The United States and Europe are drugmakers' biggest markets, but just because a drug wins approval in one doesn't mean it will get the nod in the other. Each market has its own system for clinical trials and drug reviews, and there are key differences in commercializing drugs in these regions that investors ought to know about before investing.

In this clip from The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by healthcare investor Todd Campbell to explain the differences associated with launching drugs in Europe versus launching them in America.

A full transcript follows the video.

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This video was recorded on May 16, 2018.

Kristine Harjes: What do our listeners need to know about drug approval in Europe?

Todd Campbell: Well, it's a little bit different than it is in the U.S. There's some nuances that people ought to be aware of. I think, Kristine, one of the things that might be helpful to listeners, just to put things into context and to add on to what you've already said, is just how big the market is for medicine in Europe. I think, in the U.S., as U.S. investors, we tend to look at the U.S. market and recognize that, yeah, the U.S. market in dollar terms is the biggest market on the planet. But the European market is still incredibly significant. There are 741 million people who live in Europe, Kristine.

Harjes: Yeah, it's not insignificant. It's something that, even if you are looking at domestic companies, U.S.-based companies, they're still probably going to have some European exposure. If you can get a drug approved in the United States, a lot of people consider our standards the strictest, then you might as well go ahead and look to get it approved internationally, as well.

Campbell: Right. In the olden times, European approval was done on a decentralized basis -- so, you had to go to each individual country. You can imagine what a pain in the butt that would be. I have to get approved in Switzerland, I have to get approved in the U.K., I have to get approved in Germany, I have to get approved in Sweden, Finland, etc. Obviously, that wasn't the most efficient system. However, since the European Union was formed, they've set up a regulatory process over in the E.U. in the 90s that's a little bit similar to the Food and Drug Administration here in the United States in that it provides a centralized review process.

Again, we talked about the nuances that people have to be aware of between the two approaches to approval. But, I think what's helpful, maybe, is to know that on in clinical trial basis, in the U.S., you have to get approval to begin clinical trials with the FDA. In Europe, it's still done on a decentralized country-by-country basis. Once those trials are complete, however, the new drug application would get submitted to the EMA, which is the centralized body that will consider the approval of any drugs for member countries in Europe. Similarly, in the U.S., you would submit it to the FDA for approval.

Once it's submitted, both agencies have their own independent review mechanisms. In the U.S., maybe they convene a group of experts and have an advisory committee meeting. Similarly, in the E.U., they would convene a group of experts there to offer up an opinion. Then, again, in both of those systems, the regulatory body doesn't have to listen to the advisors, but usually they do.

Harjes: Exactly. In many ways, there are parallels between the FDA and the EMA, the European Medicines Agency. But where the system really starts to differentiate itself is what happens after that central agency says, "Yes, this drug can be approved." In the United States, after that, you're pretty much good to go. You can get on the market and start selling it.

But in Europe, the key difference to note is that the drug makers must then go nation by nation to get reimbursement approval. And that's because, in these countries, since there is a centralized universal health insurance program, it's the government itself that's going to wind up paying for these drugs, so they want to be able to negotiate a price. And if the price isn't deemed worth it, or if, for whatever reason, they don't want to cover this drug, they don't have to. And that's a conversation that the drug maker must have country by country.

Campbell: Right. If you look at the studies of the review times that it takes for drugs that are filed for approval in the U.S. to win an OK versus in Europe to win an OK, the U.S. typically comes in a little bit faster. But, they're not too much different, as far as how long it takes to get a drug approval. But, I think what you're talking about with the individual obtaining reimbursement, that's maybe what shifts more companies to say, "I'm going to focus on the U.S. first." Because you're right, winning approval for reimbursement in each one of these member states can be a time-consuming and arduous process. Probably the best example of that, Kristine, is what happens in the United Kingdom, right?

Harjes: Yep!

Campbell: The United Kingdom has NICE, which is a regulatory body whose sole function is to look at the value that's created by drugs that have been approved for use in the European Union. Then, based upon determining value, and they use statistical formulas to determine that, they'll decide whether or not they agree to reimburse for it. Oftentimes, you end up with situations where, yeah, we've crossed all our T's and dotted all our I's, jumped over all of our hurdles, overcome all our obstacles and won approval in Europe, but NICE says, "Nope, your drug is priced too high for the value that we believe it adds to our population."

Harjes: There's an interesting philosophical rabbit hole you can go down here regarding how exactly you do come up with that calculation. Like you said, Todd, it's completely statistical. It's based on the quality-adjusted life year metric, or the QALY. It then affixes a price to that to say how much a life year is worth; how much, as a government, do we want to pay for a drug that gives somebody one more year. Or, the quality-adjusted is, maybe it's multiple years, but they're not quite at full health, so then you adjust for that.

I don't know, there's a lot to think about there. I don't want to unpack that too much, because I think we could probably do an entire episode on that. But, it's an interesting differentiation between how things work in the United States, where you do sometimes see private payer pushback on prices, but it's completely different than seeing it in a centralized location.

Campbell: Yeah. I think that's kind of the hiccup. If you're looking at it and saying, what's the biggest difference between these two marketplaces, that would be it, is the fact that in the U.S., it's fully centralized. And then, of course, it goes to the private payers or Medicare or whatever to negotiate pricing. But, the drugs are typically available, and those conversations usually happen relatively quickly. But, in Europe, because you have all of these different cooks in the kitchen, it becomes a much longer process and sometimes a little bit more difficult process. So, I think that, from an investing standpoint, what investors want to know is, if I hear that a drug has been approved in the European Union by the EMA, I guess I probably shouldn't jump to think that we're going to start seeing meaningful revenue in Europe right away. It'll probably be best to model a benefit from European sales as occurring over a course of maybe one to three years.

Harjes: Yeah, absolutely. But, it can still be interesting for some of the drugs that are approved first in the E.U., which is not as common, but it can sometimes be an indicator of how a drug might fare over in the U.S.

One place in particular where we get that sort of perspective is with biosimilars. Listeners who are familiar with the show will know, these are a more complex form of generic drugs for biologic drugs, which are more complex treatments. Biosimilars are not like your traditional generics because they're not identical, so it's a little bit trickier to evaluate whether or not it actually is a perfect or close-enough-to-perfect substitute for the original therapy.

The biosimilar approval process has been in place for a lot longer in Europe than it has in the United States. In the U.S., the framework was first enacted in 2009, and the first approval of a biosimilar didn't come until 2015. Meanwhile, across the pond, the first approval was granted in 2006, which is one year after a framework was created for this. So, there are many more biosimilars approved in the E.U. than in the U.S.

So, while domestically we're still kind of looking at these first few that have been approved and seeing what the trends are in pricing discounts -- because a non-branded drug is going to be cheaper, but the question is, how much cheaper, since it's still a very complex drug -- and, just looking at adoption rates and all the other questions around biosimilars, it can be helpful to look at how things have fared in Europe first.

Campbell: Absolutely. And perhaps their adoption of biosimilars, and that pace of adoption being so much faster than here in the U.S., is due to the fact that they approach medicine with more of a budget focus. I have a fixed pool of money in my country that I can spend on care, therefore if I can decrease the amount I spend on this expensive biologic by instead recommending the use of this biosimilar that's cheaper, that frees up more money for me then to spend on these other new drugs that are coming through and winning approval by the EMA. So, I think there's definitely some differences on that front.

I believe that biosimilars will eventually gain a foothold here, similar here to what we saw with small molecule drugs. I think we're in the 1990s, if you compare the two, where we are timeline-wise, in biosimilars. And my expectation would be that you'll see biosimilars demand ramp up relatively rapidly over the course of the next five or ten years. But, again, still trailing what we've seen so far in the European Union for sales. That's obviously the most attractive market for the manufacturers of biosimilars to win an OK in right now.