Drugmakers are counting the cost of the deepening euro zone crisis, with further austerity-driven price cuts expected in important European markets, including Italy and France, said experts.

Growing alarm at multiple government-imposed cuts prompted a frank letter from the CEO of GlaxoSmithKline, who heads Europe's pharmaceuticals association, to the European Commission warning of the industry's 'significant concern'.

A copy of the Sept. 16 letter, from Andrew Witty to Health Commissioner John Dalli and Industry Commissioner Antonio Tajani, was received by Reuters this week.

The decision by governments to pay less for medicines in a bid to plug holes in their budgets is taking a heavy toll because drugmakers rely on state-funded healthcare systems for most of their European sales.

Smaller firms like Spain's Almirall and Greece's Alapis, whose shares have tumbled 42 and 99 percent respectively since the start of 2010, have been hardest hit.

But price cuts and unpaid bills are also weighing on the heavyweights of the industry, whose leaders now see more pressure on profit margins in 2012 following the latest downward jolt in the fiscal outlook for European economies.

'It's going to remain very tough,' Richard Bergstrom, director general of the European Federation of Pharmaceutical Industries and Associations (Efpia), said in a telephone interview.

'The thing that worries me the most now is that debts, particularly at hospitals, are running so high. We're looking at close to 10 billion euros ($13.8 billion) only in Portugal, Spain, Italy and Greece.'

Some companies, including Roche, have stopped delivering certain drugs to state-funded Greek hospitals with high unpaid bills, diverting supplies instead through  pharmacies, which have a better payment record.

Earlier this year, drug company executives were hoping the round of cuts instigated in 2010 might run its course by the end of 2011. Now it seems things will only get worse.

AstraZeneca, Pfizer and Sanofi all expect continued pressure on prices next year.

'We don't think that's going to get any easier -- it's probably going to get tougher,' AstraZeneca's finance chief Simon Lowth told reporters on October 27.

Analysts at Deutsche Bank expect average European drug prices to be down by around 5.5 per cent this year, after 3.5 per cent in 2010, with no let-up in 2012.

Greece, not surprisingly, has implemented the deepest cuts, axing prices by up to 27 per cent and forcing drug companies to take some payments in government bonds. Spain has imposed a 7.5 percent rebate on patented drugs and a 25 per cent price cut for generics.

In his letter to the commissioners, Witty said drugmakers have taken price cuts and discounts of more than 7 billion euros in Greece, Ireland, Italy, Portugal and Spain during 2010 and 2011, representing more than 8 percent of their turnover in these markets on a yearly basis.

But the pain is not confined to Europe's periphery. The common practice of cross-referring to prices in other countries means that exceptional price cuts in countries like Greece and Portugal can trigger automatic cuts in richer countries.

In Germany, for example, the system of reference pricing led to major price cuts in July for both GSK's lung drug Viani -- also known as Advair or Seretide -- as well as AstraZeneca's rival Symbicort.

'The pressures on innovation are now immense ... I believe it is time to review current pricing and reimbursement practices, in the light of the ongoing crisis,' Witty wrote in his capacity as Efpia president.

Italy and France are seen as the next countries to impose additional healthcare reforms, given limited action so far this year and their clear fiscal challenges.

Indeed, France this week outlined a new austerity package calling for a further 700 million euros of savings on health spending next year, with savings coming in part from additional price cuts on branded drugs and generics.-Reuters