Europe's crisis spells more pain for drugmakers

Drugmakers are counting the cost of the deepening euro zone crisis, with further austerity-driven price cuts expected in important European markets, including Italy and France.

Growing alarm at multiple government-imposed cuts prompted a frank letter from the CEO of GlaxoSmithKline, who heads Europe's pharmaceuticals association, to the European Commission warning of the industry's "significant concern".

A copy of the September 16 letter, from Andrew Witty to Health Commissioner John Dalli and Industry Commissioner Antonio Tajani, was received by Reuters this week.

The decision by governments to pay less for medicines in a bid to plug holes in their budgets is taking a heavy toll because drugmakers rely on state-funded healthcare systems for most of their European sales.

Smaller firms like Spain's Almirall and Greece's Alapis, whose shares have tumbled 42 and 99 percent respectively since the start of 2010, have been hardest hit.

But price cuts and unpaid bills are also weighing on the heavyweights of the industry, whose leaders now see more pressure on profit margins in 2012 following the latest downward jolt in the fiscal outlook for European economies.

"It's going to remain very tough," Richard Bergstrom, director general of the European Federation of Pharmaceutical Industries and Associations (Efpia), said in a telephone interview.

"The thing that worries me the most now is that debts, particularly at hospitals, are running so high. We're looking at close to 10 billion euros ($13.8 billion) only in Portugal, Spain, Italy and Greece."

Some companies, including Roche, have stopped delivering certain drugs to state-funded Greek hospitals with high unpaid bills, diverting supplies instead through pharmacies, which have a better payment record.

Earlier this year, drug company executives were hoping the round of cuts instigated in 2010 might run its course by the end of 2011. Now it seems things will only get worse.

AstraZeneca, Pfizer and Sanofi all expect continued pressure on prices next year.

"We don't think that's going to get any easier - it's probably going to get tougher," AstraZeneca's finance chief Simon Lowth told reporters on October 27.

Analysts at Deutsche Bank expect average European drug prices to be down by around 5.5 percent this year, after 3.5 percent in 2010, with no let-up in 2012.

Greece, not surprisingly, has implemented the deepest cuts, axing prices by up to 27 percent and forcing drug companies to take some payments in government bonds. Spain has imposed a 7.5 percent rebate on patented drugs and a 25 percent price cut for generics.

BEYOND THE PERIPHERY

In his letter to the commissioners, Witty said drugmakers have taken price cuts and discounts of more than 7 billion euros in Greece, Ireland, Italy, Portugal and Spain during 2010 and 2011, representing more than 8 percent of their turnover in these markets on a yearly basis.