Home Brussels EU efforts to ‘reshore’ drug production trip over subsidy rules

EU efforts to ‘reshore’ drug production trip over subsidy rules

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The EU’s declared goal of bringing home pharmaceutical production is clashing with the reality of its own rules on public investments.

Nominally at least, the Commission is on board with efforts to revive drug manufacturing inside the bloc. Speaking at a gathering of executives from Europe’s off-patent medicines industry in Athens last week, Commission Vice President Margaritis Schinas called the pandemic a “wake-up call” for Europe to strengthen its pharmaceutical sector.

“Being able to produce and supply medicines … is a matter of great strategic and geopolitical importance for our union,” said Schinas.

Commission Vice President Margaritis Schinas (center) tours an ELPEN pharmaceutical research campus under construction in the outskirts of Athens | ELPEN images

But the EU is going to have to let member countries help foot the bill to build new capacity if it wants to bring back its medicines production, argues Adrian van den Hoven, director general of generic drug lobby Medicines for Europe, despite its own competition rules designed to restrict how countries help their local industry.

It’s a familiar story: Europe’s place in drug manufacturing has gradually been eclipsed by the rise of China and India. According to a report for Germany’s generic drug association Pro Generika, Asian companies hold nearly two-thirds of the approval certificates needed to produce active pharmaceutical ingredients in Europe, with the remainder held by local firms — a ratio that has reversed over the last 20 years. And for 93 active ingredients, no European company holds a certificate.

“We used to be the biggest producers of active pharmaceutical ingredients in the world,” said van den Hoven, adding that with the right incentives, Europe’s generic manufacturers can once again compete with China. “But with these rules,” he said, “they’re not qualifying.”

Europe is still a major player in cutting-edge innovative medicine. But Asian companies, taking advantage of cheaper labor and laxer environmental regulation, now supply a substantial share of the bloc’s generic (or off-patent) medicines, and an even greater portion of the active ingredients and chemical inputs used to make them. These include drugs like paracetamol or the common antibiotics hospitals rely on to function day-to-day.

Spurred by a close call when major exporters threatened to block the shipment of crucial drugs at the height of the pandemic, as well as a general re-orientation towards domestic manufacturing under the label of “open strategic autonomy,” Brussels has set its sights on tightening scrutiny over its globalized pharmaceutical supply chains as it pushes for greater self-reliance. 

Supply-chain resilience

With a reform blueprint for pharmaceuticals published in November 2020, the Commission pledged to shore up the resilience of supply. While concrete measures are needed before the publication of the Commission’s proposal to re-write the EU’s basic pharma rules, expected late next year, the strategy gave a few previews, suggesting the bloc diversify supply chains, encourage local production and stockpile strategic medicines.

The Commission’s proposed health union package, put forward in the wake of the COVID-19 outbreak, would meanwhile hand extra powers to the European Medicines Agency to monitor drug shortages. And the new Health Emergency Preparedness and Response Authority (HERA) will be tasked with mapping supply chains that can be ramped up in an emergency — and with identifying bottlenecks.

Member countries have signaled they’re ready to give the industry a push to bring production back to Europe. Such steps clash, however, with the reality of state-aid rules, which require that public money be invested in less-developed regions. Countries must also prove investments have a so-called “incentive” effect — meaning they need to demonstrate that, without the funding, the project would not have been feasible at all.

In Greece’s case, the industry group representing local pharmaceutical manufacturers says restrictions on subsidies make it impossible for 85 percent of the country’s drugmakers to tap the billions in funds granted by the EU to aid the economic recovery. That’s because companies cluster in the Attica region, a developed part of the country with very little leeway to distribute public funds.

Commission Vice President Margaritis Schinas (center) tours an ELPEN pharmaceutical research campus under construction in the outskirts of Athens | ELPEN images

“The Commission is becoming stricter and stricter … and the state aid rules are becoming more and more complex,” said competition lawyer Annabelle Lepièce, a partner at CMS Belgium.

And while the crisis has shown the Commission has loosened the rules in exceptional circumstances, Lepièce added that competition chief Margrethe Vestager has made it clear this would be temporary.

In one such move, the Commission exempted COVID-19 projects — such as vaccine or therapeutics development — from state aid rules, a measure it’s planning to extend until mid-2022. But in terms of production, however, its impact is limited to the handful of authorized vaccines. To date, only two treatments — remdesivir and dexamethasone — mention COVID-19 on the label. Other exemptions cover “serious disturbance in the economy” of a member country, but it’s not clear how this would apply to pharmaceutical production.

The workaround

One possible solution might lie in the EU’s Important Project of Common European Interest (IPCEI) initiative.

In May, French President Emmanuel Macron met with German Chancellor Angela Merkel and Commission President Ursula von der Leyen to discuss the issue. As a result of the meeting, the French-German pair floated the possibility of an IPCEI focused on pharmaceutical research and manufacturing.

There are already IPCEIs in the field of microelectronics and for the kind of batteries used in electric vehicles. While they require Commission approval, the initiatives are led by member states. Crucially, they let countries invest in strategic industries, and are a sanctioned way of getting around the EU’s state aid rules.  

Yet, despite the Commission’s stated commitment to bolstering pharmaceutical supply chains, some officials aren’t enthused by the prospect of green-lighting massive incentives that bypass its own subsidy rules, fearful that what member states are touting as industrial policy are really industrial-sized giveaways and there are better tools to address the supply issue. 

There are also large hurdles member countries have to jump over to prove an IPCEI is needed, rather than just an excuse for industry freebies. Projects approved under an IPCEI need to demonstrate “wider relevance and application to the European economy or society” beyond the single industry they’re applied to. Typically, they should apply to more than one member country and their “benefits must not be confined to the financing Member States.”

‘Magic solution’

“I have this impression that this IPCEI is seen, not just by industry, but by government, as a magic solution to everything,” said Giacomo Mattinó, head of a unit at the directorate general for the Internal Market (DG GROW) dealing with health topics. He said EU regulation gave broad scope to implement industrial policy, for example through Horizon Europe research funding.

“When I talk to member states around the table, I’m not sure they’re so familiar with all the rules,” Mattinó told the conference in Athens, adding significant progress could be made by using a mix of existing resources.

Speaking to POLITICO, Schinas acknowledged the industry’s stance on the need for aid, but noted one of the European Commission’s roles was as an “independent competition enforcer” and this had to be kept in mind.

The Commission had proven in the past it was possible to apply the rules in a way that both avoided “distortion,” he said, while preserving the bloc’s competitive edge and facilitating the need to invest.

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