Commentary: Europe Pays a High Price for Cheap Drugs

Americans are up in arms over the soaring cost of prescription drugs. The U.S. already spends more per capita than any other country on medicines (chart). And that spending has been rising at double-digit rates annually, faster than anywhere else in the world. U.S. politicians and consumer-advocacy groups looking to put the brakes on that trend often cite Europe as a model. No surprise there: Germans, Italians, and the French pay far less for prescription drugs than Americans do. Take Pfizer's (PFE ) cholesterol-lowering medicine Lipitor: It retails for 60 cents a pill in Paris and $3.98 in Philadelphia.

But the U.S. shouldn't be too quick to reach for the European prescription. While there is ample room to argue that European-style universal health care is more equitable than the U.S. system, there is no question that patients on the Continent are often shortchanged. Europe's cash-strapped national health-care systems rely on cheaper, older, and often less effective drugs. Access to new and potentially lifesaving medicines is delayed, and frequently restricted. Last but not least, studies have shown that measures to restrict drug prices could deprive drug companies of incentives to develop cutting-edge therapies. "As a result of price controls, European consumers are heading toward second-class citizenship when it comes to access to medicine," says Daniel L. Vasella, chairman and CEO of Swiss drugmaker Novartis.

Blame it partly on the wads of red tape choking most of Europe's health-care systems. Once a drug is approved by the European Agency for the Evaluation of Medicinal Products, national governments must debate whether to make the drug available through their health systems and at what price. The process, which usually involves negotiations with manufacturers, who are under pressure to extend deep discounts, can drag on for several years. Bristol-Myers Squibb's Taxol, an effective but costly treatment for breast cancer, is a prime example. The drug was approved for use in Europe in 1995 but was not available to British cancer patients until 4 1/2 years later. It is worth noting that Britain has the worst cancer survival rates in the developed world, according to a study by London-based research consultancy Datamonitor. The study cited insufficient screening, along with lack of access to drugs like Taxol, as factors.

In some European countries, patients aren't able to get their hands on lifesaving medicines at all. Take beta interferons, widely regarded as one of the few effective treatments for multiple sclerosis (MS). Although the first beta interferon was approved in Europe nearly eight years ago, the high cost of this therapy--upwards of $17,000 per patient annually--means very few are receiving the drug. As many as 60,000 people in France have MS, and an estimated 2,000 new cases are reported each year. Yet less than half of the French patients diagnosed with MS are treated with beta interferon.

These budgetary pressures aren't confined to France: European health authorities in general are often reluctant to prescribe expensive drugs. The paradox is that prescription medicines can yield big savings in overall health-care costs down the line, as they often reduce the need for expensive specialist care or hospital treatment. Oliver Schöffski, a professor at the University of Erlangen-Nuremberg in Germany, found that in the U.S., statins--a costly class of lipid-lowering drugs--are prescribed for 56% of the 6.2 million patients diagnosed with heart disease. But in Italy, only 17% of the 3.3 million people eligible for the drugs get them. Schöffski figures that if the drugs were being prescribed more often, the Italian health system could reap savings of $890 million over five years.

Price controls have other side effects. Because prescription drug prices are so low in Europe, there is little incentive for generic manufacturers to enter the market. The upshot is that governments end up paying higher prices than needed for older, branded medicines. In the U.S., generic versions of branded medicines become available as soon as a drug goes off patent, often for as little as 10% of the price, says European pharmaceuticals analyst Kevin Scotcher at SG Cowen Securities Corp. in London. European governments could save more money and improve access to new medicines by promoting the use of generics. Any savings could then be reinvested into more innovative drugs, argues Marc Booty, European pharmaceuticals analyst at Commerzbank Securities in London.

Another knock against price controls for drugs: They reduce the incentives for drugmakers to undertake huge investments for the discovery of breakthrough medicines. It takes an average of 10 years and $802 million to develop a new drug. No company would spend that if the payoff weren't attractive. "In order to be successful, we are completely dependent on our capability to innovate. And the money goes where the money flows," says Novartis' (NVS ) Vasella.

There's research to back him up. John Calfee of the American Enterprise Institute, a conservative think tank in Washington, D.C., notes that the global drug industry scaled back annual increases in research and development spending to less than 4% in the mid-1990s, when the Clinton Administration floated the idea of price caps on prescription drugs. That's well below the 11% average annual increase in R&D spending for the industry from 1981-93. After reform was shelved, the rate went back to double digits.

Americans who spend hundreds of dollars a year out of pocket for pills have every reason to envy the Europeans. But it's worth asking whether the short-term savings from price controls are worth the long-term costs.

By Kerry Capell

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