The Implications of the EU's Pharmaceutical Reform

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A stock photo shows blue capsules on a conveyor at a pharmaceutical factory.

If approved, a plan to reform the European Union's pharmaceutical rules will create opportunities to improve the bloc's supply chain resilience in the sector, but this could come at the price of higher costs and reduced competitiveness for the industry. In April, the European Commission proposed an overhaul of the bloc's pharmaceutical rules that has since created controversy in the industry. The reform aims to tackle structural and supply chain issues (such as varying access and costs for treatments and drugs between EU countries), while seeking to improve the bloc's capacity to tackle new and old challenges like antimicrobial resistance (AMR) and rare diseases. But industry groups are warning the reform — particularly new rules that would shorten drugmakers' standard period of market exclusivity for new medicines — would dramatically reduce the incentives to invest in Europe, accelerating a trend that has already seen the region lose about a quarter of global research and development (R&D) investment over the past two decades. In fact, in a report published earlier this month, the European Federation of Pharmaceutical Industries and Associations (EFPIA) said that the European Union risks losing 2 billion euros ($2.1 billion) each year in pharmaceutical R&D investment if Brussels' reform plan is ratified.

The most controversial provision of the reform involves taking two years off the 10-year standard regulatory protection period in which drug makers enjoy competition-free market access after launching a new product. The new rules reduce the duration of standard regulatory protection from 10 years to eight years, including six years of data protection and two years of market protection. However, companies that launch their new product in every EU country would gain back those extra two years of protection, in an effort to incentivize innovation and increase access to medications across the bloc. Companies that facilitate comparative clinical trials, launch products that address unmet medical needs, or encourage the development of new indications to treat other diseases would also receive an extra six months to a year of protection. Overall, the creation of incentives rewarding companies that fulfill these key public health objectives would enable drugmakers to achieve a cumulative maximum of up to 12 years of regulatory protection, two more years compared with now. Even if companies forgo these incentives, the reduction of the standard regulatory protection period to eight years would at least enable patients and health systems to gain early access to more affordable treatment options by bringing generics online faster. However, several pharmaceutical companies and industry representatives have argued that this weakening market exclusivity protections could erode the European Union's intellectual property system and deter R&D investment in the bloc.

On Nov. 3, Lars Fruergaard Jorgensen, CEO of Europe's largest drugmaker Novo Nordisk, said his company would accelerate its U.S. expansion at the expense of the European Union unless Brussels changes its plans to reform the bloc's regulatory framework for the pharmaceutical sector, arguing the proposal would create a ''negative ecosystem'' for investment in Europe.
According to EPFIA's report, the European Union's share of global pharmaceutical R&D would fall to 21% by 2040, down from 37% in 2010, if the reform is ratified, as small- and medium-sized companies in the bloc struggle to raise funding.

The reform aims to enhance access to medicines, foster innovation and address growing challenges in the pharmaceutical sector, such as drug shortages and antimicrobial resistance. The plan seeks to establish a unified market for medicines to ensure timely and equitable access to medications for all patients across the European Union. To that end, Brussels' reform proposes creating a system of incentives to reward companies that fulfill public health objectives, such as making medicines available across all member states, developing drugs to address unmet medical needs, conducting comparative clinical trials, and repurposing medicines to treat additional diseases. The proposal also emphasizes transparency in disclosing public funding for research, streamlining procedures, and reducing administrative burdens to expedite processes, particularly for small- and medium-sized enterprises. Moreover, to improve the availability of medicines and guarantee an uninterrupted supply, the proposal mandates companies to develop comprehensive plans to prevent shortages, which would be monitored by national authorities and guided by the European Medicines Agency. Finally, the reform plan stresses the need to address the growing threat of antimicrobial resistance (AMR), which it sets out to do by introducing a ''tradable vouchers'' system, under which developers of innovative and transformative antimicrobials would be granted an additional year of protection from market competition.

A key objective of the proposal is addressing structural issues affecting the bloc's pharmaceutical sector, particularly the profound differences across member states in the availability, affordability and waiting times for treatments and medicinal products. Once the European Medicines Agency (EMA) approves a new drug or treatment, it currently takes an average of 133 days for that product to become publicly available in Germany, while in Romania, the average waiting time is over 900 days, according to data from the European Federation of Pharmaceutical Industries and Associations.

The reform comes as the European Union is trying to achieve greater strategic autonomy in critical sectors, including pharmaceuticals, amid growing global protectionist trends and an increasingly multipolar world. The global supply chain disruptions caused by the COVID-19 pandemic combined with the energy and inflation crises brought on by the war in Ukraine (and, in particular, the loss of Russian gas supplies), highlighted the risks posed by the European Union's reliance on single trading partners, especially those that are not strategically aligned with the bloc (like China and Russia). In this context, the European Union's strategic autonomy goal — which seeks to both reduce the bloc's external dependence on third countries while simultaneously improving its capacity to act as a more unified force on the world stage by enhancing internal cohesion — has become a guiding principle for nearly all recent EU legislation. The reform to the European Union's pharmaceutical legislation largely aligns with this objective by seeking to reduce concentrated import risks and secure supply chains, while also enhancing the competitiveness, innovation and resilience of the bloc's own pharmaceutical sector. The reform also aims to address the challenges and capitalize on the opportunities brought about by an increasingly multipolar world. In doing so, it seeks to address rising geopolitical risks and anticipate potential challenges related to supply chain disruptions and market access, while also creating a more attractive and innovation-friendly framework for the research, development and production of medicines within the European Union.

In May 2023, a group of 19 EU member states — including Belgium, France, Spain and Germany — issued a joint report demanding the European Commission take more ''drastic steps'' to secure Europe's security of vital drug ingredients. The report highlighted how the bloc has become increasingly dependent on imports from a few manufacturers and regions for key pharmaceutical products. The report also showed that, in 2019, more than 40% of the world's active pharmaceutical ingredients (APIs) — the basic ingredients used to make drugs — were sourced from China, and that nearly all API producers, including those in Europe, depended on China for intermediate inputs.
According to a December 2020 study by market research firm IQVIA for the European Fine Chemicals Group, Europe depends on Asia for an estimated 75% of its pharmaceutical ingredients and precursor chemicals, with China sourcing 70% of those supplies.
The COVID-19 pandemic, in particular, exposed serious vulnerabilities in the European Union's pharmaceutical supply chain. As demand for generic medicines surged in the bloc, the pandemic-induced lockdowns and travel bans created a supply crunch due to logistical issues and the closure of key production facilities, while export restrictions from key suppliers like India and China added to the strain. This underscored the need for strengthening preparedness and safeguarding essential drugs and medical products. As a result, the European Union has shifted its focus toward strengthening domestic manufacturing capacities and ensuring an adequate supply of medicines to reduce its reliance on external sources.

If approved, the reform would bring opportunities for innovation and increase supply chain resilience in the European Union's pharmaceutical sector, but companies and member states may struggle to adapt to the sweeping changes. The reform's lengthy negotiation process and constant delays demonstrate the challenges ahead before it can be turned into law. The European Parliament and the European Union Council are currently discussing the text, with interinstitutional negotiations set to intensify in the coming months. However, given the divisions among member states and key stakeholders, a final text for the proposal may not be approved by the next EU elections set for June 2024, and some of its original provisions will likely be further tweaked as well. As it stands, however, the current proposed overhaul of the European Union's pharmaceutical industry poses several key implications:

Reduced market fragmentation may mean greater operational and compliance costs for companies. The new system of incentives rewards pharmaceutical companies that launch their products in all EU markets by offering an extra two years of regulatory protection. By incentivizing companies to make products available across all member states, this requirement could help more evenly distribute medicines throughout the bloc and reduce market fragmentation. But it may also pose significant logistical and administrative hurdles for companies, particularly for smaller ones that do not have the expertise or capacity to navigate often complicated regulatory and reimbursement systems across all EU countries. Pharmaceutical companies would thus face higher operational costs, while smaller developers may be put at a comparative disadvantage.
Difficulties in complying with the new incentive systems may hurt developers' margins or favor generic competitors. The new incentive system will also instill a new sense of urgency for companies to accelerate price negotiations in each of the European Union's member states, as they only have a two-year window available to launch their products across the bloc to qualify for the extended regulatory protection period. This will strengthen EU countries' ability to negotiate lower costs, but may hurt companies' margins. Moreover, if a significant number of companies are unwilling or unable to take advantage of the incentives (which can extend competition-free market access to up to 12 years if all criteria are met), the shorter standard regulatory protection period will benefit cheaper generic distributors selling products where developers aren't taking advantage of the incentives by enabling those distributors to go to market two years earlier than they are currently allowed to.
While they may boost innovation, the measures aimed at tackling antimicrobial resistance and overcoming the associated market constraints could strain member states' health budgets and reduce competition in other market segments. Drug manufacturers are currently not incentivized to create new antibiotics, which requires significant R&D investment for a product that must then be used as sparingly as possible to avoid creating drug resistance, thus cutting into companies' bottom lines. To tackle this challenge, the reform proposal introduces a system of tradable vouchers granting an additional year of competition-free market access to incentivize businesses to invest in new antibiotics. But this will also increase pressure on member states' public health budgets, which will finance these incentives, and reduce cheaper competition for expensive products.
Reduced regulatory burdens for companies could help incentivize innovation. The proposal creates regulatory sandboxes to support the testing of new therapies and medicines, which will offer significant opportunities for businesses to innovate and grow. The same will enable regulators to gain better knowledge of new products at a very early stage of development, which will help them develop better ways to regulate those innovations, possibly leading to a more agile and innovation-friendly regulatory framework.
The measures to improve supply chain resilience would result in higher costs for the pharmaceutical industry. The draft reform includes various proposals to avoid drug shortages, including the prospect for contingency stocks of medicines or intermediate products (which the European Commission may impose on companies and wholesalers in case of emergency), as well as requirements for companies to prepare shortage prevention plans and notify authorities six months ahead of possible supply issues. But while these measures would reduce the risk of drug shortages, they'd also increase redundancies in supply chains, which would increase operating costs and reduce efficiencies for EU pharmaceutical companies, as well as for national and EU regulators.
The European Union would be better equipped to respond to health emergencies. The reform introduces significantly easier procedures to implement compulsory licenses that would allow governments to override drug patents and suspend regulatory data protection to ensure supply during an emergency. This would negatively impact drugmakers in favor of generic competitors that would be able to distribute their products at cheaper prices.
Lower protections for companies could deter investment in the EU pharmaceutical sector. The many new requirements for companies — particularly those weakening market exclusivity protections — could reduce the business attractiveness of the European system vis-a-vis the U.S. and Chinese markets, particularly for high-innovation sectors like the biopharmaceutical industry. Despite the promise of regaining two years of regulatory protection, drug makers may still face constraints in making new medicines available across all EU member states, as poorer and smaller countries often simply cannot afford new products. As a result, pharmaceutical companies may be discouraged from researching and launching treatments in Europe, knowing that they'll be forced to slash their product's price to ensure availability in every EU country, or else face a shorter regulatory protection period. As investments get redirected to other geographical areas, European start-ups in the pharmaceutical sector may also struggle to attract enough capital to launch their businesses in the European Union.