Cutting pharmaceutical prices in the way European governments are doing now will severely reduce the number of new drugs making it to market, according to a study of the sector by a Berlin-based business group. A report by the European School of Management and Technology Competition Analysis (EMST CA), and commissioned by the drugmaker Novartis, said there was a direct link between strict regulation and low innovation in the sector.

New medications likely to be hit hardest under tough pricing regulation include antibiotics, as well as treatments for heart disease and immune system disorders such as multiple sclerosis and chronic meningitis, it said. The report comes as governments across Europe are seeking to slash drugs prices as they reign in spending to try to tackle runaway budget deficits.

Germany's government approved a draft bill on Tuesday which aims to eventually save some €2 billion each year on the cost of patented drugs by breaking up drugmakers' pricing power, and Greece has also moved to slash drug prices by more than a fifth on average. "

Our study shows the consequences that pricing and reimbursement regulation can have on pharmaceutical innovation. It also shows that, incorrectly applied, regulation can reduce the value of pharmaceutical projects and curtail the resources available to carry them out," Hans Friederiszick of ESMT CA said in a statement with the report. "Rational investors will naturally look for the most profitable investment choices, which is why regulation has a direct impact on the number and characteristics of the medications developed."

This means the more innovative drugs were like to get the most attention he said, whilst important areas like the development of new antibiotics may get left behind. Drugmakers, such as GlaxoSmithKline and AstraZeneca are already cutting back on research and development (R&D) as they try to position themselves for a huge "cliff" of patents on big-selling drugs that are set to expire over the next five years. 

The EMST report said that while European governments predominantly see pharmaceutical pricing models as a way of controlling public health costs, they may not realise or acknowledge the implications for product value, and therefore for the development of new drugs. It said that internal reference pricing (IRP) - a system used within Europe whereby prices in one country are taken as a reference point for others in negotiations - could result in an almost 12% drop in prices. Beyond that, another pricing system called external price benchmarking (EPB) - a model widely used across OECD countries - can lead to an almost 6% price drop.

"Having some regions of the world under IRP and others under EPB magnifies the problem, since internal prices are then exported to external markets, leading to a 19.8% drop in portfolio value," the report said.

Reference pricing is common throughout the Europe Union and even beyond, with countries including Japan and Canada also taking account of European prices when deciding reimbursement.

Read Reuter's in-depth report Big Pharma, Small R&D here.