Boss Sir Andrew Witty appeals to governments to rethink the sharp cuts that have seen prices fall by an average of 7-8% across the continent
GlaxoSmithKline boss Sir Andrew Witty said on Wednesday that pharmaceutical companies could scale back on innovation and decamp to Asia or the US if European governments continued to impose drug pricing cuts as part of austerity programmes.
Speaking as he announced a review of the drugmaker's European business he appealed to governments to rethink the sharp cuts that have seen prices fall by an average of 7-8% across the continent. The fall was twice as big as GSK had assumed at the beginning of the year.
It led to a 9% slide in the group's European sales in the third quarter, and an 8% fall in overall sales to £6.5bn. The company, Europe's biggest pharmaceutical group, had hoped to return to "sustainable growth" this year but now anticipates no sales growth.
Sir Andrew said: "It is not reasonable for governments to believe that they can continue to make these sorts of price reductions and delay the introduction of novel medicines without that creating unintended consequences."
He would not be drawn on whether the European review would entail job cuts. Asked about the UK, where the company has its headquarters and employs 15,000 people in research labs and factories, Sir Andrew reiterated that GSK would be hiring more people in the long run.
He said government-imposed price cuts in crisis-hit countries like Greece had cascaded through Europe, with Germany also enforcing big price reductions in respiratory medicines and vaccines. "The effect of a Greek price cut in February, for example, could still be rippling through the market a year later."
He recounted that in one European country, which he would not name, drug prices were now 50% below where they were in 1996. "Could this be the new normal? It could. I hope very much it isn't. It will erode the attractiveness of Europe for innovation, and for the entire industry."
Mick Cooper, analyst at Edison Investment Research, said: "Austerity measures in Europe are having a significant impact on GSK's growth but fortunately the company has a strong late-stage pipeline." GSK plans to file for regulatory approval by the end of the year for new treatments for HIV, type II diabetes and chronic obstructive pulmonary disease – an umbrella term for chronic bronchitis or emphysema.
The group's consumer healthcare division - which sells products such as Sensodyne, Horlicks, Panadol and Lucozade - is also doing well. For example, it sold 3.5bn cups of Horlicks in India last year.
Sir Andrew recently wrote a letter on behalf of the industry in his capacity as president of the European Federation of Pharmaceutical Industries and Associations, in which he warned: "Europe is already a world leader in the pharmaceutical sector ... However, other locations such as the US and certain Asian countries present increasingly strong competition. Cost-containment policies that create market distortions - will drive investment elsewhere and consign Europe to a gradual decline, to the second rank of the new global order."
Medicine pricing systems vary across Europe. In the UK, drugmakers set their own prices but there is a profit cap. Every five years, guidance for pricing is established through the Pharmaceutical Price Regulation Scheme, a voluntary agreement between the government and the industry. They are currently thrashing out a new regime for 2014, which is expected to include value-based pricing for all new medicines for the first time. Medicines would be assessed on the basis of how well they meet unmet clincial needs, and how innovative they are. Germany also has value-based pricing. The NHS spends about £9bn a year on branded prescription drugs.
As governments slash healthcare costs, speculators are buying medicines cheaply in one country - such as Greece or the UK - to sell in another at a much higher price, according to business intelligence firm GlobalData.
Keith Bowman of Hargreaves Lansdown Stockbrokers, said: "GSK's results have again failed to inspire. Europe continues to weigh, whilst hoped for new product sales are yet to compensate for disposals and tough comparatives."
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