ROMANIA: REGULATIONS CHOKE PHARMA COMPANIES

UNCLAS SECTION 01 OF 02 BUCHAREST 000337

STATE FOR EUR/CE ASCHEIBE
STATE PLEASE PASS TO USTDA JMERRIMAN
COMMERCE FOR KNAJDI AND JBURGESS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV TBIO PGOV SOCI AMED KHIV RO
SUBJECT: ROMANIA: REGULATIONS CHOKE PHARMA COMPANIES

REF: A) BUCHAREST 315; B) 08 BUCHAREST 607 AND PREVIOUS

Sensitive But Unclassified. Not for Internet distribution.


1. (SBU) Summary: American and other foreign pharmaceutical
companies are upset that the Ministry of Health (MOH) has recently
passed several ordinances which, taken together, severely impact
their ability to operate profitably in Romania. With its
"universal" healthcare system, the Government of Romania (GOR) has
significant pricing power in the pharmaceutical market, which the
MOH has consciously decided to use to force down costs. In order to
sell medicines in Romania, pharmaceutical firms must certify to the
Government that they are charging the "minimum European price,"
i.e., the lowest average price available in a basket composed of
several EU countries, using a methodology and foreign currency
exchange rate unilaterally determined by the MOH. Recently adopted
rules also institute a price freeze for all drugs, including the
drugs currently priced below the minimum European level. A
separate, poorly conceived ordinance establishes a circular pricing
methodology which interrelates generic and name brand prices in such
a way that any price greater than zero theoretically violates the
ordinance. Pharmaceutical firms are concerned that the ordinances
in question were passed with no advance, and little subsequent,
consultation with industry. The MOH appears secure in the knowledge
that no one company can afford to exit the growing and highly
competitive Romanian market, and is therefore willing to wring out
cost savings by targeting the deepest pockets around-- multinational
pharmaceutical firms.


2. (U) Post reported in ref A on proposed reforms to the Romanian
health care sector. This cable, together with ref A, updates post's
prior series of reports (ref B) on this sector. End Summary.


3. (SBU) In a letter sent to Health Minister Ion Bazac on March 17,
2009, the Association of Drug Manufacturers and Importers (ARPIM)
asked for further bilateral discussions on three issues: 1) a clear
methodology for updating the exchange rate; 2) the elimination of
the "circular references" (see paragraph 5) between generic and
name-brand medications; and 3) a calendar for raising the prices of
pharmaceuticals that are currently sold below the minimum EU price
level. MOH has not accepted any of these proposals to date. To
illustrate the egregiousness of the problem on just the last point,
one American company had agreed on a humanitarian basis to
temporarily sell an anti-HIV drug at a loss in Romania. However,
the MOH freeze on price increases has meant that the company now has
to choose between selling indefinitely at a loss or withdrawing the
product entirely-- a tough call when the medication is the only
thing keeping some Romanian HIV-positive patients from developing
full-blown AIDS.


4. (SBU) The fixed exchange rate for imported drugs established by
the MOH has disproportionately affected American manufacturers whose
costs are denominated mostly in U.S. dollars. On February 1, the
MOH determined that the official exchange rate forecast in the
Government's 2009 budget of 4.00 RON/euro would be used to calculate
the "minimum European price" for pharmaceuticals for the entire
year. (The Government's budget forecast has since been revised to
4.3 RON/euro, but the Ministry's number has not been adjusted.)
While this represents an improvement from the 3.63 RON/euro rate
previously in effect, the RON was trading at 4.31 RON/euro when the
rate was fixed and has remained above the reference rate since then.
Major American firms with cost structures largely in dollars, such
as Merck Sharpe and Dohme (MSD),operate at a competitive
disadvantage to their European rivals (who are also suffering, but
less severely),as they are forced to convert prices to RON at an
arbitrarily fixed RON-euro exchange rate and then repatriate any
profits at a floating RON-dollar rate. In essence, the weak RON has
allowed the MOH to tack on an extra discount to the "minimum
European price," wiping out already-slim profit margins.


5. (SBU) Pharmaceutical companies maintain that the combination of
a disadvantageous exchange rate and "minimum European price" will
cause the damage to their business to ricochet through other EU
markets. As many of Romania's neighbors peg drug prices to a basket
of prices in other countries (using Romania as a reference),
Romania's artificially low price forces prices lower in other EU
markets. Furthermore, the fixed exchange rate creates a potential
arbitrage opportunity for distributors to purchase pharmaceutical
products in Romania and export them at a profit to other EU
countries. The lack of intra-European border controls makes the
extent of the latter problem hard to track, but isolated instances
have been uncovered.


6. (SBU) MOH's new rules applying to generic pricing are even more
objectionable on commercial grounds. The MOH requires that brand

BUCHAREST 00000337 002 OF 002


name medications be sold at no more than a 35 percent mark-up over
generic competitors, while generic drugs are required by law to be
sold at no more than 65 percent of the price of a brand name drug.
The net effect of this "circular reference" pricing policy is that
the only price at which both criteria can mathematically be met is
zero. Any other price puts companies in violation of one of the
ordinances, as it is impossible for a product to be no more than 35
percent more expensive than a competitor, when the competitor is
required to charge no more than 65 percent of the name brand.
Despite repeated interventions on the part of companies, this
requirement has remained in place and the Ministry has shown no
inclination to adjust the rules or further clarify how these
ordinances are to be implemented.


7. (SBU) Comment: Post is coordinating with other foreign missions
on this issue, and there is a general agreement on the need to
address at least the generic pricing question on a high-level basis.
In this instance, the American firms seem the worst off overall and
they have been the most active in pushing the European firms to act
in concert with them. The one point of consensus, however, is that
the Ministry has neglected to consult with stakeholders in advance
and is enforcing rules which are harmful and discriminatory toward
all pharmaceutical importing companies. This lack of consultation
underlines the importance of post's continued engagement on the
issue. From both a commercial and policy standpoint the harm being
done to American pharmaceutical companies in Romania is significant.
Furthermore, the crack-down on medication is short sighted in a
country which experiences high rates of chronic illness. If the
MOH's actions force firms to exit from or reduce their exposure to
the Romanian market, it is ultimately the patients who will bear the
brunt of having access to lifesaving medications curtailed. End
Comment.

GUTHRIE-CORN