Germany unveiled plans to cut patented drug prices on Friday, hitting shares in major drugmakers, the latest sign that indebted governments intend to bear down on runaway medical costs.

Drugmakers in Germany will be given the right to charge their own prices on brand-name drugs only in the first year of market launch, according to new proposals unveiled by the German health ministry. After the one-year respite, Germany's health insurers, which spend more than €30 billion on pharmaceuticals each year, would be able to negotiate a discount on the new treatments based on their proven benefits.

The move is part of a drive by health minister Philipp Roesler to save €2 billion in expenses on patented drugs. Drug developers will also have to show in studies that new treatments offer a benefit over existing products, the ministry added, a move that could increase drug development costs.

Bringing a new drug to market already costs more than $1 billion, on average, about a quarter of which is spent in the decisive third and final phase of testing on humans, which is needed to secure regulatory approval. The ministry said Phase III studies might suffice for a cost-benefit analysis but further testing on humans may be warranted in some cases.

"We will see to it that all new and innovative pharmaceuticals will be made available to patients immediately," Roesler said in a statement. "At the same time, we will make sure that pharmaceuticals will stay affordable for people in the future."

Forced discounts of up to 16% and a ban on branded drug price increases would also be put in place to keep health expenses in check, according to the draft law, which should take effect at the beginning of 2011.

What Price Innovation?

Mark Clark, an analyst at Deutsche Bank in London, said the move amounted to an effective price cut of some 10%, since the current discount is 6%, and firms would have the added burden of proving cost benefit in the first year.

"It's a fairly large price cut, but this is what tends to happen when we step out of a recession. You get this tail-end effect in those markets where there is a high proportion of government payment," he said. Similar actions to cut prices or find other ways to cap healthcare bills were taken by Italy, France, Spain and Germany in the early 1990s, Clark noted.

 "There are relatively high prices in Germany, so there is potential for cutbacks," said Stijn Vanacker, a healthcare fund manager at ING Investment Management. "But in the long term, it's detrimental for patients in Germany because it's blocking innovation."

The VFA association of research-based pharmaceutical makers with operations in Germany said the draft law included "forced measures with a degree of complexity that is unmatched."

"Forced discounts are poison for investments in Germany," VFA added. Bayer and Merck KGaA, the country's largest listed drugmakers, declined to comment, referring to industry body VFA.

German lawmakers are turning their attention to patented drugs after completing sweeping changes to the market for generic drugs. Health insurers are now allowed to tender bulk procurement deals of generic drugs at a discount, a move spearheaded by Germany's largest health plan AOK, leaving Novartis's Hexal unit, Stada and Ratiopharm —which is being bought by Israel's Teva — scrambling for contracts.