Spanning the Globe

This month, we catch up on major developments around the world and their implications for the contract services industry.
Aug 01, 2010

Jim Miller
The European Union (EU) debt crisis may have started in Greece, but it has spread throughout Europe. The immediate nature of the crisis was monetary, but the underlying cause of the problem is excessive government spending on social programs financed by uncontrolled government borrowing. Now, nearly all European governments are focused on reining in their budgets.

As European governments begin to focus on their fiscal profligacy, spending on healthcare and bio/pharmaceuticals will get close attention. Healthcare accounts for 15% of public spending in most European countries and has been growing faster than most budget items. Government-run programs account for 75% of all healthcare expenditures in Europe and at least 70% of pharmaceuticals purchased there, according to data from the Organization for Economic Co-operation and Development and Bloomberg News. As European governments make drastic cuts in public expenditures to lower deficits and reduce sovereign debt, spending on healthcare and bio/pharmaceuticals will likely be a major target.

One key way European governments will cut spending is through their control of prices. Government agencies set prices for bio/pharmaceuticals in most European countries, and they are aggressively cutting prices. Spain and Greece already have announced plans to reduce prices for generic drugs by 25%, and Germany has announced 10% cuts.

Another government tool will be driving more use of generics. The countries with some of the biggest problems, e.g., Spain and Italy, also have some of the lowest generic-drug penetration. IMS Health estimates that increased use of generic drugs by the 27 EU member states could generate €30 billion ($38 billion) in savings annually. Government agencies also could make it more difficult for new drugs to get coverage eligibility, especially expensive new biopharmaceuticals.

Contract manufacturing organizations (CMOs) will feel the effects of reduced healthcare expenditures in the form of fewer or smaller batches, and pressure from clients to reduce prices. This situation will be especially difficult for European CMOs, which already must compete in a market with far too much capacity and widespread price-cutting.