INTRODUCTION

In January 2007 the European Union expanded by another two members which will add more diversity to the European market and healthcare policy fragmentation. Forced to harmonise with the acquis communautaire by the uneasy process of accession, Bulgaria and Romania strived to implement the EU pharmaceutical legislation regarding drugs regulation and control well ahead of the old 15 and the new ten EU members. Nevertheless, the area of pricing and reimbursement policies in the EU still remains fragmented and under the sovereign of the national healthcare institutions and governments, pursuant to different budgets, search costs and supply constraints. The political idea of a single and competitive EU market providing timely access to market for generics will continue to fuel healthcare and pricing policies harmonisation across Europe, as is happening in recently acceded ten plus two new EU member states from Central and Eastern Europe. Generic companies should, however, still have in mind both local and global market constraints and opportunities emerging out of national pricing and reimbursement policies in order to retain their regional market position and ensure long-term sales growth.

Although this paper has a descriptive character, the readers should bear in mind the following analytical and strategic aspects of price as one of the major market attributes of the pharmaceutical products:

1. Price is traditionally viewed as a competitive advantage tool but, as price competition is leading to higher levels of price erosion, companies must convert their old pricing strategies to newer and more flexible models which should on one hand follow pricing policies and on the other, add new value to the different consumer groups and at the same time create a sustainable future for the generic companies.
2. Branded generics still get higher profit margins in CEE markets compared to International Nonproprietary Names (INN) generics which compete solely by differential pricing and cannot build up upon brand tactics. Brand names in the new accession countries are still being used for both retaining customer loyalty by well-known locally produced generic brands from the ex-socialistic past, and to build customer awareness about newly registered generics. (CEE countries used to be traditionally branded generics markets but will this last for long?)
3. The rising need of effective cost containment measures will lead soon to the wide spreading of the INN prescribing and substitution policy model. As prompted by the annual EGA 2005 Market Review on the European generics market, doctors are assisted to prescribe generics by their health authorities in 44 per cent of the countries (including new and candidate members). Also, the review finds that 70 per cent of the countries have legally permitted generic substitution. In 59 per cent of the countries, pharmacists have to dispense generic products if a doctor prescribes using INN.
4. This is the beginning of the end of the branded generics prescription market in CEE. Healthcare finance policy advisors are pressing governments to adopt more cost effective measures in order to cope with the budget deficits. The INN prescribing and substitution as a tool to drive prices down works well enough in developed markets like the UK and Germany and this example is quite appealing especially for transition countries with high budget constraints.

REFORMING HEALTHCARE POLICIES ON PRICING AND REIMBURSEMENT—A REVOLUTIONARY OR AN EVOLUTIONARY PROCESS?

Pricing as a political phenomenon

Pricing and reimbursement policies naturally evoked and developed in western Europe as an evolutionary economics process, but it was not the case with countries from CEE that used to have a planned socialistic type of economy. After the falling of the Berlin wall in 1989 many of these countries were facing a political and economic bankruptcy and had to draw an end to the 'developed socialism' and start a large reformation revolution in every single sector of their economic and political being. The national healthcare systems were also affected deeply by this major change and still continue to be in process of structural and political transformation. Clearly this means that there is still a lot to be done regarding deregulation of the health insurance sector, hospital decentralisation and privatisation, modernisation of pricing and reimbursement policies, and change of payment and budgetary administration models.

Permanand and Mossialos¹ highlighted in a discussion paper titled 'Theorising the Development of the European Union Framework for Pharmaceutical Regulation', that the first major push for a 'European' dimension to Member State pricing methodologies was Directive 89/105/EEC which came into force in early 1990, and was designed to assure open and verifiable criteria in Member State pricing and reimbursement decisions within their healthcare systems. This was to ensure that national policies did not represent any restrictions on trade and to promote further the idea of the single EU market. The Directive aimed to set transnational standards regarding harmonised and transparent decisions on pricing applications so that the national price regulation systems did not hinder timely access to market.

Permanand and Mossialos, however, conclude that the European Commission accepted that national differences, such as in per capita income and healthcare systems meant that price harmonisation were at that stage 'not realistic'. Therefore, the Directive followed the idea that it had to facilitate mainly progress towards policies convergence, taking into account the national differences, and was set up as an initial move towards price harmonisation between all member states as the first major step with more to follow in future.

The result of the efforts of the European Commission to converge different member states pharmaceutical policies has lead now to the G-10 High Level Group follow-up initiative — the Pharmaceutical Forum, which has set up three working groups — a relative effectiveness group, a patients' information group and a pricing working group, all of which aim to continue to pursue the G-10 recommendations to encourage innovation and competitiveness and ensure public health and social imperatives towards a harmonised regulation and access to markets, thereby improving the EU science base and ensure safety and effective medicines for patients.

The Working Group on Pricing was designed to ensure control of pharmaceutical expenditure while respecting the Member States competencies and differences, ensure equitable and rapid access of patients to medicines throughout the EU, and come to more competitive and dynamic market mechanisms ensuring reward for Innovation.²

Pricing as a socio-economic phenomenon

Timing of pricing and reimbursement has an impact on cost and is critical for timely access to market and reward for innovation, and provides significant value to different patient groups. In New Accession Countries (NAC) healthcare policies implement cross-national mechanisms like parallel trade and international reference pricing, though they bare the challenges of meeting and balance expectations on pricing from the major stakeholders — payors, patients and industry.

Most of the cost containment measures that NAC have been trying to implement are therapeutic class reference pricing and cross-border reference pricing, positive and reimbursement lists, price cuts and promotion of parallel import, co-payment increase, reduction of margins of intermediaries and taxation. Although there are no official legal provisions for generic prescribing and substitution, the latter happens very often at the point of sale, reflecting differences in patient therapeutic needs and their financial profiles.

Having financially unstable healthcare systems, which are still in a process of reform, NAC will soon begin to consider issues like implementing efficient generic substitution models and prescription guidelines, liberalising the private health insurance sector, increase transparency and comparability of price levels and distribution margins, address adequately inequality of timing of availability, implement free pricing for non-reimbursed medicines (not only for over-the-counter medicines) and proven models for state budget control.

All of the above measures will increase price pressure both on generics and originator brands on one hand, but on the other, it will develop incentives and opportunities to increase both the volumes of generics sold and public demand for cost-effective medicines.

Licensing regimes

Bulgaria

The current pricing and reimbursement process in Bulgaria is shown in Figure 1. After obtaining Marketing Authorisation (MA) the applicant has to apply for a 'ceiling' price to the price commission in the Ministry of Health. The application then goes to the positive commission for an inclusion decision, after which the MA holders negotiate a reimbursement price. The applicant will then finally get reimbursed by the National Health Insurance Fund (NHIF) which is the only funding body in the country. The new pharma legislation sets the framework for merging steps 3 and 4 which will significantly decrease current time delays of access to market for new generic applications.

Figure 1.

Pricing and reimbursement process model in Bulgaria

Full figure and legend (19K)

The 'ceiling' price for prescription medicines should not be higher than the lowest registered price in nine cross-reference countries, which at the present time are Austria, Spain, Poland, Portugal, Russia, Romania, Slovakia, Hungary and the Czech Republic.

The regressive pricing system defines margins for the wholesaler from 10 to 9 or 7 per cent, and the margins for the retailer regress from 28 to 25 then 20 per cent depending on preliminary set price levels. The ceiling price is calculated as the sum of the manufacturer's price and wholesaler's and pharmacy's margins. The over-the-counter drugs are freely priced and are subject only to inclusion in the official price register.³

Table 1 shows the number of drug applications and inclusions in the Positive Drug List for 2004 in Bulgaria. All of the included drugs in the list were subject to another application process for inclusion in the then Reimbursed Drug List and for setting a reimbursement price.

Table 1 - The Bulgarian positive drugs list — 2004.

Full table

Pricing for reimbursement of prescription generic medicines in Bulgaria is managed through a national reference pricing system. Similar to that when setting the ceiling price, reference prices for generics are cross-referenced with the Czech Republic, Greece, Hungary, Latvia, Poland, Romania, the Slovak Republic and Slovenia.

The reference price is established according to the active substance and by pharmacological class and is based on the lowest priced INN offered through a negotiation process between Marketing Authorisation Holders and the National Health Insurance Fund. The reference price is fixed on a price per dosage unit. There is also patient co-payment on medicines which is equivalent to the difference above the reference price. Prescribing doctors are not encouraged to prescribe generics and no incentives are given to them to do so. The government has not yet taken any legal measures to stimulate prescribing and dispensing of generics, except by public talks and health policy conferences. The prescribing doctors are not yet legally required to prescribe using INN, and most often trade names are used and are also heavily advertised.

By law, generic substitution is not permitted in Bulgaria. In practice, however, when a doctor prescribes a branded off-patent product or a branded generic product, the pharmacist can substitute with any generic product available without reference to the doctor. The pharmacist is not rewarded if a less expensive generic has been substituted. Therapeutic substitution also occurs and can be driven either by doctor and pharmacist decision, or from the patient's request.

Romania

In Romania, the Ministry of Health establishes and controls the prices, sets the reference price and the reimbursement percentage, which differs from Bulgaria where the NHIF negotiates prices and sets the reimbursement percentage. Pricing margins for wholesalers and retailers in Romania are similar to those in Bulgaria, and can reach up to 29 or 31 per cent respectively for generic or originator brands.

Pricing and reimbursement for prescription generic drugs in Romania are regulated by the National Drug Agency (ANM) and are managed again through a reference pricing system. When setting a reference price for a generic, reference is made to Czech Republic, Hungary, Poland, Bulgaria, Slovak Republic, Slovenia, Croatia, Germany, Austria and Denmark and is based on the lowest priced INN and is fixed on a price per package basis.

In Romania like in Bulgaria patients must co-pay the difference above the reference price with two categories of co-payment 50 and 35 per cent. Here again, doctors are not legally required to prescribe by INN and again are not assisted in their generic prescribing.

By law, generic substitution is permitted in Romania. When a doctor prescribes a branded off-patent product or a branded generic, the pharmacist must substitute with the cheapest product available. The pharmacist, however, does not receive any reward for substitution and no form of therapeutic substitution is allowed.

Slovenia, Poland, Croatia and Turkey

It is interesting to parallel the situation in Bulgaria and Romania with that in Slovenia and Poland which joined the EU in 2004 and which have gained more experience with these issues, and with Croatia and Turkey that have recently started their negotiations for accession in the EU.

In Slovenia and Poland, pricing and reimbursement for prescription generics are also managed through a reference pricing system. The reference price in both countries is based again on the lowest priced INN. Patients co-pay the difference in price above the reference price. The countries to which Slovenia makes cross-reference when setting the reference price for a generic are France, Italy and Germany. Prescribing doctors are not encouraged to prescribe generics and are not legally required nor encouraged to prescribe by INN. Generic substitution is permitted in Slovenia but the pharmacist again is not rewarded if he or she substitutes with a cheaper generic. The generic pricing systems in Slovenia and Poland are price-regulated for reimbursed drugs. A company may set its price freely if it does not want to get its drug included in the reimbursement list.

The pricing systems in Croatia and Turkey are also price-regulated and prices are cross-referenced to a group of different other European countries. In Croatia, the prices of generics are based on an average of three EU countries — Italy, France and Slovenia, and on a percentage below the originator. The first generic available will have the price set 15 per cent below the originator and each subsequent generic will be 10 per cent below the previous generic on the Croatian Positive list. Prices are also regulated through negotiations with the government. In Turkey the cross-reference has to be based on countries which are selected by the Ministry of Health every year and the price is based on the lowest priced INN, and has to be 20 per cent below the reference product price. For 2005 these were France, Spain, Italy, Portugal and Greece. Reimbursement is done through an insurance model based on the cheapest medicine included in the Ministry of Health's Drugs List plus 30 per cent of that price.

Patient co-payment is based on a percentage of cost of medicines. Turkey has set 20 per cent co-payment for the employed and 10 per cent for pensioners. Doctors are not encouraged to prescribe generics and there are not any measures to stimulate prescribing and dispensing of generics. Prescribing doctors are neither legally required nor encouraged to prescribe using INN. Generic substitution is legally permitted in Croatia but the pharmacist is not rewarded for substituting with a cheaper generic.

LEGISLATION HARMONISATION AND ITS IMPACT ON HEALTHCARE POLICY ON PRICING AND REIMBURSEMENT

Apart from the direct transposition of EU medicines legislation into national law, healthcare policy, pricing and reimbursement remain, as stated above, in the realms of local policy and decision makers like government, the Ministry of Health, National Drug Agencies and National Health Insurance Funds.

Although the harmonisation process has no direct impact on the pricing policies, its indirect influence, linked with the transitional reform of the healthcare systems in NAC should be well acknowledged. The pricing control frame, being included in new national legislations reflects more or less the general policy direction, and is derived by the need of implementation of restrictive and cost containment measures to maintain the narrow healthcare budgets and cope with constant deficiencies in the healthcare systems.

Indeed, the major problem of the national healthcare policies that is addressed as the main challenge is the lack of sufficient budgetary resources which is an average of 4.2 per cent of the Gross Domestic Product (GDP) for the last six years in Bulgaria. In Romania the budget assigned to the healthcare system accounts for 3.6 per cent of GDP, as compared to an average of 5.3 per cent in Central and Eastern European countries, and 8.5 per cent in the old EU member states. The subsidised consumption of pharmaceuticals in both countries is limited by the state budget to approximately 40 per capita, with overall of about 100 for healthcare expenses per capita per year.

In 1995, with the adoption of the Human Medicines and Pharmacies Act, and later with its amendment in 2003, Bulgaria managed to gradually phase in with the harmonisation process introducing all relevant EU pharma directives and regulations, and without any transition periods for the local industry and the consumers. Together with implementation of the data exclusivity 8+2+1 rule and Bolar provisions as in Directive 2004/27/EC, some of the other key changes drafted in the final project for the amendment of the current legislation include updating of the Reimbursement List twice a year, merging the Positive and Reimbursement Lists into a single formulary of all subsidised medicines in the country, implementing a cost-containment system based on pharmaco-economic analysis and evaluation of drugs, optimisation of the process of newly registered drugs timely access to market, application for price registration and inclusion in the reimbursement list processed in one single step and discontinuation of patent linkage practice.⁴

A new chapter in the law is to regulate parallel imports, which are viewed as a market mechanism to assist the implementation of price cutting and price equalisation government policies. The chapter on prices of medicinal products specifies a mechanism of regulation of prices and working out of a single Positive List as one simplified system of timely access to market and the healthcare system. In addition, it settles the Positive List main parts, defines Positive List inclusion criteria and implements Council Directive 89/105 in terms of transparency.⁵

The process of amending the medicinal products legislation in Romania started in 1990, and has been stimulated by major events occurring afterwards, for example the signing of the European Agreement on 1st February, 1993, official launch of negotiations for Romania's accession to the European Union on 15th February, 2000 and signing of the Accession Treaty on 25th April, 2005. The draft of the new law was included as Title XVII-Medicinal Products in the legislative package entitled 'The Law on HealthCare Reform' in December 2006, and approved by the Parliament in February 2006. The new legislation introduced the 210 days deadline for resolution of applications for Marketing Authorisation, the 8+2+1 formula for data exclusivity, and all other provisions relevant to EU pharmaceutical Directives and Regulations. Pricing is included but still it retains its specific national character.⁶

CHALLENGES AND OPPORTUNITIES FOR GENERICS COMPANIES

During the last six years, the Bulgarian pharmaceutical market reacted with an increased competition by foreign multinationals and generic entrants reaching value share of 75 per cent of total of the 400m 2005 ex-manufacturer price (EX-MNF) market and 40 per cent in volume, a decreasing consumption of local generic brands equal to 25 per cent in value and to 60 per cent in volume, and a drugs budget deficit of 200m out of the allocated 2.2 per cent of GDP. The overall drugs consumption has grown more than three times between 1999 and 2005 reaching retail figures for 2005 of nearly 640m (Table 2).⁷

Table 2 - Bulgarian and Romanian drugs markets — 2005.

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Perspectives for the generic industry

In both countries and all other CEE states, the healthcare gap between scarce budget resources and consumers' rising demands creates a generics friendly environment, but also presents a double-edged effect: on one hand, it raises the opportunities to increase substantially the reimbursed volumes and on the other, it increases the price pressures due to the tighter cost containment measures by the system. The Reference pricing system provides for more severe price competition between generics which will continue to rely on their branded status in order to retain a relatively higher profit margin. As profit margins narrow products will become unbranded — usually INN+company name (umbrella generics), and profits will rely much more on the volumes sold. Only new generics which are among the first on the market will continue to compete successfully under newly invented (or fantasy) brand names. OTC switches are another marketing tactic that seeks to prolong the lifecycle and profitability of the branded generic product depending on free pricing, brand competition and a consumer-based approach.

Prices will continue to erode also as new global generic players from North America and Asia, which are keen to enter the market pool of the new accession countries, bring rich portfolios and leading products which are coming off patent within their generics pipelines, and this will inevitably and abruptly alter the current status of the domestic companies landscape. This will also lead to further intense consolidation through M&A and newer partnership alliances. Global companies like the Icelandic Actavis, the Czech Zentiva, the Indian Ranbaxy and Cipla have made their way by aggressive acquisitions and strategic partnerships throughout the CEE region. Actavis, Zentiva and Ranbaxy, recently took over respectively the Romanian companies Sindan, Sycomed, Therapia. Cipla entered into a partnership deal with the Bulgarian company Medica in the past year while the largest domestic generic medicines company, Sopharma, is still remaining open to offers while its shares continue to attract investors' interest on the national Stock Exchange with 86 per cent annual growth in 2006 compared to the previous year.

Both markets are growing faster than many other EU countries as their economies are regaining strength after years of recession, and the buying power of consumers and government payers rises. Table 3 shows that Bulgaria and Romania outpace Hungary, Slovenia, Croatia, Poland and the Czech Republic in expected 2007 GDP growth of respectively 6.0 and 5.8 per cent, while Table 4 shows that healthcare expenditure (as a proportion of total household expenditure) in Bulgaria has increased year on year for the last six years.

Table 3 - GDP growth — Eurostat 2007 forecast.

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Table 4 - Healthcare expenditure in Bulgaria as proportion of overall household expenditure per capita (% increase from previous year).

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Taken together, as is shown in Table 5, Bulgaria and Romania will add about 15 per cent to the Central and East European-regulated drugs market and will present a favourable environment as reference member states of choice for first registration in EU under the Mutual Recognition Procedure (MRP). Generic medicines penetration will be more successful if the both countries find legislative ways to liberalise price regulation.⁸

Table 5 - Bulgarian and Romanian share of the 2005 CEE regulated drugs market.

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CONCLUSION

Simoens and De Coster⁹ insist in their report that the ability of the generic medicines industry to deliver competitive prices can only be achieved and sustained if it is ensured a high volume of the pharmaceutical market, and that countries with mature generic medicines markets provide incentives for physicians, pharmacists and patients to demand generic medicines instead of their branded referent products, while in countries with developing generic medicines markets, there are few incentives to stimulate generic medicines consumption.

Although the above statement is fully acceptable and widely observed, the cases of Bulgaria and Romania both present, in sharp contrast, an important policy paradox typical for most of the new member states being countries with traditional generics markets for decades on one hand, but they do not have incentives to stimulate generic consumption on the other, mainly due to their former political and economic statuses when competition was barred and there was no need of such policy measures. This explains why we see that the reference pricing system based on the lowest generic and differential co-payments as the major cost containment strategies which should drive prices down and aid generic penetration. The deregulation of OTC prices and the delisting of non-prescription medicines from the reimbursed lists are another way to decrease budget cost burdens. The pharmaceutical policy in the EU-25 has, however, continued to be restrictive on the supply-side and is moving gradually towards improving efficiency and value for money, employing more sophisticated pharmaco-economic analyses, which, if viewed as a trend is affecting also countries like Bulgaria and Romania.

Kanavos and Gemmill¹⁰ argue that the 'explicit introduction of health economic criteria, and cost consequences criteria in the decision-making process, as decision-makers are increasingly interested in maximising value from healthcare investment and value for money altogether can now be acknowledged as an universal trend in Europe and is applied in different ways by different countries'. And this only comes in time to support the importance and wide spreading of the health economics criteria as a major tool in the visible hand of the policy institutions, which anyone from industry should include as a key factor in their future pricing and reimbursement strategies.

Healthcare costs are under increased pressure in the whole of Europe and especially in transition countries such as Bulgaria and Romania, and this will force governments to introduce more price cutting measures. As the Central and Eastern European market is already largely generic, this segment will continue its firm growth in the following years driven by the traditional consumption behaviour model and by the increasing public awareness and demand for cost effective medicines. This will lead to more local and cross-border consolidation and to new and innovative marketing and strategic reaction by the generic companies in response to the constraints set up by the governments healthcare policies on pricing and reimbursement.

References

1. Permanand, G. & Mossialos, E. (2004). Theorising the development of the European Union framework for pharmaceutical regulation. Discussion paper Number 13, LSE Health and Social Care, London, pp. 28–30.
2. Siebert, C. (2006). Generic medicines policies in the EU and the role of the Pharmaceutical forum. Presentation at EGA seminar on 'Generics Medicines and Pricing and Reimbursement Systems in Europe', 6th April, 2006, Brussels, Belgium.
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