In the European Commission’s enterprise directorate in Brussels, offices have emptied in recent months as officials who once handled relations with the pharmaceuticals industry shifted to other posts, while those who remain have been seconded to deal with the eurozone crisis in Greece.

Their disappearance – as overall responsibility for medicines and medical devices has shifted to the health directorate of the European Union’s executive arm – symbolises what many see as a broader switch away from a strategic vision for innovation in Europe’s life sciences, as a plank of economic growth and improved healthcare for its citizens.

Recent scares including deaths linked to Mediator, a diabetes drug made by Servier of France, and the faulty breast implants of PIP, another French company, have boosted a drive for tougher EU regulation. That has compounded the effects of the shorter-term pressures on prices, purchasing and payment caused by the financial crisis, at a time when the medical devices and drugs sectors globally are cutting jobs as they tackle underlying productivity problems.

With taxpayer-funded national health systems the norm in Europe and their budgets now squeezed, many are refusing to pay for some expensive newer drugs to be prescribed. Industry executives and national and European policymakers alike are struggling to balance conflicting demands that risk jeopardising Europe’s historical role as a centre of worldwide investment, innovation and high-quality healthcare.

“There’s a real danger of Europe losing its competitiveness in pharmaceuticals,” says Prof Fabio Pammiolli, at the IMT Institute for Advanced Studies in Lucca, Italy, and author of an EU-funded study on the subject. “The macroeconomic challenge is putting pressure on healthcare systems funded in a way that is unsustainable.”

For much of the 20th century Europe was the “world’s pharmacy”, producing life-saving and life-extending medicines through companies such as Merck of Germany, which traces its roots to 1668. The pharmaceutical sector alone accounts for 640,000 jobs across the EU, invests €27bn a year in research – one-fifth of all private R&D – and accounts for a significant share of manufacturing exports. Yet that is changing fast. The share of global medical research investment in Europe has been falling, as has the worldwide proportion of clinical trials to test new products in patients. With it, access to new drugs and doctors’ familiarity with the most innovative medical approaches are coming under threat.

UK company AstraZeneca this month joined a growing batch of drug companies announcing job cuts in Europe, including the closure of a landmark research centre in Sweden, as part of a worldwide programme of 7,300 positions to be axed. Others, including Sanofi of France, have taken similar measures.

Many of these decisions reflect pressures far beyond Europe’s boundaries. The cost of launching medicines has risen sharply in recent years and, despite repeated tinkering with management models, there has been scant sign so far of any compensatory rise in productivity. Research and development departments that were long shielded from the cuts companies have made in administration and marketing are now feeling the squeeze.

Ian Read, the Scottish-born chief executive of Pfizer of the US, who a year ago caused shock in the UK life-science sector by closing its longstanding research centre at Sandwich in Kent, stresses: “You need to do R&D where you believe you have the competitive advantage. The Sandwich closure was not driven by the UK being an unwelcome place, but it was working in difficult therapy areas.”

But at a time when companies are looking for ways to boost efficiency, Europe’s attractiveness as a location for medical innovation has come under the microscope. Emerging economies led by China not only offer fast-growing markets for medicines but are also investing heavily in science and cultivating western companies.

Joe Jimenez, chief executive of Novartis of Switzerland, which has been building a presence in both Russia and China in recent years, says Europe remains a central pillar for his company but adds: “In Asia there is a lot of money, and governments are trying to attract R&D at the same time as there is a squeeze in Europe. We go where the talent is.”

At the turn of the millennium, much rhetoric in the EU focused on the life-science sector as a pivotal part of the “Lisbon agenda”, a programme for stimulating innovation. The Commission hosted a high-level “pharmaceutical forum”, and there was discussion of bold reforms including more flexible pricing designed more fairly to reward companies that produced effective treatments.

But since 2008, attention has turned instead to more short-term national interests. Greece and Spain have led a pattern of ever longer delays on repayments for medicines used by their health services. Other countries including Portugal, Italy and Ireland have imposed price cuts on new drugs as well as older generic ones. That has a wider knock-on effect, since many nations across Europe and beyond use “reference prices”, linking what they are willing to pay to the rates that are adopted elsewhere.

Even more financially stable countries such as Germany and France are attempting to cut healthcare costs, with aggressive measures imposed to assess the extent of innovation in drugs. France, for instance, last year resolved no longer to pay for Multaq, a heart treatment produced by Sanofi, its own national champion.

“There is no question that austerity programmes will have an impact,” says Chris Viehbacher, Sanofi’s chief executive. “I worry about access to new medicines. The bar has certainly got higher. Every time there is a safety issue, there is always a pendulum swing. France’s decision on Multaq was disappointing. It deprives patients of a treatment option.”

The situation has been compounded since the PIP implants scandal triggered demands for tougher regulation of medical devices – one industry in which the EU has long held a competitive edge over the US. Luciano Cattani, chief executive of Eucomed, the EU trade association for devices, recognises the need for reform but cautions that going too far could destabilise a system that has “ensured a high level of safety and quality while making innovative medical technology available faster than elsewhere in the world”.

Panos Kanavos, a health policy expert at the London School of Economics, says: “It’s a rather perilous situation and it will get worse over the next two to three years. The message around Europe from officials is they don’t give a damn about industry competitiveness. They have fixed budget targets to observe and there is no cross-fertilisation between medicines consumption and innovation.”

For many years, drug companies enjoyed significant profits on sales in Europe. Britain’s GlaxoSmithKline, one of the few pharmaceutical companies to provide such detailed financial information, showed in its 2011 accounts published last week that operating margins in its European region were 55 per cent.

Sir Andrew Witty, GSK chief executive, says: “Europe has been an austere environment, but it’s not the end of the world. It’s not brilliant but it’s not horrible.” Yet his figures show that profits fell more in Europe – down 16 per cent – than anywhere else, while rising modestly in the US and far more significantly in the Asia-Pacific, albeit from a smaller base.

As he told a meeting of analysts, Europe remains an important market but other regions willing to pay for innovation are becoming more significant in determining future priorities: “Given the current propensity not to pay for innovation, Europe will no longer have quite the same capacity to drive the agenda that the Japanese and US markets will.”

Despite the alarm, longer-term efforts to improve Europe’s competitiveness are not yet dead. In Brussels, officials are finalising draft revisions in the current clinical trials directive to cut red tape, which researchers say makes drug testing too costly and is driving it elsewhere.

John Dalli, the health commissioner who will launch proposed new rules on the regulation of medical devices before summer, says: “We have to be sensible in considering the competitiveness of our industry. We depend on innovation. I’m concerned about reference pricing which limits flexibility. Everybody needs to be rational.”

He praises the Innovative Medicines Initiative, jointly funded by industry and the EU, which supports early-stage collaborative research in conjunction with academics. He has championed a project to support research into “healthy ageing”, and another designed to find a new generation of antibiotics. He is also trying to boost co-operation in health technology efforts across Europe.

But his hands are tied by both the budgetary pressures faced by national health ministries and by member states’ resistance to relinquishing powers on health. Prof Pammiolli says similar national interests mean there is more co-operation between individual European academic researchers and their US counterparts than among their cross-border peers within the EU.

Some individual nations are stepping up efforts to attract investment. The UK government is pursuing a “patent box” to offer tax deductions for companies registering their intellectual property in the country. It is promoting “conditional approvals”, designed to allow the sale of experimental drugs more quickly after fewer clinical trials in exchange for closer monitoring of their effects after launch. It also believes more sophisticated computerised records within the National Health Service could provide invaluable data for medical research.

Sir Andrew Dillon, the chief executive of Nice, the UK agency that has sparked industry criticism for its tough scrutiny of the value of new medicines, points out that similar approaches are being adopted from Australia and China to the US: “Companies will increasingly come up against these processes worldwide.”

The tougher conditions currently being faced by European pharmaceutical executives may therefore leave them better prepared than their rivals to weather similar barriers increasingly being erected elsewhere around the world. But even if that places EU-headquartered companies in a good strategic position, there is no guarantee it will translate into more funds, jobs or medicines for Europeans.

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