The strategy being employed in Europe of cutting pharmaceutical prices “will severely reduce the number of new medications making it to market", according to a new study.

A report issued by the Berlin-based European School of Management and Technology’s Competition Analysis economic consultancy, and commissioned by Novartis, “clearly models and quantifies” for the first time “the direct link between strict regulation and low innovation”. It argues that the new drugs most likely to be hit hardest under tough pricing include antibiotics, as well as treatments for cardiovascular disease and immune system disorders such as multiple sclerosis and chronic meningitis.

The EMST report said that “European governments predominantly see pharmaceutical pricing models as a tool for cost control in the public health sector, but may not to the same extent acknowledge its implication on product value and, hence, on the development of new drugs”. It goes on to note that the external price benchmarking (EPB) pricing model, widely used across OECD countries, causes a 5.7% drop in the ‘optimal pharmaceutical portfolio value’ of a representative company under the ESMT CA simulation. Another system, internal reference pricing (IRP), used in 17 European Union-member and 3 non-EU OECD countries, causes an 11.7% drop.

The analysis goes on to say that having some regions of the world under IRP and others under EPB “magnifies the problem, since internal prices are then exported to external markets, leading to a 19.8% drop in portfolio value”. EMST CA adds that prices lower than market value in the cases of both IRP and EPB “means that less money is available to invest in new products”.

Specifically, IRP can lead to “a failure to launch for one in ten products, half of them highly innovative” as that model “may group innovative drugs that have just been launched with older drugs whose patent life has expired or is about to expire”.This has the effect of “shortening the life cycle of innovative drugs and decreasing the incentive to innovate”.

The ESMT report goes on to argue that current pricing models “are often shown to favor ‘breakthrough’ pharmaceutical innovations over ‘follow-on’ drugs, or incremental improvements”. Under a form of IRP introduced in Germany in 2004, later-in-class drugs always have their price referenced against the relevant first-in-class treatment, it notes, “even if they have new and beneficial characteristics”.

This can lead to ‘a different understanding of “innovation” for patients and chemists’, the study states. For example, a statin may be redeveloped to have fewer side effects or be more beneficial for one group of patients and while this will seem like an innovative development to the patient, “it will not necessarily be innovative enough from the pricing regulator’s point of view to benefit from favorable regulation”.

The report concludes by saying that the analysis “demonstrates the need to support both ‘first in class’ and ‘best in class’ products, rather than drawing a regulatory distinction between ‘breakthrough’ products and everything else”.

Hans Friederiszick of ESMT CA said the study shows “the consequences that pricing and reimbursement regulation can have on pharmaceutical innovation”. It also shows that, “incorrectly applied, regulation can reduce the value of pharmaceutical projects and curtail the resources available to carry them out”.

He ending by noting that “rational investors will naturally look for the most profitable investment choices, which is why regulation has a direct impact on the number and characteristics of the medications developed”.