The current healthcare, regulatory and reimbursement landscape in Italy

This article explores how Italy's austerity measures are damaging overall pharmaceutical market revenue, but will provide a major boost the country's undeveloped generics sector.

Italian pharmaceutical market in decline

Italy's pharmaceutical market is expected to decline in value in the foreseeable future, due to growing government support of generic drug prescribing and a stringent drug pricing policy. Indeed, revenues for the Italian pharmaceutical market are expected to fall from $25.1 billion in 2012 to $23.5 billion in 2020 – a decrease of $1.6 billion in eight years.

Additionally, as a wave of economic turbulence continues to ripple through Europe, the sovereign debt crisis is playing heavily on the strategies of both domestic and multinational companies operating in Italy.

Governmental reforms put pressure on innovative pharma

With economic difficulties providing the catalyst, Italy's government has implemented new plans to contain healthcare spending and reduce the nation's budget deficit. One of the key changes brought into effect is to drug pricing policy: the Italian Medicines Agency (AIFA), which negotiates drug prices through internal and external referencing, will no longer reimburse medicines if the drug manufacturer does not agree with the AIFA's suggested price – substantially restricting market potential.

"...revenues for the Italian pharmaceutical market are expected to fall from $25.1 billion in 2012 to $23.5 billion in 2020..."

Significant savings are also expected to come from growth of the generic drug sector in Italy, which will again prove detrimental to innovative pharmaceutical industry revenues. An austerity package introduced in 2010, which made the reimbursement of the lowest priced generic alternative mandatory, has provided a significant boost to Italy's burgeoning generics market. However, this has been at the detriment to the overall value of the country's drugs market and indeed the integrity of innovative drug manufacturers whose therapies are no longer patent protected.

Italy's generics market set for surge

Traditionally, Italy's generics market is distinct from the rest of the EU in that it is significantly under-developed – generic market share by volume is around 20% in Italy, much lower than in the UK and Germany, where generic uptake is more than 50% by volume. Positioning generics at the lowest possible reference price and a relative scarcity of prescription incentives for physicians are two major issues that have hampered the development of the generic market.

But recent governmental reforms are expected to produce a significant shift towards encouraging generic usage and position Italy closer to its EU neighbours. These reforms include:

• The government policy to promote the usage of generic drugs

• Reforms in the regulatory guidelines that facilitated the entry of more generics

"...Italy's generics market is distinct from the rest of the EU in that it is significantly under-developed..."

• Patent expiries of major drugs, leading to generics entry

• The introduction of generic substitutions for branded products at the pharmacy level

This change of tact will help the government to reduce the growing healthcare budget deficit at the expense of branded pharmaceutical companies operating in Italy, including domestic companies such as Menarini and Recordati, whose strength lies in the market exclusivity and generic insulation of their ageing drug portfolios, as well as major multinationals such as Pfizer and Merck that operate in the region. One thing is certain; Italy's historical prescribing model is unsustainable given the country's economic difficulties, and any steps to facilitate savings will be highly beneficial to the country's healthcare system.

Outstanding drug bills test pharma companies' resolve

While pricing reforms and generic prescribing incentivisation will undoubtedly hurt pharmaceutical companies, the sovereign debt crisis in Italy is already weighing heavily on pharma's operating performance, Italy's main public healthcare body, the Servizio Sanitario Nazionale (SSN), is currently struggling to settle its accounts with major drug companies.

"...the sovereign debt crisis in Italy is already weighing heavily on pharma's operating performance..."

A consequence of these financial conditions is that multinationals are increasingly less inclined to supply costly drugs on credit, leading to drug supply shortages in the region, despite legal requirements to supply life-saving treatments. Existing receivables are being adjusted on balance sheets to account for the delayed payments, notably in the public sector.

For example, Merck & Co. is owed almost $300m in hospital and public sector receivables in Italy and has recently completed non-recourse factorings of approximately $230 million of hospital and public sector receivables in Italy, as well as shifting $500m in overall EU receivables into other assets on its balance sheet.

While companies have to adapt their financial reporting methods, they are on the whole well positioned to absorb the impact of the debt crisis and are not expecting to make significant write-downs that will adversely affect their financial position in the short-term. However, with the aforementioned cost containment efforts already affecting profitability of multinationals in the EU region, the debt crisis is adding to the list of deterrents for companies looking to generate high returns from their innovative drug portfolios. Despite this, the big companies are unlikely to pull out of the region altogether, while generic manufacturers are set to reap rewards from recent reforms.