Austerity in Europe Puts Pressure on Drug Prices

By STEPHANIE NOVAK/ The New York Times

Profits at pharmaceutical companies have been declining or showing little growth for the last year as austerity measures across Europe lead to cuts in health care spending. Some analysts say this trend could continue until at least 2014.

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Budget cuts mean that many European governments are not willing to pay as much for pills. But new laws in some countries are also putting pressure on companies to prove their drugs are effective or risk having them dropped from the coverage list, or covered at a lower rate.

And price reductions in Europe can have a ripple effect. Profits from sales in emerging markets may also fall, because governments in emerging markets refer to the prices set in Europe to determine their own.

And price reductions in Europe can have a ripple effect. Profits from sales in emerging markets may also fall, because governments in emerging markets refer to the prices set in Europe to determine their own.

That would particularly hurt European pharmaceutical companies, which have been quite successful in emerging markets in the last five years. American companies, by contrast, do not rely as much on overseas revenue because of their large domestic market.

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Analysts say that it is difficult to predict how badly profits will be affected in the next fiscal year. Other factors, including expiring patents, mean that each company’s profit will be affected differently.

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Novartis, the Swiss pharmaceutical giant, posted a 7 percent decline in net income for 2011 despite a 16 percent increase in sales. AstraZeneca, based in Britain, posted full-year revenue for 2011 of $1.34 billion, down 2 percent from 2010. In 2011, net profit for the company’s West European market was down 11 percent from the previous year.

Kaushal Shah, an analyst with Business Monitor International, said the clearest way to see the effects of the euro crisis on pharmaceutical companies was in job cuts. AstraZeneca plans to cut more than 7,000 jobs in Europe, in addition to the 21,600 positions it has eliminated since 2007. Novartis, a largely European company, will cut nearly 2,000 jobs in the United States this year. Pfizer cut 6,000 jobs last May. In times of hardship, pharmaceutical companies usually lay off sales representatives and protect research and development departments, which lead drug creation. In this crisis, even research and development positions face cuts as companies strive to make these departments more efficient so as to reduce costs while maintaining a pipeline of new products.

“2011 is the first year recorded where R.& D. is down in the industry as a whole,” Mr. Bergström said.

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