Greece in the aftermath of their fiscal meltdown is implementing pharmaceutical cost controls that are slated to reduce their spending on drugs by 21.5% and save 1.9 billion euros annually. This NasDaq report gives a concise overview.
I'm jealous. It seems Greece (unlike the U.S.) has a Senate (or whatever) with balls.
The repercussions of Greece' austerity measures is hotly debated, but as far a pharmaceuticals is concerned; this is going to cause more than one pharma sales manager to head for either the bourbon or the Nexium.
You might be thinking, "but what about me?"
What this means for those of us who live in the good U S of A is that pharma is going to try and cost shift their profit picture to us.
I'm Jealous. I want Reimportation
First, the EU allows drug wholesalers to buy pharmaceuticals in low price markets and import and sell them for higher profits in high-price markets. The U.S calls that "reimportation", but Europeans call it a parallel market or parallel trade. Either way, it's a process strongly opposed by pharmaceutical companies. An objection that was wisely disregarded by the EU. A sensible process that we don't have available to us in the U.S.
From pharma's point of view, they can handle what's going on in Greece, as long as it stays in Greece; but it seems that Spain and the UK are about to follow suit. In fact, according to the NasDaq report, it seems that what one country in the EU does (when it comes to pharma pricing) causes the rest of the EU to drop their pharma prices like dominoes. This is enough of a concern that Citigroup analysts predict "further incremental action across key European markets" in part due to Greece but also because major players in the EU, like the U.K., Spain, Italy, Germany and France all have significant deficits too.
Having Greece's price control trickle down throughout the EU is a game changer for pharma.
Until recently, investors had been mainly concerned about the impact U.S. healthcare reform would have on the sector's profitability. But the watered down version of reform that finally passed in the U.S. was apparently largely absorbed by drug companies and is priced into their share prices.
Analysts say cuts to European government budgets now present a greater risk to pharma's profits and earnings per share in 2010.
emphasis added
Let me get this straight. Greece, a country of around 12 million people is starting a rickochet effect of lowered pharmaceutical prices that will stop short of jumping the pond. It's clear our Congress is going to take this news lying down and do nothing about instituting price controls of our own. I'm not sure if this is deja vu all over again or The Mouse That Roared vs. Predator, but it seems as if Greece (and the entire EU) gets a pharma price cut and the U.S. is told to go screw itself.
"But, pharmaceutical companies need to make a profit", you might be thinking.
Profit yes, but this is more than that. Look at Astra Zeneka's Income Statement for 2007-2009. (I'm copying what I want to focus on here.) If you compare Astra Zeneca's net profits to Xerox Corporation, you'll find that Xerox is in the wrong business, they made a 3-6.5% net profit compared to 22.9-19% for Astra Zeneca in the same time period. Astra Zeneka's net profits are after paying out $4.5-$5 billion in R&D costs.
All numbers in thousands
Period Ending | Dec 31, 2009 | Dec 31, 2008 | Dec 31, 2007 |
Total Revenue | 32,804,000 | 31,601,000 | 29,559,000 |
Cost of Revenue | 5,775,000 | 6,598,000 | 6,667,000 |
Gross Profit | 27,029,000 | 25,003,000 | 22,892,000 |
Gross Profit % | 82.4% | 79.1% | 77.4% |
Net Income | 7,544,000 | 6,130,000 | 5,627,000 |
Net Income % | 22.9% | 19.4% | 19% |
this html table protocol thingy sucks|
This is a company that Rand Paul has to admire. Greece' austerity measures and the cascade effect surely to follow throughout the EU is surely a revolting development to any card carrying member of the Libertarian Party (which, I have on good authority, most pharma executives wish they could join).
What's a Pharma Shill to do?
They are sure to cry out that impinging upon their ability to rake in profits like this will lead to less R&D and less innovation. Implying the idea that more people will die from a lack of innovation than those who already die because we ration drugs to only those people who can afford to buy them. This frightful thought likely won't come into fruition. Think about it. Threatening the end to R&D is counterproductive. Pharmaceutical companies are, after all, in the business of producing pills and new pills mean new business. Then again, what's their answer to the fact that there are dozens of countries that already have drug price controls and yet pharmaceutical companies somehow manage to make 22% net profits anyway. (Could it be, they make these profits by rapaciously giving the U.S. the full sticker price? No! Say it ain't so!)
Should we see crocodile tears when we figure out Astra Zeneka declared a net profit that was twice what they spent on R&D? ...in all 3 years? Perhaps, cutting out the costs of a private jet (or maybe reeling in raises to the CEO) can offset the costs of R&D; but somehow, I don't see pharma seeing it my way.
The threats continue.
If pulling back on R&D doesn't work, then threatening to leave the EU market like Abbott threatened to leave Thailand should work. ...um,that lasted a few days until they made a deal. It seems some profit was better than no profit. Where did Abbott recoup their lost profit dollars? No doubt, they got it out of the U.S.
Let's Be Clear
Pharma liked insurance mandates in our HCR, because it would increase their sales. Pulling out the stops to prevent national drug price negotiations also met with their goals. Doing what is in the best interest of the United States (or any country for that matter) is not on their radar.
The Status Quo Can't Continue
The United States cannot continue to contribute the lost profit dollars the rest of the world saves by negotiating for drug prices. The people most affected are the uninsured and underinsured that have no one negotiating a price break for them. It is indicative that the EU has no moral problem with pharmaceutical companies price gouging the United States. They think we can stand up for ourselves. It's a travesty that our own Congress won't do their job.