Greek Debt Crisis Will Test Big Pharma's Rhetoric About Who Pays for "Innovation"

Last Updated May 10, 2010 11:14 AM EDT

Greece will cut the price it pays for drugs by an average of 21.5 percent in efforts to reduce its debts, offering a challenge to companies like Pfizer (PFE), Merck (MRK), and Eli Lilly (LLY) who have previously insisted that patients or governments pay full price for their "innovation."

The Greek pharmaceutical cut could have a dramatic knock-on effect. The Euro zone allows "parallel trade," in which health systems are allowed to buy drugs cheaper in foreign countries and import them for domestic use. In addition, many countries' health systems use other countries' prices as their own benchmarks. Thus European governments could now be pitted in a race to the bottom on drug prices.

The question is, Are drug companies willing to back up their words with actions and withdraw their products from Greece? The events are a warning to managers: Your corporate rhetoric may sound bold when you issue it in times of market placidity. But come a crisis, as the British say, you might be "all mouth and no trousers."

Drug companies don't have a great track record of sticking up for higher prices. Thirty-nine companies once sued South Africa after that country cut the price of HIV drugs. They later backed down.

More recently, Abbott Labs (ABT) threatened to withdraw its products from Thailand over price cuts to the HIV treatment Kaletra, but eventually reached a deal with that country.

This isn't an academic dinner-table debate: Pfizer, Merck, Eli Lilly, and AstraZeneca (AZN) have all previously insisted that government price control threatens drug research innovation. They argue that if they cannot make healthy profits on the drugs they sell, then they cannot reinvest those profits to make the new drugs we'll all need in the future. (The counterpoint to that argument is that there are dozens of countries that have drug price controls and yet companies somehow manage to profit within them anyway.)

Those arguments are about to be put to the test. The Greeks want to cut €1.9 billion in costs from their system. Spain -- a country that may follow Greece into a debt crisis -- has just started a program to switch more patients to generic medicines. Doctors will be given control of prescription budgets, and pharmacists will be given incentives for switching patients off brand names. Germany just strengthened its government's right to negotiate drug prices.

If drug companies abandon Greece, they run the risk of looking cruel -- Greek patients aren't to blame for the crisis. If they stay and continue to be profitable, then we'll know that all that stuff about the price of innovation is bunk.