In this article, Michael N. Abrams and Alexander Natz discuss the current policy initiatives from Europe and the U.S., similarities between them, and implications for the pharmaceutical sector and their standing in a competitive global market.

For years, lawmakers have targeted the pharmaceutical industry, blaming it for the high cost of healthcare – its role in the management of COVID-19 notwithstanding.  Despite recent breakthroughs to rid the world of its worst scourges, both the U.S. and EU appear to regard pharma as the single worst actor in the healthcare cost drama.

Policymakers globally continue to zero in on drug costs, proposing (and in many cases, implementing) disruptive solutions to rein in what are perceived as exorbitant pharmaceutical prices.  In the U.S., the recent passage of the Inflation Reduction Act (IRA) stands out as a signal event.  In the EU, similar changes are in process.  Although not an EU competence, draft legislation has been published by the European Commission as part of the Pharmaceutical Package focusing on the affordability of drugs in the European Union.

These proposals for the first time tie the intellectual property (IP) rights of pharmaceutical companies to the access and availability of the medicine in all EU countries.  At the same time pharmaceutical IP rights (orphan exclusivity and regulatory data protection) are substantially lowered and joint price negotiations are being politically discussed as a potential solution.  These combined measures might very well make pharma companies think twice about whether they still consider the EU market attractive and predictable enough to make them their first launch markets after the U.S.

Looking ahead, the pressure to reduce drug costs is escalating.  U.S. and EU policymakers are becoming more cost-conscious than ever as budget deficits driven by the Covid-19 pandemic are compounded by rising inflation and energy costs.

In its relationships with pharmaceutical manufacturers, the EU has long been advantaged by its greater negotiating power, resulting in pricing significantly below that of the U.S.  Given the impact of the recently passed IRA in the U.S., if the EU adds its own additional pricing pressure through the policies under discussion, it will be a double blow to pharma.  The industry is likely to adapt by reducing the number and riskiness of the drugs it chooses to develop.  That would in many ways be self-defeating.

Amid this turbulent environment, manufacturers face a challenging road ahead.  Government intervention that lowers prices and raises the cost of development threatens the financial model on which this risky business is based.  Yet policymakers say that the alternative is simply unaffordable.

In this article, we discuss current policy initiatives from Europe and the U.S., their implications for the pharmaceutical sector, and their standing in a competitive global market.

Drug Pricing Trends in the U.S. and EU

U.S.

Over the past five years, spending in the U.S. at drug list prices (Wholesale Acquisition Cost, WAC) have increased at an average 5.9% per year.[i]  During this period, the average inflation rate was 2.5%.[ii]  In 2022, only 3.4% of all drugs had price increases.  Of this subset, 15-18% of increases (i.e., slightly more than one-half of one percent of all drugs) were deemed “significant”[iii], including some that increased by more than $20,000 or 500%.[iv]

Data suggests that most price changes were not significantly more than inflation.  Furthermore, net prices ultimately paid to manufacturers are even lower after rebates and other subsidies.  The public uproar over drug pricing is driven in large part by a relatively small number of high-cost products and instances of egregious price hikes (notably, scandals involving Martin Shkreli and Daraprim, EpiPen, and insulin).

Europe

Drug pricing in Europe is largely confidential, however, governments stringently control drug prices after launch in all EU countries.

One survey of average European prices of selected medicines found a decrease by at least 7.1-9.5% between 6 months and 3-5 years from launch[v].  Another study determined that European regulations have effectively kept pharmaceutical prices from rising faster than general consumer prices.  Over a 19-year period, prices never rose more than a few percentage points faster than general consumer prices[vi].  In recent years the cost containment pressure has increased tremendously in Europe due to rising healthcare costs.

Most EU governments intervene in drug pricing decisions in several ways.  These include:  regulating the maximum sale price (price cap); setting the maximum reimbursement rate determined by reference pricing systems, and rigorous health technology assessments (HTAs); prohibiting price increases after a new drug’s launch; lowering prices over time based on competition, and tendering which is used in some countries for innovative medicines.

The budgetary pressures and financial uncertainty caused by COVID-19 have escalated pressure for cost containment across Europe.  The results include greater resistance to premium pricing for newly launched drugs, higher discounting in tenders and contracts, and more extensive use of outcomes-based models.

Policy Responses

The overarching goals of policymakers, regardless of geography, are largely the same – to lower the cost of healthcare for their constituents, and of course, translate that into political support.  However, execution against this goal has varied:

• European markets have implemented rigid, evidence-based drug pricing caps, owing to its largely single-payer systems with significant negotiating power.
• Because CMS has until now been prohibited from negotiating directly with manufacturers, prices have generally been higher in the U.S. than in the EU for the same product.

Looking ahead, Europe continues to double down on its policies and evidentiary requirements, even as the U.S. is on that same path, using increased government intervention to curb drug pricing. Such policy responses from both regions are described below.

U.S.

Most notably, the U.S. passed the Inflation Reduction Act (IRA), sending shockwaves across the pharma industry.  It promises cost savings to Medicare beneficiaries as a result of direct drug price negotiation, benefit redesign, and other provisions to limit drug costs.  The IRA’s healthcare provisions focus on prescription drugs, significantly impacting the price set by manufacturers for certain drugs and the rebates they pay to Medicare.  Provisions most relevant to pharmaceutical manufacturers include[vii]^,[viii]:

• Drug price negotiation: For the first time beginning in 2026, CMS will negotiate the price of certain prescription drugs (for use by Medicare beneficiaries) directly with manufacturers.  CMS will stagger the timeline for implementation, negotiating the prices of 10 drugs in 2026 and adding 15-20 more each year thereafter.  CMS is in process of developing a value-based system for price determination, potentially elevating the role of central HTA bodies like ICER.  To date, HHS has stated it will consider the cost of production, research and development expenditures, including federal support; and alternative treatments, but a definitive process has not yet been announced.
• Penalties for “excessive” price increases: Requires drug manufacturers to pay rebates to Medicare if their price increases exceed inflation.
• Biosimilar payments: Increases reimbursement to providers at ASP plus 8% of the reference biologic’s price (up from 6%) to encourage uptake.

The IRA represents perhaps the most significant set of legislative changes for the pharmaceutical industry since the creation of the ACA (March 2010) and Part D Medicare (January 2006).  It’s important to note that as industry stakeholders unpack the new law, questions remain about the extent to which it will create desired economic impact and about unanticipated consequences as well.  Stakeholders question whether the disproportionate focus on the pharma industry will move the needle in terms of cost savings, given that drugs only account for ~ 20% of total healthcare spend.  Furthermore, the IRA may prove to be a misnomer – CBO analyses project that while the IRA may reduce deficits by $238B over a decade, it will likely have negligible impact on inflation.[ix]^{, [x]}

Despite the Administration’s enthusiasm for it, the IRA represents a very complex, controversial, and still unfolding piece of legislation.

In the meantime, numerous states have been enacting their own legislation on a range of issues related to drug pricing.  In 2022, 30 new state laws were passed across the country while hundreds more were proposed.[xi]  Key issues addressed include pricing (affordability, upper payment limits, reference rates, unsupported price hikes), consumer cost-sharing, importation of drugs from other countries, transparency, bulk purchasing, among others.[xii]

Taken together, the entire country seems to be at battle with the pharma industry.  The evolving landscape of state and federal laws presents increased compliance risks as well as significant obstacles to product uptake.

Europe

Europe has seen policies rolled out at both the EU and national level that increase focus on pricing and access with limited and varied results.  At the EU level, discussions on joint procurement have assumed a prominent role in the policy discussion, along with new policy proposals such as the EU HTA Regulation[xiii] and Pharmaceutical Package,[xiv] which will indirectly shape pricing. The environment in Europe can be summarized by an increasing focus on healthcare system sustainability, while advocating for lower pricing and a continued interest in novel therapies. Regrettably however, pricing considerations often win out over the promise of innovative therapies.

The EU HTA Regulation was initially met with cautious optimism when proposed by the Juncker Commission.  It promised an important step in streamlining administrative barriers, with benefits to industry, patients, and Member States alike.  Unfortunately, the final negotiated text did not live up to that promise, and diligent work is now required to ensure establishment of a framework that delivers some of its initial promise and avoids introducing new and unnecessary administrative burdens, or worse, negatively impacting the Orphan Medicinal Products (OMP) and Advanced Therapy Medicinal Products (ATMPs) ecosystem in the EU by failing to acknowledge their unique characteristics in the methodologies being established with industry input.

Much as the U.S. has seen a substantive legislative change to its biopharmaceutical ecosystem, the EU is in process of revising the foundational legislation that governs its regulatory and incentive framework for all innovative therapeutics in the EU, including orphan medicinal products (OMPs).  In an increasingly competitive global environment, the EU finds itself at a crossroads as it plans to publish its Pharmaceutical Package.  This wide-ranging initiative will impact all developers.  Aiming to balance access, affordability, availability, and innovation, a number of proposals have been published which are incredibly concerning.  These proposals will increase unpredictability and risk, and decrease incentives for manufacturers.

Among the options being explored by the Commission are a reduction and modification of Regulatory Data Protection (RDP) and Orphan Market Exclusivity (OME).  This modified framework would be linked to a series of ‘conditions’ such as the ability to supply or launch a product in all 27 EU Member States in a fixed time-period, as well as whether the therapy addresses an Unmet Medical Need (UMN) or High Unmet Medical Need (HUMN) for non-orphans and orphans respectively.  Beyond the modification itself, which we do not believe will bring about the changes sought by the Commission, it ‘stamps’ therapies with a label, and those products without a (H)UMN stamp are likely to face significant downward pricing pressures.

Turning to the Member State level, the EU has seen a growing number of cell and gene therapies successfully receiving Market Authorization.  Industry and other stakeholders have worked to roll-out alternative payment and risk-sharing models to facilitate access to these transformative therapies, namely outcomes-based agreements.  Despite some initial success and optimism with CAR-Ts, recent years have seen gene therapy manufacturers struggle to make similar agreements, with products or even companies having to withdraw from the European market.  In part, this has been driven by the inherent data challenges for companies and the need to rely on alternative evidence generation pathways where the gold-standard of Randomized Control Trials (RCTs) are not possible.  With an inability to agree on a pricing and reimbursement framework, stakeholders are exploring alternative solutions, including joint procurement.  This trend raises concern about the future of many innovative medicines in the EU.  If Member States and pharmaceutical companies are unable to find agreement on the value of such products, it will cast doubt on the future viability of such technologies in the EU.

At the same time the EU Member States are introducing their own legislation to lower drug prices.  For example, Germany has implemented “guardrails” in AMNOG that cap negotiations between the manufacturer and the payers at the price of the comparator – which often might be generic – if the new medicine has not shown that it is significantly better than the comparator.

These examples demonstrate a continued and increasing effort by stakeholders in the EU to apply downward pressure on pricing in the EU.  These proposals could have major and unintended consequences for the willingness of companies to bring products to the EU market and shape research priorities for decades to come.

Looking Ahead and Implications for Manufacturers

In the U.S., pharmaceutical manufacturers have historically had greater pricing power than in the EU.  However, the passage of the IRA has shattered manufacturers’ existing assumptions and forced a re-examination of development pipelines, budgets, and costs in general as they anticipate revenue cuts as a consequence.

Europe, too, is discussing raising its already high bar for evidentiary requirements to achieve premium pricing.  For instance, Germany is insisting on overall survival data vs. progression free survival – delaying the entrance of certain drugs to market as companies wait to collect required data.  In addition, it’s mandating rebates on combination therapies, discouraging manufacturers from investing in combinations.

While these policies may be well-intended, they fail to consider the unintended consequences – If Europe and the U.S. – the two biggest markets for most manufacturers – both concurrently pressure manufacturers for lower pricing, the industry is likely to adapt in ways that are negative for society.

What ultimately suffers is patients’ access to innovation.  Bringing a new drug to market is already an expensive, complex, and risky endeavor.  Arbitrarily limiting profitability, as price ceilings explicitly do, puts innovators’ willingness and financial ability to develop new drugs at risk.

In addition, price caps and subsequent diminished revenue could discourage competition.  Though new, branded products are exempt from the new law in the U.S., negotiated products will serve as a reference price, forcing manufacturers to offer deep discounts to capture share.  Limited ROI potential may deter companies from introducing second line options.

Going forward, patients may find that their options relative to innovative therapies are fewer.  As we’re on the edge of spectacular developments in precision medicine, it would be ironic if this is the moment we chose to shackle the industry.  Manufacturers need to be prepared now more than ever to overcome these potentially devastating downstream implications.  This will require a fundamentally different commercial model:

• Assess future growth areas to remain relatively insulated from IRA.
  The IRA raises the risk associated with drug development given a narrower ROI window. In order to maximize returns, manufacturers will likely look to fund products associated with lower risk and higher likelihood of ROI, e.g., populations and disease conditions most insulated from government price controls such as biologics and non-elderly disease states.
• Ensure a clear and concise value proposition.
  The price/value drumbeat will continue to increase globally. All stakeholders (e.g., payers, providers, and investors) will demand evidence of clinical differentiation and cost-savings to ensure a new product is worth their money and time.  ECV will continue to be the source of competitive differentiation; manufacturers must justify price with clinical benefit, economic savings, and potential operational efficiencies while also communicating how each product aligns with customers’ business goals.
• Invest in capabilities to clearly differentiate from the competition.
  Field teams need to be equipped to highlight the economic and clinical value of products, and benefits for specific patient types. Medical Affairs needs to be engaged as part of the strategic account approach, fostering proactive scientific engagement.  At the same time, Market Access should be leveraged as the “tip of the commercial spear” to ensure customers understand the economic impact of a therapy across populations.  This requires new skills and different approaches to strategic account management and coordination.
• Identify the segments of value and determine optimal engagement approach.
  Organizations will need more sophisticated targeting and segmentation approaches that leverage multiple channels and are tailored to customer preferences (e.g., virtual, in-person, digital content). Making choices on optimal engagement methods and establishing priorities will be key to cost-effective coverage.

Taken together, executives need to be actively focused on reconceptualizing their commercial approach to succeed in a more value-conscious market that is being radically reshaped by policy and legislative change.

 

---

REFERENCES

[i] The Use of Medicines in the U.S. 2022. Usage and spending trends and outlook to 2026. IQVIA. April 2022.

[ii] U.S. Inflation Rate 1960 – 2023. Macrotrends.

[iii] Greater than 10 percent and $20 threshold pr greater than the $500 threshold.

[iv] Price Increases for Prescription Drugs, 2016-2022. ASPE Office of Health Policy. September 30, 2022.

[v] Vogler, S., Schneider, P. & Zimmermann, N. Evolution of Average European Medicine Prices: Implications for the Methodology of External Price Referencing. PharmacoEconomics Open 3, 303–309 (2019). https://doi.org/10.1007/s41669-019-0120-9

[vi] Golec, J and Vernon, J. EUROPEAN PHARMACEUTICAL PRICE REGULATION, FIRM PROFITABILITY, AND R&D SPENDING. NATIONAL BUREAU OF ECONOMIC RESEARCH. November 2006.

[vii] H.R.5376 – Inflation Reduction Act of 2022. Title 1, Subtitle B–Prescription Drug Pricing Reform. https://www.congress.gov/bill/117th-congress/house-bill/5376

[viii] Selected Health Provisions of the Inflation Reduction Act. Congressional Research Service. Sept 2022

[ix] INFLATION REDUCTION ACT: COMPARING CBO AND PWBM ESTIMATES. Penn Wharton University of Pennsylvania Budget Model. August 2022.

[x] CBO Confirms to Graham: Dems’ “Inflation Reduction Act” Won’t Reduce Inflation. United States Senate Committee on the Budget. August 2022.

[xi] Gallagher M, Adam KC, Nuernberger C, et al. 2022 Drug Pricing Update: States Continue Legislative Push Even As Congress Passes Long Sought Changes. White and Case. Sept 2022.

[xii] 2023 State Legislative Action to Lower Pharmaceutical Costs. State Tracker. National Academy for State Health Policy.

[xiii] Regulation (EU) 2021/2282 of the European Parliament and of the Council of 15 December 2021 on health technology assessment. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32021R2282

[xiv] European Commission. 2023 Reform of the EU pharmaceutical legislation. https://health.ec.europa.eu/medicinal-products/pharmaceutical-strategy-europe/reform-eu-pharmaceutical-legislation_en