FRENCH ELECTIONS: Big Generic Drug Makers May Pull Ahead

04/15/2002
Dow Jones International News

(Copyright (c) 2002, Dow Jones & Company, Inc.)

PARIS -(Dow Jones)- Mindful of France's heavy reliance on branded pharmaceuticals, generic drugmakers are preparing for an onslaught in France - a market largely bereft of cheap copycat medicines.

Global drugmakers have been negotiating drug prices with the French government in the leadup to the elections April 21, with a view to hiking prices after the election. But instead, it's likely to be generic drugmakers who benefit.

Simply, France spends one-seventh of its annual budget on healthcare and critics argue that too much of this is used to buy pricier branded drugs. For example, France's spending increase on all drugs last year was twice what it had budgeted. Critics say this is unsustainable. Generic drugmakers think this budget burden will cue a move towards cheaper copycat drugs, regardless of who the country's new president is.

For generic drugmakers, it's a potential goldrush. Generics make up only 6% of French sales by volume and 3% of revenue according to IMS Health. In contrast, 25% of drugs sold in Germany are generics .

"France is the largest untapped generics market," said Tom Kass, a portfolio manager at EFG Asset Management. This month, Teva Pharmaceuticals Industries Ltd. (TEVA) and Ivax Corp. (IVX) - two of the world's biggest generic drugmakers - snapped up French generics operations from Bayer AG (BAY) and Merck & Co. (MRK), respectively. That gives them a toehold in the country if the industry takes off by 2005 as industry executives expect.

"It's not a fly-by-night decision for either company to be in France," said Jerry Treppel, a pharmaceuticals analyst at Banc Of America.

"They've done their homework and are going to stay."

Despite their low prices (only Portugal and Spain pay less in Europe) France is a key target market. Globally, it is the fourth largest market by sales and the biggest consumer of medicines, per capita.

"France is the toughest market that nobody wants to miss," said an executive at a major U.S. pharmaceuticals firm.

To date, both leading presidential candidates haven't exactly trumpeted the benefits of generic drug use. In fact, observers think they're loath to speak up too much for fear of alienating physicians and big pharma. Besides, the French like their state-subsidized branded drugs.

But both incumbent Socialist Prime Minister Lionel Jospin and right-of-center President Jacques Chirac have previously advocated wider use of generics . Jospin passed France's first pro-generic legislation in 1999 while Chirac pushed generics in the 1996 election as a way to curb social security spending.

Health Spending Too High

Jospin's 2002 platform proposes that patients pay a premium for the latest groundbreaking drugs while prices of older, outdated medicines are free to fall, a policy which could buoy the generics industry.

"It's a question of price, discount and financial incentives," said a Paris-based analyst.

"Generics work in markets in which innovative products are expensive and where the mark-up is much higher."

Last month Japan instituted a similar scheme to the one proposed by Jospin.

Chirac hasn't mentioned generics in his 2002 platform - some market watchers reckon this stance in part cost him the 1996 election - although one of his spokesmen supported the idea.

"We want to accelerate generics use," said Jean-Francois Cope, a spokesman for Chirac. "It's part of the solution."

"The state wants to control medicine costs," said Stephane Le Masson, an analyst at market research firm IMS-Health, who says the country has insufficient funds to sustain heavy health-related spending. "Generics play a big role."

Health-related expenses make up about one-seventh of all French public spending and generic drugs are priced about 30% below their branded peers.

As a guide to what possible, since pro- generics laws were passed in the U.S. in the mid-1980s, generics have shot up to make up nearly half of the U.S. market by volume, up from 19% in 1984. The reason for the French lag in generics is that unbranded medicines have only been pushed since 1999. Germany, for example, legislated generic drug use more than 15 years ago.

What's more, generous reimbursement rates have also held the market back. On average, social security covers around 73% of a medicine's price. This means the meager payback from opting for the unbranded version offers little incentive to users.

Take Prozac. In France, a monthly dose of the anti-depression drug costs about EUR26 while the generic version goes for EUR21. Reimbursed at the official 65% rate, a user would only pocket about EUR2 a month by buying the generic.

But things are changing. Jospin's 1999 bill allowed doctors to prescribe generics and put them on pharmacists' official reimbursement lists. Now more than one-third of drugs can be substituted. It also incentivized chemists to push unbranded medicines through better profit margins.

Since the law took effect, volumes of unbranded medicines have shot up nearly 20%. Resistance from pharmacists to substitute is also on the wane. In 2001, a 77 of France's 95 regions met state targets to substitute generics 30% of the time.

Another of Jospin's proposals is known as reference pricing, which would force pharmacists to sell the lowest-priced generic option available.

Furthermore, patent expiries before 2005 of bestsellers like Merck & Co.'s (MRK) cholesterol drug Zocor - the fifth most-prescribed medicine in France - and Johnson & Johnson's (J&J) Procrit, for anemia, will fill pharmacists' medicine chests with many more options. Globally, $35 billion in branded drugs face patent expiries before then.

"There's a potential French market worth EUR2.2 billion of products going off patent before 2005," said Andrew Kay, deputy president of Teva Europe.

"We aim to exploit those products on day one of patent expiry."

Prescription Spending Blew Its Budget

If enforced, generics could cannibalize sales of their blockbuster peers. It could also incite price wars among unbranded medicine makers, forcing a shakeout in the generics industry.

The world's generic heavyweights - like Watson Pharmaceuticals Inc. (WPI), Mylan Laboratories (MYL), Teva and Ivax - would likely emerge as winners.

Driving those changes are skyrocketing health care costs. In 2001 public spending on prescriptions shot up nearly 9%, forcing closer state scrutiny of costs particularly if unemployment rosters rise. Parliament's goal was a 4.5% rise.

France is also mindful of European Union budget targets. Its budget deficit should rise to 1.8% of its gross domestic product this year from 1.5% in 2001,and the E.U. wants France to balance its books by 2004. Jospin has stuck to the E.U. target while Chirac has set 2007 as a target date for budget balance. Eight of twelve EU countries have balanced budgets or surpluses already.

"The drift is coming from prescriptions - it's a main concern for fiscal policy and public spending," said Christophe Duval-Kieffer, an economist at Credit Suisse First Boston. "They will probably do something after elections."

The government must also increasingly answer to corporations frustrated over the high social costs they carry for local staff.

Around 78% of health costs are covered by the state in France, versus 45% in the U.S., much of which comes from corporate taxes.

Finance Minister Laurent Fabius has been pushing for tax cuts to lure foreign investment into the country. Chirac advocates cutting social security contributions for both companies and the state to rein in spending and reach a balanced budget, which could foreshadow lower drug reimbursement rates.

Company Web site: http://www.ims-global.com

-By Carolyn Whelan , Dow Jones Newswires; 331-4017-1740; carolyn . whelan @dowjones.com