ANALYSIS-Rule changes rock German generic drugs market
Add comment October 1st, 2007
FRANKFURT, Sept 28 (Reuters) - For foreign manufacturers of generic drugs, Germany has been hard to crack because of its complex regulatory system. All of a sudden the door to Europe’s biggest generics market is open.
Keen to curb rising healthcare costs, the government is for the first time allowing public health insurers to choose cheap drugs for patients through a system of tenders, replacing a structure where doctors or pharmacists made the choice of drug brand.
Stada (STAGn.DE: Quote, Profile, Research), Germany’s third biggest generic drugs maker, announced 230 job cuts and a 29 million euro charge on Friday as a direct result of the policy change, and analysts said the move to so-called discount contracts will reshape the market.
“It will change the industry. It’s a whole new game,” said Martin Possienke, a healthcare analyst at brokerage Equinet.
Possienke said local companies like Stada will have to adjust their business models, cutting marketing expenditure, if they want to survive in this new contract system.
“For Germany, this kind of rebate contract will be the future. I expect other public insurers to follow the example of AOK,” he added.
AOK, Germany’s biggest healthcare insurer, launched two tenders this year to select drug suppliers for the 25 million it covers out of Germany’s 70 million publicly insured persons.
Investors are also closely tracking healthcare policy changes in Germany because its neighbours such as the Netherlands and Austria consider German prices before setting their own.
According to industry tracker IMS, the German generic drugs market is worth about 8 billion euros ($11 billion), compared with consultancy Frost & Sullivan’s $17 billion estimate for Europe.
Top German players did not participate in AOK’s first-round tender early this year for fears of margin erosion.
The absence let companies little known in Germany such as Israel’s Teva (TEVA.O: Quote, Profile, Research) (TEVA.TA: Quote, Profile, Research) and Actavis of Iceland snap up several drug contracts with AOK, giving them a crucial platform to tap into the market in Europe’s biggest economy.
Teva is the world’s biggest generic drugs maker, but is so far only a minor player in Germany.
“It’s great that we are now mentioned at the same time as Stada, ratiopharm and Hexal,” Michael Ewers, general manager of Teva Germany, told Reuters.
“In early 2007, 2006, nobody has compared us with them. We were not present at all,” Ewers said.
Stada, family-owned ratiopharm and Novartis’s (NOVN.VX: Quote, Profile, Research) Hexal unit have dominated Germany’s generic drugs market, where about 85 percent of sales went to public insurers.
While the discount system is a boon for new players, local companies are feeling the pinch and can no longer stay on the sidelines to get a slice of the two-year supply contract.
“You can have as much marketing as you want. But if you aren’t winning our contracts, you have a big problem,” said Christopher Hermann, deputy head of AOK Baden-Wuerttemberg.
“The incentives for companies are different now. The focus is on how big a discount you can provide. In one go, you can secure big volume here,” Hermann told Reuters, adding that everybody had participated in the recent second-round tender.
AOK Baden-Wuerttemberg, AOK’s arm in southwestern Germany, is heading the new tender system and plans to detail the winners
– over 700 discount offers for 83 active pharmaceutical — over 700 discount offers for 83 active pharmaceutical ingredients on tender — next week.
For Teva, which has said it has won “a significant increase” in supply contracts in the second round compared with the first, the time to seize the German market has come.
“We understand the new language better than those ugly words like ‘doctors acquisition’, ‘brand building’,” Ewers said, adding that Teva would expand to cope with the new business.
“We don’t need people from Stada or ratiopharm who used to lobby doctors. We need people from health insurers,” he added.
Stada said last week it had secured less than a third of AOK’s latest drug tender, which disappointed investors.
Equinet analyst Possienke said the deals were not enough to protect Stada’s operating margins in Germany and might not even be enough to maintain a stable revenue level.