A New Pricing Game for Drugmakers in Europe

AstraZeneca (AZN) recently set the price of its new Brilique blood thinner, which it hopes will become its next blockbuster drug, at €1.69 ($2.38) per pill in Germany. Whether it will be allowed to maintain that price in Europe's largest drug market remains to be seen. The British drugmaker, insurers, and German regulators are bracing for a yearlong battle over the medicine's value, the first test of a new pricing law in Europe's biggest economy.

What makes the legislation so wrenching for Big Pharma is that drug companies previously needed to show only that a drug was safe and worked better than a placebo. Now the onus is on companies to prove not just that a drug works but that it is actually worth more than older therapies. If a drugmaker can't convince German regulators that its compound has greater efficacy or additional benefits, then it cannot charge more than rival medicines already on the market.

It's the latest effort by a European nation to curb health spending, and AstraZeneca in January became the first to seek approval for a new drug under the revised process. "We have the chance to help design the system," says Claus Runge, AstraZeneca's vice-president for health-care affairs in Germany.

AstraZeneca has a lot at stake. More than half its $33.3 billion in sales last year came from drugs that will face generic competition by 2014. Brilique is expected to garner annual sales of $2.4 billion in 2016, according to the mean estimate of six analysts surveyed by Bloomberg. That would make it AstraZeneca's first blockbuster in years. But success depends on winning approval to sell the drug in the U.S., where the government does not negotiate prices for drugs used by Medicare patients. Elsewhere, AstraZeneca may also need to price the drug closer to the €2.25-€3.50 range it used in an internal study.

What happens in Germany "is important for AstraZeneca, particularly for Brilique," says WestLB analyst Mark Belsey in London. The decision "will have a ripple effect on other major European markets like France."

Regulators estimate the new law will help save Germany about €2 billion annually. Pharmaceutical companies say such thrift may undermine their ability to recoup the cost of developing innovative drugs. John C. Lechleiter, chief executive officer of Eli Lilly (LLY), says pricing pressure in Europe is so worrisome that he has traveled to Berlin, Madrid, and London over the past year to meet with health officials about their regulatory overhauls. He told the U.K. Health Dept. that negotiations over a drug's value-based price may lead to delays in the introduction of new treatments, according to minutes of a meeting obtained by Bloomberg News. "Ultimately, for more medicines to come from our labs, the value of those medicines needs to be rewarded with prices and reimbursements that really reflect that," says Lechleiter. Lilly and others, he says, are closely watching AstraZeneca's experience in Germany to see how dramatically the environment has changed.

The new drug pricing law, passed in November, was a central element of Chancellor Angela Merkel's plan to ward off a shortfall in Germany's public insurance system this year. Health Minister Philipp Rösler coupled the nation's first price negotiations on new drugs with higher premiums for patients and 2.2 billion euros in temporary rebates and price freezes on older medicines.

For drugmakers, there are roughly six steps in the process. After about six months of internal assessments, companies set the price for new drugs, as AstraZeneca did when it started selling Brilique, known as Brilinta in the U.S., in January. That price becomes the starting point for negotiations with regulators.

Companies must file a dossier with the Federal Joint Committee, the German body that makes drug reimbursement decisions, to prove the new medicine is better than comparable therapies already on the market. If it fails that test, the drug gets priced like existing ones—which can mean a very big discount. For example, Brilique currently sells for about 22 percent more than Plavix, an older blood thinner. If a new medicine can clear that qualitative hurdle, price talks start between the drugmaker and the public insurers that cover some 90 percent of Germany's population to negotiate a rebate to insurers on the original price.

Just how much the new process will save in the long run is unclear. Rösler's plan was for savings from price negotiations to equal the €2.2 billion in temporary rebates by 2013, says Rainer Hess, head of the Federal Joint Committee. Proponents of the law say it's meant to keep a lid on spending and ensure that only the real innovators get rewarded. "If it's a groundbreaking new product, we're ready to pay," says Ann Marini, a spokeswoman for the National Association of Statutory Health Insurance Funds.

AstraZeneca could use some good news on Brilique. The company has already withdrawn its application for the drug in France—which represents one-third of the European market for anti-clotting drugs, according to Sanford C. Bernstein (AB)—after authorities asked for more information about side effects. The company says it intends to refile. In the U.S., the Food and Drug Administration initially rejected the drug in December. A second review is slated for July.

Lilly's Lechleiter says the emphasis on having to prove a new drug is better is prompting some drugmakers to start thinking like regulators. For instance, aside from running a medical study designed to show Brilique works better than Plavix, AstraZeneca also commissioned an economic review of the data using a ratio known as quality-adjusted life year (QALY). The measure tries to estimate both the number of years of life that would be added by a medical intervention and the quality of that existence based on the patient's level of health—on a scale of 1.0 for perfect health to 0.0 for death—during the extension. The QALY measure is traditionally used by government agencies such as Britain's National Institute for Health and Clinical Excellence, which advises the National Health Service on treatment cost-effectiveness.

AstraZeneca's internal review found that Brilique provided a quality-adjusted life-year gain of 0.13 on a scale of 0 to 1, with 1 being the best health benefit. The additional cost per year of putting someone on Brilique instead of the existing standard would be €2,500 to €5,700, the company reported. Explains AstraZeneca spokeswoman Abigail Baron: "Increasingly, we're looking for ways to demonstrate the value of our medicines."

Justin Smith, an analyst with MF Global UK in London, says AstraZeneca's analysis released in May was the first time he had seen a company touting the QALY benefit of one of its compounds. If the German model takes hold elsewhere, it likely won't be the last.

The bottom line: New German rules on pharmaceutical prices are pushing drug companies to think more like regulators.

    Before it's here, it's on the Bloomberg Terminal.