Statement of Pro Generika submitted to the German Ministry of Economics and Technology: “Effects of tendering on the generics industry in Germany“ Generic pharmaceutical companies cover over 70% of the public health insurers’ entire demand for medicines in Germany - with the trend pointing up. Generics hence make an indispensable contribution to sustainable drug supply in Germany. This is borne out by the annual prescription volume of generic drugs: • In 2011, some 450 million generics packs were prescribed to persons covered by public health insurance, which is equivalent to around 28 billion defined daily doses (DDD). In contrast to the essential importance generics have for the supply with medicines in Germany, their relevance for spending is very low. As little as slightly above 10% of the entire drug spendings of public health insurers goes into generics at net exfactory prices (that is, after deduction of all statutory discounts and the revenues from rebate contracts reported by the health insurers; Appendix 1: IGES market development 2005-2011). The gap between the sales volumes and sales revenues of generic pharmaceutical companies in Germany has increasingly widened over the past few years, with the following results: • • Public health insurers have already come to spend distinctly more on the distribution channels of generics than on the generics themselves (remuneration paid to wholesalers and pharmacies). Public health insurers today spend more money on value added tax than on the generics themselves. I. T endering in the healthcare system 1. The scale of tendering in the generics market has reached an absolute high in 2012. By the end of that year, no less than over 65%1 of all generics were traded under rebate contracts, with a strong upward trend. 2. Rebate contracts extend to nearly all segments of the generics market, even to products priced at a very low level anyway: • 1 Public health insurers demand additional price discounts under rebate contracts for over 900 generics out of around 1,000 prescription generics costing less than 89 euro cents (ex-factory). Insight Health, NVI KT, January 28th, 2013 1 Pro Generika Statement for the German Ministry of Economics and Technology: “Effects of discount contract tendering on the generics industry in Germany“ 15/02/2013 The revenues generated by pharmaceutical companies have to be seen in proportion to the ever-increasing administrative expenses caused by the continuing expansion of legal regulations for drug approvals, production, quality monitoring, additional pharmacovigilance rules and rising fees for the European Medicines Agency (EMA). Moreover, the companies’ costs of development, warehousing and logistics are rising. Generic pharmaceutical companies are thereby ever more frequently confronted with the question of whether they are still in a position to recover the cost of marketing certain drugs in Germany. 3. In 2012, there has been an increasing tendency towards tendering starting ever earlier after a drug has gone off patent, often after just a few weeks: • Candesartan, atorvastatin, quetiapine, all active agents that went off patent in 2012, were tendered by public health insurers after just a few weeks. And yet scientific studies (Pharma Sector Inquiry of the EU Commission2 and a study conducted by the IGES Institute in 20113) have clearly shown that it takes one or two years, depending on the active agent in question, until generics competition has fully unfolded. In other words: The earlier health insurers tenders rebate contracts, the narrower is the time window for sustainable generics competition to develop. Tendering has, especially by public health insurers, been dubbed a “successful competition model“ that “opens up the generics market to small businesses in particular“. These assertions entirely fail to bear any scientifically founded scrutiny. The Berlin IGES Institute has conducted an empirical investigation into the effects of tender procedures on the generics market4. According to this investigation, tendering fails to enhance competition in the generics market. The outcome of this study rather says that the intensity of competition in the generics market is governed by how many generic pharmaceutical companies offer their products in the market. The larger their number in a market for a specific active agent, the higher the competition intensity, and the faster the economically desirable level of price competition in favour of the healthcare system will be reached. 4. In a more detailed analysis titled “Generics competition in Germany: Market concentration and rebate contracts“ (IGES Institute, Berlin, 05/04/2012), the IGES Institute came to the pivotal conclusion that the market concentration in the respective active ingredient markets is predominantly very high and has seen another pronounced increase in the past few years as a result of tendering. The number of suppliers operating in the active agent markets plays a leading part in this context: the higher the number of suppliers present in a market, the lower is the market concentration. 2 http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/communication_de.pdf, accessed on 29/01/2013 3 Study conducted by the IGES Institute in 2011, “Generika in Deutschland: Wettbewerb fördern – Wirtschaftlichkeit stärken“ (Generics in Germany: Promoting competition – strengthening economic viability), Berlin, 18 October 2012 4 Study conducted by the IGES Institute in 2011, “Generika in Deutschland: Wettbewerb fördern – Wirtschaftlichkeit stärken“ (Generics in Germany: Promoting competition – strengthening economic viability), Berlin, 18 October 2012 2 Pro Generika Statement for the German Ministry of Economics and Technology: “Effects of discount contract tendering on the generics industry in Germany“ 15/02/2013 5. Public health insurers, pursuing what is a purely cost-focused analysis, tend to disregard the manifold effects tendering procedures have on the pharmaceutical companies. And yet, public health insurers have already seen themselves compelled to terminate rebate contracts as businesses were no longer in a position to deliver at these discount terms. The suppliers in question, however, risk very high contractual penalties in such a case, a phenomenon which has already made pharmaceutical companies refrain from participating in tender procedures. This applies also - and in particular - to small and medium-sized enterprises (SME). 6. Even representatives of public health insurers admit these days that “... the entire competitive action of public health insurers [is] geared to the central objective of not having to levy any extra premium for as long as possible“. (Klaus Jacobs, Managing Director of WIdO, the scientific institute of AOK, in IMPLICONplus 11/2012: 5). This means that public health insurers are exclusively focussed on short-term price rebates in the competition between health insurers, including tendering and therefore losing sight of the adverse effects of this approach. The necessary sustainability of the generics competition plays a subordinate role. 7. Tendering has, however, already caused a measurable and increasing narrowing of the market. A very high market concentration is a trend emerging in numerous active agent markets. However, a very high market concentration is not a feature of competition-based markets. Accordingly, the President of the German Federal Cartel Office, Dr Andreas Mundt, publicly expressed his concern that tendering abets an “oligopolisation” of the generics market5 (Appendix 4). Recent data have furnished proof of this market concentration: a. According to data presented by the market research institute IMS Health, the market concentration is very high in the rebate contract market: Out of the total sales volumes, 72% is accounted for by the top10 manufacturers. b. Additionally, tendering leads to a very high market concentration in active agent markets: For example, only one manufacturer each accounts for market shares as high as 60% for simvastatin, 74.4% for diclofenac and 80.1% for metamizole, all active agents which are important and relevant to ensure basic medical care. 8. Against this background, Pro Generika has expressly welcomed the fact that the Federal Ministry of Economics is now performing a holistic assessment of tendering, and that the Conference of Ministers of Economics of the German states has also espoused this topic. II. Effects of the tender system on generic pharmaceutical companies 5 Mundt, Andreas: Krankenkassen dürfen nicht zu mächtig werden (Public health insurers must not be allowed to become too powerful), interview with the President of the German Cartel Office published by FAZ on 24/06/2012. http://www.faz.net/aktuell/wirtschaft/im-gespraech-kartellamtspraesidentmundt-krankenkassen-duerfen-nicht-zu-maechtig-werden-11797999.html, accessed on 01/02/2013. 3 Pro Generika Statement for the German Ministry of Economics and Technology: “Effects of discount contract tendering on the generics industry in Germany“ 15/02/2013 1. A study commissioned by the EU Commission, “Tender systems for outpatient pharmaceuticals in the European Union: Evidence from the Netherlands and Germany“ which was conducted by the London School of Economics in 2012 (Appendix 2: Tendering report), used empirical analyses of the tendering systems in the Netherlands and Germany to show that tendering very quickly leads to pricing at marginal-cost level. As a consequence, the companies have no funds left to invest in the further development of products or the expansion of production facilities. Even investments of generics manufacturers which are indispensable for the public health insurance system, like those in promising future market segments like biosimilars, are at risk of not being made, the consequence being that sustainable price competition is nipped in the bud in this high-tech segment of pharmaceutical supply. Therefore, the currently existing system of tendering is not sustainable. 2. Generic pharmaceutical companies have been forced to respond to the rising number of rebate contracts tendered, by: a. downsizing their workforce in Germany (e.g. in production, marketing, sales, field staff); b. making their employment contracts more flexible. With rebate contracts usually being termed for two years before they have to be re-awarded, companies have to enter into corresponding agreements with their workers councils and redesign existing employment contracts to make them more flexible. c. relocating their production facilities, especially to non-EU countries. Beyond the production of active agents, this trend towards re-siting also applies to the production of medicines themselves. What is evolving here is a sneaking de-industrialisation of the generics industry in Germany, a trend that reduces the role of the local companies to the one of a mere sales force. d. subjecting all their production processes to permanent review: i. For example, advancements for the benefit of the patient, like scorelines or dosage aids, have to be increasingly abandoned as these would entail higher production costs. Apart from not being rewarded in the rebate contract system, patient convenience has clearly become a cost factor and hence a competitive disadvantage. ii. Pharmaceutical companies have started eliminating generics from their portfolio up to double-digit percentages and withdrawing them from the German market as they are no longer in a position to recover their costs when marketing them in Germany. The enormous, sustained pressure on prices and rebates witnessed in the German generics market for years implies that every single product has to deliver a business case on a stand-alone basis, including in a total-cost-ofownership analysis. iii. Quality assurance systems are being reduced to what is legally mandatory, or, alternatively, they are completely outsourced as a service, especially by SME, in order to scale down their internal infrastructure as much as possible in view of the volatility of rebate contract awards. 4 Pro Generika Statement for the German Ministry of Economics and Technology: “Effects of discount contract tendering on the generics industry in Germany“ 15/02/2013 3. Tendering, especially if performed shortly after patent expiry, makes any market entry unattractive (study conducted by the IGES Institute in 2011, “Generika in Deutschland: Wettbewerb fördern – Wirtschaftlichkeit stärken, (Generics in Germany: Promoting competition – strengthening economic viability), Berlin, 18 October 2012, page 45 et seq.) 4. In an attempt to provide evidence for the purportedly smooth functioning of tendering, public health insurers often argue that many businesses, especially small and medium-sized enterprises, participate in the tender procedures. However, business success is governed, rather than by mere participation, by whether small companies indeed receive an award in a tender procedure. And this is indeed not the case: In the tender procedures performed by AOK alone, the total tendered turnover of medicines goes up to 95% to the top 10 companies (see Appendix 3: IGES 2011). 5. Tendering leaves pharmaceutical companies with tremendously high administrative costs. This impacts all generic pharmaceutical companies: a. The large number of tender procedures (while 987 discount contracts were tendered in 2010, this number had already risen to 1,988 in 2012), the differences in modalities between the tender procedures, as well as the simple activity of submitting quotes in such procedures tie up enormous human resources. b. Time and again, legal disputes on procurement law have to be conducted around the participation in rebate contracts, and solely the costs of these disputes are very high, all the more as many generic pharmaceutical companies are not in a position to maintain internal legal affairs departments (Appendix 5: Number of litigation cases). c. Raw materials have to be purchased subject to minimum quantity orders. If the sale of the ready-made product then depends on an unpredictable award in a tender procedure, the entrepreneurial risk of participating in tender procedures will increase tremendously. This applies in particular to SME. d. Contractual penalties due in the event of the manufacturer’s incapacity to deliver - for whatever reason - additionally keep pharmaceutical companies from taking part in tendering procedures. This is because such incapacity to deliver poses an existential risk to the businesses in the face of the public health insurers’ unremitting moves towards further aggravating the penalty clauses. e. Public health insurer AOK has partly switched away from single slot to multiple slot tender, indicating the increase in delivery problems as a reason. This practice presents a major problem to the pharmaceutical companies because this makes it still more difficult to predict the volumes actually taken off by the market. 5 Pro Generika Statement for the German Ministry of Economics and Technology: “Effects of discount contract tendering on the generics industry in Germany“ 15/02/2013 f. Additionally, it has become evident, particularly in the case of multiple slot tenders, that the established generic pharmaceutical companies boasting a high level of brand awareness receive a significantly higher market share within the awarded slot in comparison with smaller businesses. 6. The tender system leads to major distortions and volatilities in the generics market which cannot be influenced by the generic pharmaceutical companies themselves. The consequence: The enterprises are no longer in a position to plan their business. Due to the conduct of other market players, generic pharmaceutical companies are exposed to the danger of not being capable to deliver and thereby risk high contractual penalties. a. At the beginning of the term of rebate contracts, for example, it often happens that individual market players pile up stocks beyond their actual needs – at volumes normally not predictable for generic pharmaceutical companies. This means the companies are at risk of becoming stock out and being subjected to the resulting penalties. b. If, for example, a rebate contract company fails to deliver, larger volumes of the medicine in question will be requested from another generics supplier. The latter, however, will not have produced these as they had not received the award. Because of this unpredictable and unexpected demand, this company will then in turn be exposed to the risk of not being able to deliver and being fined by the public health insurers with whom they have themselves signed rebate contracts on delivery of this medicine. 7. Public health insurers increasingly tend to fix overly short deadlines between the award of a contract and the start of the contract term/delivery. This confronts enterprises, no matter of what size, with formidable challenges. This is because generic pharmaceutical companies urgently need certainty in planning their business in view of the volumes requested under rebate contracts at the start date. In order to make sure the start volumes are available, generic pharmaceutical companies need six months on average for planning, ordering the charging stock, production, pharmaceutical and regulatory reviews as well as the logistics. According to the targets set by the health insurers, however, they frequently have to be ready to deliver within less than two months. This is more than just a major logistic challenge for these companies. Faced with the enormous pressure for rebates, they can afford it all the less to pre-produce the volumes in question “on spec“. If they fail to get the award, they will not be able to market the volumes put into storage through other channels. Another point is that especially SMEs cannot sell their products on foreign markets as they are lacking a pan-European business organisation. This means their business risk in particular will increase with every tender procedure. 8. Tendering is entirely unsuitable for complex biotech medicines or even sterile products (i.e. medicines produced in a sterile environment). Biologics are produced in living cells. This production process is highly complex and sometimes takes several months. If, for example, production problems or delays caused the unavailability of several batches, no manufacturer would be in a position to produce the additional volumes of this biologic at short notice. 6 Pro Generika Statement for the German Ministry of Economics and Technology: “Effects of discount contract tendering on the generics industry in Germany“ 15/02/2013 This has already been demonstrated by some practical examples: a. The chaotic flu vaccination situation in the 2012/2013 season which resulted from tendering procedures performed by several public health insurers; b. Supply shortages of medicines relevant for general health care due to price pressures from tenders for antibiotics and sterile products (e.g. cytostatics). De facto market entry barriers are also put up by the current tendering of biosimilars as follow-up products to biopharmaceuticals which have gone off patent. This is because the very high investments of the biosimilars manufacturers must pay back fully in a competition environment – in contrast to the situation of the originator who enjoys exclusivity on the basis of patent protection over many years. Germany, however, must see to it that these market barriers to biosimilars are dismantled in the interest of Germany as a place of business, and of sustainable patient care. While Germany and the EU still enjoy a strategic siting advantage in high-tech production, other countries are catching up. III. Increasingly challenging regulatory requirements In the past few years, the EU has adopted two overarching directives6 in the regulatory sector which were transposed into German law by virtue of the latest amendment to the German Medicine Act (AMG) in autumn 2012. They have come with considerable organisational and financial burdens for the pharmaceutical companies. In some respects, they are tantamount to nothing but considerable extra expenses of the pharmaceutical companies without having any positive effects on drug safety (XEVMPD data collection). On top of that, the central European Medicines Agency (EMA) intends to charge very high fees for its regulatory activities in future, especially in the field of pharmacovigilance. The level of these fees is incommensurate with the actual work input of this Agency. According to estimates, they amount to around 0.5% of the annual sales revenues for SME, and to around 0.2% in the case of large companies. These fee rates exceed the figures indicated in the EU7 Impact Assessment of 2008 many times over (by a multiple of up to 12). On the other hand, the €145 million annual savings forecast to be harvested by the industry under the new arrangements of the Pharmacovigilance Directive have not materialised. Pro Generika therefore urgently pleads in favour of subjecting new regulatory stipulations to be adopted by the EU to a much more detailed advance cost-benefit analysis, and of proceeding to a necessary differentiation between active agent categories. 6 7 Pharmacovigilance Directive 2010/84/EU and Falsified Medicines Directive 2011/62/EU Pharmacovigilance Impact Assessment, EU Commission, 2008 7 Pro Generika Statement for the German Ministry of Economics and Technology: “Effects of discount contract tendering on the generics industry in Germany“ 15/02/2013 IV. Assessment The adverse impact of the tender system can be clearly evidenced: The prices at marginal-cost level compare with steeply rising costs due to expanding regulatory requirements and a high administrative effort in handling rebate contracts. This has already impaired the companies‘ capacity to deliver on the basis of rebate terms. The prices at marginal-cost level have - as has already been observed - led to concentration processes at both manufacturer and active agent level. These have had grave adverse consequences on pharmaceutical companies in Germany, especially medium-sized ones. Cost containment instruments should be subjected to a critical scrutiny as far as their impact on the diversity of suppliers is concerned. All available studies have indicated that the tender system leads to an accelerated narrowing of the market and reduced supplier diversity. However, competition and security of supply are built on a shared foundation: the presence of a multitude of suppliers in the market. The current tender system undermines this diversity, endangering the foundations of sustainable supply with medicinal products in Germany in the mid-term. February 15th, 2013 8
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