TLDR; Acute pressures on pricing and profits are not new or unique to Europe. Biopharma leaders must adapt rather than flee for the long-term benefit of the industry and patients.

Bayer recently made no bones about its intention to pull back on Europe.

Stefan Oelrich, head of Bayer’s pharmaceutical division, openly voiced his concerns whilst speaking to the Financial Times at the JP Morgan Healthcare Conference earlier this year. He described Europe as “innovation unfriendly” and said that governments were making “big mistakes” in how they managed healthcare budgets. 

In response, Bayer now plans to deprioritise Europe – which currently contributes 40% of its global sales – and shift its commercial focus to the US and China.

After over a century at the helm of the European pharma, why the change of heart?

Oelrich is not alone in his dissatisfaction. There has been growing mutterings of discontent among biopharma leaders for years, but recent developments may finally have sparked meaningful action. 

A maelstrom of factors is cited as making Europe an increasingly difficult place for pharmaceutical companies to turn a profit: drug pricing squeezes, hiked taxes, stagnant healthcare budgets and sunnier alternative markets. 

Europe’s war on drug prices may have reached a tipping point of tensions with industry.

In early 2023, AbbVie and Lilly pulled out of the UK’s Voluntary Scheme for Branded Medicines Pricing and Access (VPAS), a long-standing agreement between the industry and government with roots going back to the foundation of the NHS. The five-year agreement began in 2019, intended to return a portion of funds back to the NHS when the maximum sales growth (initially capped at 2%) is exceeded.

The VPAS exits follow a surge in repayment rates in 2023 to 26.5% which sent shockwaves through the industry. These hikes were triggered by consecutive years of unusually high sales over the COVID-19 pandemic and post-lockdown boom, distorting the original model. In 2023, this would require participating companies to return almost £3.3bn in sales revenue to the UK government, up from around £0.6bn in 2021 and £1.8bn in 2022.

Not to be outdone, Germany also extended their claim as perhaps the most complicated pricing and reimbursement environment in the world. 

In late 2022, the German parliament accepted the controversial draft Act for the Financial Stabilization of the German Statutory Health Insurance System (GKV-FinStG). This act contains a number of provisions including halving the period of free pricing, increasing the negotiating powers of health insurers, raising mandatory discounts to 12%, stricter pricing in orphan and combination drugs, and extending the ongoing drug price freeze a further five years until the end of 2026.

Elsewhere in Europe, headlines about health systems in funding crisis are all too familiar. France has pledged to reduce its drug budget by about 13% to path a health system at breaking point.

However, the grass is not much greener on the other side of the pond…

The US is also undergoing the most significant pricing reform for decades, including introducing the new Inflation Reduction Act (IRA) in 2022. The urgency is clear, as the US currently pays roughly 2.5 times the average drug price among other major global markets. Over the coming years, the US government will now have the power to negotiate prices on some of the most expensive treatments under Medicare, fix annual out-of-pocket costs for 64 million patients at $2,000, and penalise companies that raise prices above inflation.

Unsurprisingly, the industry is looking to blunt these changes. Speaking to investors in February, Novartis CEO Vas Narasimhan hinted at legislative measures against these new laws, stating that they would lead to “unintended long-term innovation distortion”.

What does this mean for the commercialisation of novel medicines in Europe and globally?

Biopharma leaders must consider the impact to established medicines and new launches, with several emerging models for global commercialisation:

  1. Where smaller innovators flee, big pharma can serve as a gateway to Europe

Smaller innovative biotechs looking for a high price tag may well steer clear of Europe in future launches for fear of being burned.  

Back in March 2022, Boston-based Bluebird Bio pulled it’s one-off gene therapy for beta thalassaemia Zynteglo from the European market the German government could not be persuaded to cover its $1.8 million price tag, having recently launched the same drug in the US priced at $2.8 million. The saga prompted Bluebird’s leadership to wind down European operations, calling the situation “untenable” and stating “there is an element of the European system that’s frankly broken”.  

Pricing pressures aside, building an operation to tackle the web of idiosyncratic access, reimbursement and commercial pathways in Europe is a costly endeavour for any biotech. If the reward is unclear at the end of that journey, they may be disincentivised from trying altogether. 

On the reverse side, the hesitancy of smaller innovators could present ripe partnering opportunities for larger biopharma companies to navigate Europe (and swallow the shorter margins) on their behalf using their existing operations.

  1. European innovation is an essential ingredient for sustainable and lucrative pipelines

Europe is undoubtedly a fertile ground for life science innovation, with around 20% of the world’s publications come out of this region.

This strength in European science has been particularly apparent in recent years, where home-grown vaccines and treatments from Pfizer/BioNtech, Oxford/AstraZeneca and GSK all played a global role in addressing the COVID-19 pandemic crisis. A boom in biotech IPOs followed. However, the vast majority went public on the US NASDAQ.

Maintaining a sustainable pharma business is built on a strong and deep pipeline. With the immediate focus being on pricing pressures and profitability, it is important biopharma leaders maintain the channels and infrastructure to tap into early scientific progress in Europe. Pulling back entirely may prove to be a short-minded strategy at a time when many industry leaders are hungry to refresh their early pipelines.

  1. Lean operating models can help extract maximum value from Europe

Despite a disincentive to build an operational footprint in Europe, biopharma leaders still recognise the value in launching in Europe but minimising their operational commitments. 

Pharma companies are also traditionally lumbering behemoths with significant headcount. An alternative to the traditional ‘brick-and-mortar’ model is the potential for ‘virtual’ pharma companies (VPC). Within these VPCs, a small core group of employees is responsible for strategic, regulatory and financial management, with all non-core business functions outsourced. 

The little-known Debiopharm is one such success story among VPCs. Founded in 1979 in Lausanne Switzerland, it operates a fully virtual R&D model for drug development and in-licensing. It boasts one of the highest revenue rates earned per employee across pharma companies, with an estimated value of $2.3 million per employee, roughly 5x the industry average. 

Other more familiar names all started life as VPCs, including Genentech and Vertex. The need to better control costs and extract the maximum profit from Europe could lead large pharma players to revisit similar virtual models.

Similarly, international supply chains will be key for unlocking European markets without huge spend on infrastructure. For example, Bluebird CEO Andrew Obenshain has previously hinted at a return to Europe if manufacturing costs can be brought down by achieving scalability, but any manufacturing would still be based in the US.

Nothing is certain in life sciences accept death, taxes and pricing reform.

Whilst declarations such as Bayer’s may be bold, the downward trend of drug pricing is not a new one and it is not confined to Europe, with the US also implementing new measures. There is nowhere to hide from pricing reform. 

Biopharma commercial leaders must therefore shoulder the responsibility of navigating these pressures and developing models for efficient, timely commercialisation of new medicines for the long-term benefit of our industry and (most importantly) patients.