* U.S. FDA approves 41 novel medicines in 2014 vs 27 in 2013
* New treatments for cancer and rare disease fuel rise
* High cost of new drugs leads to tensions with insurers
By Ben Hirschler
LONDON, Jan 1 U.S. drug approvals in 2014 hit their highest level in 18 years and recommendations in Europe also came at a rapid rate, driven by expensive new treatments for cancer and rare diseases.
After suffering a wave of patent losses on blockbuster products, which peaked two years ago, drugmakers are recovering their ability to bring new medicines to market and productivity is improving.
The U.S. Food and Drug Administration's Center for Drug Evaluation and Research approved 41 novel medicines in 2014, 14 more than a year earlier, according to its website. That tally is second only to the all-time high of 53 approvals reached in 1996.
The European Medicines Agency, which includes generic drugs in its list, recommended 82 new medicines last year, up from 79 in 2013 and 57 in 2012.
Innovative new drugs have continued to command premium prices, to the relief of investors but the frustration of insurers and governments, which are starting to push back against the sky-high cost of some modern therapies.
Nearly 40 percent of new drugs approved in the United States last year were for rare diseases, underscoring the industry's focus on specialised products where competition is limited and annual costs often exceed $100,000 per patient.
Among 2014's highlights were two cancer drugs that help the body's own immune cells fight tumours and promise better, longer-lasting treatment with fewer adverse side effects.
Merck & Co's Keytruda and Bristol-Myers Squibb's Opdivo, which work by blocking a protein called Programmed Death receptor (PD-1), are the first in a coming wave of immunotherapies that analysts believe could generate annual sales of more than $30 billion a year.
Fuelled by new drug enthusiasm, biotech initial public offerings hit a record high in 2014 and the wider drug industry saw a flood of deals.
That helped lift the Nasdaq Biotechnology Index and S&P 500 Health Care Index 34 percent and 23 percent respectively, though some fund managers are starting to question valuations as insurers take a tougher stance on prices.
Pricing pressures have already taken a toll on older products like diabetes and respiratory medicines, where there are multiple options available, and the confrontation is now spreading to newer ones.
Express Scripts, the largest manager of prescription drug plans for U.S. employers, shocked the industry last month by lining up a lower price for AbbVie's new hepatitis C treatment, adding to strains between drugmakers and insurers over rising costs.
(Editing by Susan Thomas)