Industry Trend Analysis - Macron's Focus On ONDAM To Continue To Challenge Drugmakers - AUG 2017

BMI View : France's pharmaceuticals and healthcare market will benefit from an uptick in economic growth over Macron's presidential term, supported by a pro-business agenda and lower corporation tax. That said, with public debt ballooning to over 97.0% of GDP at the end of 2016, the French government will have to consolidate its budget. Over the long term, cost-containment will remain high on the government ' s agenda and the pharmaceutical market will remain a target of cost containment.

French President Emmanuel Macron's En Marche La Republique (REM) party is set to win a majority in the two-round legislative elections to be held on June 11 and 18. Importantly, an absolute majority in the 577 seat National Assembly will give Macron a strong mandate to push through his ambitious pro-business reform programme, including his plan to boost France's flagging economic output, cut red tape, and reduce labour market rigidities.

Government Committed To Healthcare Spending

The French government committed to health spending and this outlook will remain following the upcoming election - providing revenue-earning opportunities to drugmakers, medical device companies and healthcare service providers. Macron's pro-growth healthcare proposals include a EUR5.0bn (USD5.6bn) investment to support medical technology innovation and new forms of patient care including eHealth and increased patient access to dental, optical and auditory care through reduced patient contributions for dental prostheses, sight-corrective devices and hearing aids with the aim of making these 100% reimbursable by 2022. We note that the incoming government will continue to contribute more to overall healthcare expenditure; however, an ongoing focus on cost containment will mean that government health expenditure as a percentage of total health expenditure will fall over the next decade. Macron is aiming to achieve savings of EUR15bn (USD16.7bn) over five years through a greater focus on preventive medicine and a reduction in hospital-centred care through better access to primary care doctors and other forms of non-hospital care.

We calculate that France's health expenditure reached a value of EUR257bn (USD284bn) in 2016, and this is expected to increase to EUR264bn (USD272bn) in 2017. By 2021, we forecast that overall healthcare spending will reach EUR302bn (USD302bn), experiencing a compound annual growth rate (CAGR) of 3.2% and 1.2% in local currency terms and US dollar terms, respectively. Driven by ageing demographics and rising chronic disease prevalence, by 2026 we expect health spending to reach EUR368bn (USD368bn), posting a 10-year CAGR of 3.7% in local currency terms and 2.6% in US dollar terms. Over the forecast period, government healthcare spending as a proportion of total healthcare spending is to fall from 78% in 2016, to 77% in 2021 and 75% in 2021.

Pharmaceuticals Will Remain A Target Of Cost Containment

France is home to the fifth-biggest pharmaceutical market in the world, and second only to Germany in Europe. High per capita pharmaceutical spending and a strong demand for patented medicines will continue to provide significant revenue-earning opportunities to innovative drugmakers. However, despite the high demand for medicines, government enforcement of cost containment measures targeting the healthcare sector, and in particular pharmaceutical spending, have created challenges for drugmakers. We do not foresee the incoming government relaxing its focus on pharmaceutical cost containment, and therefore companies promoting new medicines will continue to face commercialisation challenges and will need to prove the cost-effectiveness of their products.

The government's Loi de Financement de la Securite Sociale (LFSS - Social Security Finance Act) has consistently made the pharmaceutical industry a prime target for savings in its healthcare budget. Highlighting the extent of the contribution made by pharmaceutical companies to rebalancing the accounts of the L'objectif national des depenses d'assurance maladie (ONDAM - National Goal of Health Insurance Spending), according to the Les entreprises du medicament (pharmaceutical industry association - LEEM), of the EUR10bn (USD11.2bn) in cuts made by the government over a three year period (the ONDAM three-year plan for 2015- 2017), EUR5bn (USD5.6bn) comes from pharmaceutical company contributions.

For 2014, government health expenditure was capped at EUR179.1bn (USD200bn) (a growth rate of 2.4% as opposed to 4% on average over the past 15 years); and for 2015, 2016 and 2017 was capped at 2.1%, 2.0% and 1.9%, respectively. However, in H215 Health Minister Marisol Touraine announced an ONDAM target for 2016 that was 'historically low' - at 1.75% - due to slow progress in ONDAM's objectives for 2015. The Health Ministry also announced its aim to achieve EUR3.4bn in additional savings in 2016 in the health sector, including EUR1bn (USD1.1bn) of expected savings through price reduction of certain health products (medicines and medical devices) and encouraging the use of generics.

The 2017 ONDAM growth target is set at 2.1% (compared to 1.75% originally planned). The LFSS for 2017 has a target of EUR4.05bn (USD4.5bn) in savings, with EUR1.7bn (USD1.9bn) in savings from the pharmaceutical industry (including the price cuts on medicines, the increased use of generic medicines and biosimilars, discounts negotiated with drugmakers and changes to prescribing volumes). Macron has indicated that he will adhere to the current government's ONDAM, which projects annual growth in healthcare spending of 2.3% in the period 2018-2022. Although he hasn't yet elaborated on specific plans for pharmaceutical cost containment, it seems plausible that he will stick to the cost-cutting measures in place for 2017 - especially because of the relative ease with which governments can target the sector, rather than pursuing less politically friendly cuts such as reducing the number of hospital beds or cutting doctor and nurse headcounts.

Innovative Drugmakers To Face A Challenging Business Environment
ONDAM 2017: Savings To Be Generated From The Pharmaceutical Sector (EURmn)
Source: LEEM, BMI

In 2016, France's pharmaceutical market was valued EUR33bn (USD36bn), which is expected to slightly increase in local currency terms to EUR33bn (USD34bn) in 2017. We forecast the French drug market to be valued at EUR35bn (USD35bn) in 2021, experiencing a low compound annual growth rate (CAGR) of 1.3% in local currency terms and -0.7% in US dollar terms. By 2026, we project that France's drug market will reach EUR41bn (USD41bn), posting a 10-year CAGR of 2.3% in local currency terms and 1.2% in US dollar terms.