Germany remains the most attractive of 10 pharmaceutical markets in western Europe, but it will increasingly be seen as presenting a challenge, especially to innovative drugmakers, says a new report.

The German drug market is worth 37.84 billion euros, ranking it fifth worldwide behind the US, Australia, Canada and Japan. It continues to hold strong appeal for drugmakers due to its strong emphasis on the regulatory environment, but the raft of cost-containment measures being considered by the new government could signal an end to the free pricing of novel products in the country, says the study, from Business Monitor International (BMI).

These uncertainties, combined with the pending patent cliff, lead BMI to forecast a negative five-year compound annual growth rate (CAGR) for the German pharmal market, of -0.99% and -3.33% respectively, in terms of local currency and US$. While the report expects some growth to return over the longer, 10-year period as a result of increased use of personalised medicine and biotechnology products, this will remain subdued, averaging just 0.36% and -0.83%, respectively, it says.

On the other hand, the forecast development of Germany’s generics market will provide opportunities for strong players, adds BMI. It suggests that US major Pfizer could potentially become a market entrant, having recently being mentioned in relation to the possible sale of German generics specialists Stada Arzneimittel. Previously, Pfizer had targeted Ratiopharm, another German generics company which was eventually acquired by Israeli generics giant Teva.

In the meantime, the direction of the proposed healthcare reforms put forward by Chancellor Angela Merkel’s government is far from ensured, says BMI. Coalition bickering, falling approval ratings and the loss of the all-important state of North-Rhine Westphalia in the first of a wave of local elections in May 2010 all suggest that her government’s ambitious reform agenda could be over before it has had a chance to begin; the proposal to introduce fixed health insurance fees has already been shelved.

Key tests of the government will be its ability to administer highly controversial budget cuts worth a total of 82 billion euros by 2014, while also taking a leading role in ensuring the future stability of the eurozone.

However, a major plus for the pharmaceutical industry is the fact that Germany's economic recovery is in full swing, with an improving domestic consumer climate and strong foreign demand powering strong performance by the industrial sector. Nevertheless, the report cautions that, with the economy highly geared towards the export sector, Germany remains vulnerable to cyclical downturns in global demand, and the anticipated slowdown in US and Chinese economic activity will weigh on Germany's growth outlook into 2011. This suggests that trend growth will come in below the currently-projected 2.0% real Gross Domestic Product (GDP) growth rate for this year, and this will also have an impact on the availability of public health care finances, it says.