key issue will be how high or low the new basic threshold will be and how much that can be increased through the different weightings. The general expectation is that me-too drugs will be punished and discouraged through significantly lower thresholds, while innovative treatments will be rewarded. However, with the NHS currently facing real-term cuts (or at least no growth in the near term), there is a question of where the funds for expensive drugs will be found and whether the UK will indeed become a more lucrative market for expensive therapies. Furthermore, with NICE still holding the reins in terms of cost-effectiveness evaluation, whether the new system will bring any real change is questionable. It is likely that value-based pricing will present a more strict system compared to the current PPRS and is therefore an unwelcome (if inevitable) outcome for the pharma industry. Moreover, considering that UK drug prices are widely used as a reference by other countries, a move towards value-based pricing would have far-reaching implications for pharma manufacturers, well beyond the UK. Price negotiation may not be a complete novelty in the UK, since this is required in risk-sharing schemes These schemes would, however, be scrapped under new proposals, prompting industry fears that negotiated discounts (when rebates are taken into account) will impact other markets that use the UK as a reference. In summary, the details of how the new value-based pricing system will work are yet to be clarified. However, confusion will be compounded by the parallel NHS reforms that will fragment reimbursement decision-making on a regional basis. In the future, pharma may find itself having not only to negotiate the price for the UK market, but also with potentially hundreds of stakeholders with respect to reimbursement decisions and additional discounts or rebates.
Germany introduces drug price negotiation

Germany is now subject to new price negotiation arrangements. The second part of the Entwurf des Gesetzes zur
Neuordnung des Arzneimittelmarktes (AMNOG) law, passed in November 2010, introduced a requirement for price
negotiation for newly launched drugs from January 2011. As a result, innovative drugs are subject to benefit assessments and price negotiations with public health insurers; the reference pricing system now includes me-too drugs, and drugs included in the reference pricing system will be increasingly targeted with discounted contracts (IHS, 2010c, Bruce, 2010f). These changes are expected to lead to 2.0bn ($2.7bn) in savings per year (IHS, 2010d).
Furthermore, pharmaceutical manufacturers now have to provide a report on the additional benefits of their drugs compared to existing therapies (mainly cost-effectiveness data from Phase III clinical studies), in addition to an estimation of how many patients would benefit from the drug. Specifically, the manufacturer must provide information on (The Pink Sheet, 2011):

the authorized indications the actual medical benefit of the product the additional medical benefit of the product compared with existing therapies the relevant number of patients and patient groups for the product is the price that statutory health insurance funds will have to pay for the treatment requirements for ensuring the product is used in a way that ensures quality The data must be provided by the time the product is launched (The Pink Sheet, 2011). Manufacturers have pricing freedom for a maximum of 1 year, after which the negotiated price will be used. If the negotiations fail, an arbitration price will be used. All new medicines will be affected, while already marketed drugs will be added to the system gradually over a number of years (Bruce, 2010g). As a result of the new law, pharma companies now have to be prepared to negotiate with Germanys key regulatory body, the Federal Joint Committee (Gemeinsamer Bundesausschuss; G-BA), or risk having a low ceiling price that would affect prices in other markets through reference pricing. In addition, as pharma companies are only able to freely price their products for a maximum of 1 year following market authorization, this incentivizes them to launch immediately following approval before the drugs price may be reduced through negotiations and rebates. Companies will also be under pressure to submit to insurers during negotiations, otherwise the arbitration committee will set the price according to the European average price, a move which will bring the price down. Furthermore, unless a drug is proven to have a significantly better cost-effectiveness ratio through the Institute for Quality and Efficiency in Healthcare's (Institut fr Qualitt und
Wirtschaftlichkeit im Gesundheitswesen; IQWiG) assessment, there will be little incentive for insurers to allow a higher drug
price than that set by the arbitration committee (Kifmann and Neelsen, 2010). As a result of the new price negotiation process, Germany may lose its status of typically being the first EU market in which drugs are launched. Me-too drugs will be particularly affected since they may be assigned to reference price groups if they fail to demonstrate any additional benefit to existing drugs. In addition, price setting under the new law could impact drug prices in markets referencing Germany, namely Austria, Belgium, Canada, Finland, France, Greece, Hungary, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, Norway, Slovakia, Slovenia, South Korea, Switzerland, and Taiwan (IHS, 2010b). Pharmaceutical manufacturers in Germany may find themselves in a similar position to those in the UK, having to decide whether to forego applying for reimbursement status of certain medicines in order to maintain a higher price in other markets. However, taking into consideration the size of the German pharmaceutical market, it is unlikely that companies will decide to take this option.
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Datamonitor Country Statistics Database, 2010 Datamonitor, Pipeline and Commercial Insight: Antithrombotics, December 2010, DMHC2636 Datamonitor, Emerging Markets Series: Benchmarking Key Countries, December 2007, DMHC2352 Datamonitor, Reforms to the Pharmaceutical Benefits Scheme in Australia, February 2011, HC00060-002 Datamonitor, Commercial Insight: Top 20 Cancer Therapy Brands, September 2010, DMHC2661 Datamonitor, Pricing and Reimbursement: Innovative Risk-Sharing Strategies, July 2009, DMHC2537 Datamonitor, Australia Pharmaceutical Market Overview, August 2010, DMHC2646 Datamonitor, Germany Pharmaceutical Market Overview, December 2010, HC00002-001 Datamonitor, PharmaVitae Explorer, January 2010, company-reported information Datamonitor, Italy Pharmaceutical Market Overview , June 2010, DMHC261 Datamonitor, Japan Pharmaceutical Market Overview, July 2010, DMHC2622 Datamonitor, US Pharmaceutical Market Overview, September 2010, DMHC2621 Datamonitor, Spain Pharmaceutical Market Overview, December 2010, HC00002-003
Appendix
APPENDIX Exchange rates used in this report

Table 6 summarizes the currency exchange rates used in this report. Table 6: Currency exchange rates, 2011
Country
Currency
Dollars per national currency unit, 2010
US Australia UK EU
$ A$
1 0.9184 1.5453 1.3267
Source: www.oanda.com
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Healthcare System and Drug Regulatory Overview

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Healthcare System and Drug Regulatory Overview

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Pharmaceutical Key Trends 2011 Healthcare System and Drug Regulatory Overview

Cost-containment and regulatory pressures intensify

About Datamonitor Healthcare

ABOUT DATAMONITOR HEALTHCARE

About the Healthcare Strategic Analysis Team

HC00062-004/Published 03/2011 Page 2

EXECUTIVE SUMMARY Introduction

HC00062-004/Published 03/2011 Page 3

Strategic scoping and focus

HC00062-004/Published 03/2011 Page 4

Pharmas strategic responses

Strategies to drive profitability Innovation Diversification Cost savings

HC00062-004/Published 03/2011 Page 5

HC00062-004/Published 03/2011 Page 6

Reforms seen as negative

Reforms seen as neutral

Reforms seen as positive

HC00062-004/Published 03/2011 Page 7

Abbreviated NDAs or No 505b2 applications receive 3 additional years

Pediatric exclusivity is an additional 6 months

US: Original biologic drugs Market and data exclusivity 6 months

Manufacturers of biologic drugs get at least 12 years exclusivity

As with NDAs, 6 months pediatric exclusivity is included

Branded product receives new license

* = Additional market exclusivity if new indication is registered in first 8 years d

NDA: New Drug Application

HC00062-004/Published 03/2011 Page 8

Pricing and reimbursement

HC00062-004/Published 03/2011 Page 9

Pricing and reimbursement pressures

Growing price negotiation

Greater use of pharmacoeconomics

HC00062-004/Published 03/2011 Page 10

Upcoming related reports

HC00062-004/Published 03/2011 Page 11

HC00062-004/Published 03/2011 Page 12

HC00062-004/Published 03/2011 Page 13

HEALTHCARE EXPENDITURE Healthcare expenditure is growing fast

Total health expenditure ($bn)

2,239 272 343 176 169 43 101 109 379 24 139 36

2,400 283 353 183 178 45 106 117 385 31 158 38

2,549 280 367 193 190 47 113 122 344 37 176 40

2,685 304 396 210 235 52 123 140 317 49 188 43

Source: Datamonitor Country Statistics Database, 2010

HC00062-004/Published 03/2011 Page 14

Pharmas strategic responses

Strategies to drive profitability Innovation Diversification Cost savings

HC00062-004/Published 03/2011 Page 15

Health expenditure as a proportion of GDP (%)

Government health expenditure Private (private insurance plans) expenditure

Private (out of pocket) expenditure

Source: Datamonitor, OECD Stat Extracts, 2009; WHOSIS, 2010

Government health expenditure as a proportion of GDP

Private (out of pocket) expenditure as a proportion of GDP

GDP = gross domestic product

Source: OECD Stat Extracts, 2009; WHOSIS, 2010

HC00062-004/Published 03/2011 Page 17

The US has the highest healthcare spend in the world

High healthcare costs

High cost of end-of-life care

Reimbursement and payment in efficiencies

HC00062-004/Published 03/2011 Page 18

Europes austerity measures will see a real-term reduction in healthcare expenditure