First We'll Sign Up France, Then Spain...

Within days of becoming chief executive officer of Smith-

Kline Beecham PLC, Jan Leschly cut a deal that confounded some of his company's European investors. In early May, he agreed to pay $2.3 billion--a resounding 50 times earnings--for Diversified Pharmaceutical Services Inc. Minnetonka (Minn.)-based DPS manages drug benefits for health-maintenance organizations and insurance companies in the U.S., helping them to hold down costs. But such benefits management is an arcane specialty that hardly exists in Europe.

It may soon, though. The possibility of exporting this largely American concept to the $41.5 billion European drug market was one of the deal's big attractions, Leschly says. Likewise, some of DPS's toughest rivals, including

Merck's Medco Containment Services unit, McKesson's PCS Health Systems, and Caremark International, are eyeing expansion into the Old World. With European governments needing help to clamp down on rising health costs, "the race is on," says DPS President Henry F. Blissenbach.

It's a particularly high-stakes game, since an entire nation's business could go to one company. A contract to manage the drug benefits of even a small country, such as the Netherlands, would be worth tens of millions of dollars, while the Continent's biggest markets, Germany and France, are potentially worth hundreds of millions. "Some of the countries are like big HMOs," says Elizabeth Dichter, executive vice-president for strategic marketing at PCS. "It's a terrific opportunity."

One of the leaders is Medco, the huge U.S. drug mail-order and pharmaceutical-benefits outfit that Merck & Co. bought last year for $6.6 billion. In recent months, Medco has been talking with the Swedish, British, and Dutch governments in a bid to manage their pharmaceutical benefits for a fee, says Barrie G. James, president of Pharma Strategy Consulting in Ba-sel, Switzerland. Medco also is talking to the French mutualites, the private insurers that sell coverage on the 25% of prescription-drug costs that France's national insurance doesn't cover, and Germany's Krankenkassen, the federal government's health-insurance funds, industry sources say. Medco says only that it's pushing into Europe, "taking a country-by-country approach."

That's key, since European health-care systems vary widely. France, Germany, and the Netherlands have compulsory, insurance-based schemes financed mainly by employers and employee contributions. And then there are government-run programs financed by payroll taxes, as in Britain, Italy, Spain, and Sweden.

HEFTY BILLS. Yet despite these differences, universal coverage is a common denominator of life in Europe. For pharmaceutical-benefits managers, such as DPS and Medco, that offers a tantalizing prospect. Nearly all Europeans are eligible for some form of drug benefits.

What's more, the lingering economic downturn, coupled with shaky state finances, is forcing European governments to trim their health-care bills, which now average 8% of gross domestic product. The first target is drugs. "There is a groundswell of support building up to find other ways to purchase and distribute prescription drugs," says Jurgen Klauber, spokesman for Allgemeine Ortskrankenkasse (AOK), Germany's largest Krankenkasse. Klauber says AOK is in discussions with leading companies in drug management but declined to name them.

European governments are trying to cut drug spending on their own--with varied success. Germany is testing a reference-pricing scheme that pegs reimbursement fees to the lowest-priced drugs available. Its retail pharmacy purchases dropped 9% last year, to $12.6 billion. The British government now lets family doctors keep a share of the savings if their prescribing costs fall below a target level. Even so, its drug spending jumped 11% last year, to $5.1 billion. And France, where drug purchases jumped 6% last year, to $12.1 billion, hopes to cut spending by $333 million this year by discouraging consumption, including forcing drugmakers to slash advertising by 10%.

EXPERIMENTS. But it may take companies such as Medco and DPS to produce the dramatic results European governments are hoping for. By monitoring physicians' prescribing habits, bargaining for lower pharmacy fees, and negotiating better prices from drugmakers, the companies promise hefty cost savings.

To overcome the bias that might exist against a foreign company, it could help to have a European partner. DPS, which is betrothed to the Anglo-American SmithKline, would like to do test runs for European governments to prove it can save money. "We certainly hope within the year to have experiments in place," says Jean-Pierre Garnier, chairman of SmithKline Beecham Pharmaceuticals. While neither company would comment, PCS's parent, McKesson Corp., is believed to be talking to Britain's Glaxo Holdings PLC about a possible linkup. In contrast, Caremark International Inc. is going it alone and initially concentrating on the Netherlands. "We're basically knocking on doors," says Michele Hooper, Caremark's corporate vice-president for international business.

Europe will be tough to crack. Some experts doubt European governments will ever give such lucrative contracts to Americans--or pay a middleman to do what many are starting to do on their own. There also are legislative barriers, including set drug prices in some countries. Yet considering that an industry born in the 1980s now manages drug benefits for more than 65 million Americans, Europeans had better watch out.

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