10 November 2023

European sovereignty

Building a healthcare europe to free it of dependencies and strategic vulnerability

Juliette Cohen

CPRAM Strategist

The Covid crisis has highlighted Europe’s dependence on the supply of certain drugs and on US leadership in research and development of new treatments. Healthcare has thus emerged as one area where Europe needed to regain its strategic autonomy. Yet, the European pharmaceutical industry seems to have been escape the wave of deindustrialisation that has affected Europe since the 1980s: it continues to create jobs and exports steadily increased over the last two decades. It is worth taking stock of the European drug industry and the challenges that it will have to face in the coming years, particularly with China and India emerging as substantial pharma actors.

Key figures of the European pharmaceutical industry in Europe: jobs, exports, R&D

— Strong growth momentum

Since 2015, European pharmaceutical output has expanded strongly, by +8% on annual average, vs. 1% in overall manufacturing respectively. This solid trend masks some less favourable tendencies in certain sub-sectors or countries, in France, for example, where the sector experienced a less rapid growth - at3% on annual average.

— A job-creating sector:

According to EFPIA1 , the European pharmaceutical sector employed 840,000 persons directly in 2022, including 125,000 in research and development. This is rather low compared to European industrial jobs (29 million in 2022), but pharma jobs are skilled jobs. The pharmaceutical sector also generates jobs at other stages of the drug value chain, particularly in logistics and distribution. Moreover, there has been a steep increase in pharma sector employment in the past 30 years – the opposite of what occurred in manufacturing on the whole.

    — An export-intensive sector:

    This is Europe’s second-largest exporting sector after machines & equipment, with almost €260bn in exports in 2022, or 11% of the EU’s total. The pharma sector’s net exports came to €162bn in 2022 and have risen constantly over the past 25 years. The top five European drug exporting countries are Ireland (€53bn), Switzerland (€47bn), Germany (€28bn), Netherlands (€14bn) and Denmark (€16bn). Moreover, the sector is closely intertwined with global supply chains and also imports large amounts of drugs and vaccines (€98bn in 2022), including active principals and generics.

      — The importance of research & development

      Pharmaceuticals is one of the most research-intensive of all manufacturing sectors, i.e., with one of the highest ratios of R&D spending to revenues, at about 10%, vs. an average 4% for manufacturing as a whole.

      In 2021, a meta-analysis of many studies2 carried out in the past decade estimated that R&D costs to develop a new compound ranged from €161m to $4.54bn. The range was even higher for certain treatments, such as anticancer treatments. It takes an average of 11.5 years to bring a new compound to market, including numerous intermediate stages to ensure drug safety, including exploratory research, clinical testing, and pre-marketing administrative procedures.

      North America has for many years led clinical research, but Europe slipped from 2nd place to 3rd in 2021, behind Asia. The EU Clinical Trials Regulation (CTR) entered into effect in 2022 with the aim of making Europe more competitive in this area and to ease administrative requirements.

        — A drug market dominated by far by the US

        According to the LEEM3, the global drug market reached $1,291bn in revenues in 2021. The US pharmaceutical market remains the largest by far, accounting for 47.2% of global sales, followed by Europe (24.5% respectively), China (9.7%) and Japan (6.6%).

        Another way of looking at US domination is the fact that among global top 10 drug companies, six are American.

          An increasing role played by emerging economies: India and China

          Emerging market economies have risen spectacularly in the pharmaceutical industry over the past 30 years, so much so that the phenomenon is referred to as “pharmerging”.

          This has resulted in offshoring of basic ingredients, mainly to Asia, both to manufacture drugs in countries where drug demand is up sharply and to take advantage of lower costs. Europe has focused on newer, higher-margin drugs and on biotech products. Subcontracting has also expanded in order to reduce production costs.

          China has focused on manufacturing active principals. Chinese drug exports exceeded $25bn in 2022 and have more than doubled over the past 10 years.

          India has become the leading exporter of finished drugs but it relies on China for 70% of its inputs. Indian drug exports reached $16bn in 2022, i.e. a 60% increase over 10 years. The geographical and industrial fragmentation of drug production is raising risks of tightness and disruptions throughout the value chain. Pharma output in Europe depends on external supplies of active principals and other raw materials, such as excipients, packing and packaging materials and coatings.

          A French Senate report on drug shortages4 estimated that when it comes to active principals of drugs that had come into the public domain, about 80% are made in India and/ or China. The report pointed out that in the 1990s Europe supplied about 80% of the active principals used by its pharma industry. The European Commission, meanwhile, deemed that: “The European Union's increasing dependence on API supplies has led to a partial loss of capability to manufacture active substances independently, which poses a potential threat to public health in the countries of the European Union.”

            — A growing risk of drug shortages

            Shortages have worsened sharply over the past 5 to 10 years and have become very frequent5.

            In fact, 100% of EU countries experienced drug shortages in 2019 and 2020. In 65% of the countries having replied to the survey, more than 200 drugs were reported to be in shortage at the time the survey was conducted, with 8 countries even reporting more than 400 drugs running short. Shortages were mainly in older, off-patent drugs and generics. Those most often in shortage were painkillers, high-blood-pressure drugs, anti-infection drugs and cancer treatments. Shortages lasted an average of 137 days, but Amoxicilline, an antibiotic, for example, has been reported lacking in Spain for more than 13 years.

            Regulating drug prices in order to control healthcare spending has also affected drug availability and production locations. For example, excessively low prices for older drugs and generics have encouraged offshoring of production or priority supplying of markets where prices are higher. Several European countries have authorised price hikes on pharmaceutical products deemed essential to make their markets more attractive to drug manufacturers.

              — Building a healthcare Europe

              The EU intervenes in healthcare only to support memberstates’ policies. This is reflected in the low amount of financing, although the EU’s budget has risen substantially since Covid. Financing of the EU4Health programme for 2021-2027, for example, came to €5.1bn, or 0.8% of the EU’s total budget. The programme’s financing is still far below national budgets (10.9% on average).

              Nevertheless, Covid-19 has highlighted the need for coordination among European countries. It has, in fact, led to the emergence of a “Healthcare Europe”, with priorities being given over to managing public health crises, followed by resolving drug supply issues.

              In healthcare, the EU now intervenes in three key areas:

              • Public healthcare policies: certain public healthcare regulations, including those on tobacco, alcohol or illegal drugs, are based on EU standards.
              • The European Medicines Agency (EMA), which manages drug marketing authorisations, has been handed an expanded role in preventing and managing drug shortages. After an initial emergency response to the Covid crisis, more structural recommendations have been made, first in the Pharmaceutical Strategy for Europe (November 2020), then in dealing with the risks of drug shortages. The main recommendations to member-states include drawing up a list of drugs deemed critical for which producers should have larger rainy-day inventories, the introduction of enhanced reporting of shortages, and increased diversification of supplies for these critical drugs. Meanwhile, contacts are to be facilitated between countries in the event of supply bottlenecks.
              • The Covid crisis led to the creation of the Health Emergency Preparedness and Response Authority (HERA), which works to prevent public-health crises but also manages vulnerabilities and strategic dependencies. The EU is set to release a list of drugs and active principals deemed priority, in order to promote the development of production capacities in Europe. Securing drug supplies has emerged as a new challenge in European sovereignty.

              In 2022, about a dozen European countries launched an Important Project of Common European Interest (IPCEI), whose objectives include the reshoring of production of some drugs to Europe while providing support for innovative technologies.

              Lacking a robust European response, the 4 main memberstates have announced their own action plans to promote or reshore drug production in Europe. In France, it was the “Innovation healthcare 2030” plan, with a €7bn budget. To expand production capacities in France, €800m in public funds has been earmarked and is expected to lead to €1.7bn in total productive investments. A facility to produce paracetamol’s active principal is being built, and about 50 drugs have been earmarked for expansion or reshoring of their production.

              In April 2023, the European Commission presented its pharmaceutical package with seeks to enhance drug access and availability, to combat antimicrobial resistance, while ensuring that the industry remains competitive. It expanded the EMA’s role and streamlined a number of administrative constraints. However, it provided no additional budget dedicated to innovation and expanding EU production capacity.

              In July 2023, 22 member-countries led by Belgium called for a “Critical Medicines Act (CMA)”on the model of what was done for semiconductors and critical raw materials. There are 3 objectives for this strategy: to reverse the general negative trend of declining production of off-patent drugs in Europe, to diversify pharma supply chains, and to guarantee a degree of “strategic autonomy” for certain critical drugs.

              Although the pharmaceutical sector was relatively preserved from the deindustrialization process that affected other parts of European industry over the last decades, it faces several major challenges. Among these are the renewed competition due to new joiners, the need to develop innovation while securing supply chains in essential drugs, the structural needs from the ageing of population, or the inevitable issue of controlling public finances. The Covid crisis has cast light on these challenges and triggered a European response in an area where public policies had been essentially nationally based. While some progress has been made through better European coordination, endowing dedicated and more substantial European budgets appears to be essential in developing an ambitious European healthcare policy.

              1. European Federation of Pharmaceutical Industries and Associations
              2. How Much Does It Cost to Research and Develop a New Drug? A Systematic Review and Assessment. Michael Schlander, Karla Hernandez-Villafuerte, Chih-Yuan Cheng, Jorge Mestre-Ferrandiz, and Michael Baumann. 2021
              3. A French professional association representing drug companies doing business in France
              4. Drug shortage: Seeking the right remedy urgently – Report n° 828 (2022-2023), Volume I, filed on 4 July 2023
              5. PGEU Medicine Shortages Survey 2020 Results
              6. medicines of major therapeutic interest (Médicaments d'intérêt thérapeutique majeur : MITM)

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