Table 1: 1989 Market and Production Figures for Major Countries (Million ECUs) and 1990 - 1992 average share of Total R&D Expenditures
|Market||ECU per capita||Pharma consumption as % of GDP||Production||% Share TotalR&D Spending ( 1 )|
|Switzerland||1,395||179||0.92||3,378 ( 2 )||-|
|Japan||36,316||295||1.53||30,544 ( 2 )||17.6|
Source: Mossialos et al , 1993; OECD, 1995.
1. Averages for 1990 to 1992 for eight EU countries: UK, Germany, France, Italy, The Netherlands, Denmark, Sweden, and Finland. No data for Switzerland. The total adds to 100%, with 1.8% of R&D spending in other countries.
2. 1990 results.
Table 2: National Shares of Pharmaceutical Patent Grants in the US between 1969 and 1994
Source: US Department of Commerce, Patent and Trademark Office
Patents are particularly important in the pharmaceutical sector as a means of protection and patent statistics therefore measure part of technological innovation, although they should never be used as the sole indicator of innovation, partly because results can be biased by defensive patenting in which companies compete to patent similar chemical compounds. Table 2 gives the share of all US pharmaceutical patents by the nationality of the applicant. Both Germany and the UK show a substantial rise in patenting in the late 1970s and early 1980s followed by a decline since the mid-1980s. The EU share has been falling since a peak in the late 1970s.
Another measure of innovation in the pharmaceutical sector is the number of launches of new chemical entities (NCEs) and the number of products among the 50 top-selling prescription drugs. Both Germany and France have launched a relatively large number of new drugs, but in 1990 German firms had only five and French firms none of the major sellers. In contrast the UK has had fewer launches of NCEs but 12 top-sellers. This compares with 27 top-sellers from the US and six from Switzerland.
To summarise the results so far, the US is the strongest player in the pharmaceutical industry. It is a significant exporter and has the largest share of the 50 top-selling drugs. In Europe, the UK has had the greatest success, while the performance of Germany has declined over time. France and Italy have a strong R&D performance but have failed to develop any of the top-selling drugs. These trends at the country level are also reflected at the firm level, where the rank of German firms among the world's 20 largest pharmaceutical firms by sales has slipped, while British firms have moved up.
For the 20 largest R&D spending pharmaceutical firms, there is little correlation between measures of innovation such as R&D spending, patenting, the number of new drugs under development (in R&D), or the number of top-selling drugs, except for a positive correlation between R&D intensity and the number of new drugs as a percentage of sales. Six EU firms are among the 20 largest firms in the world in terms of R&D expenditures on pharmaceuticals. Data on R&D, patents, and drugs under development are given in Table 3 for these six firms plus, for comparison, the American firm Merck. The relationship between R&D intensity and the number of top-selling drugs depends on the firm's current strategy and the success of its past R&D. Some firms with very high R&D intensities, such as BI (Boehringer Ingelheim) have no drugs among the top 50 while Merck has a relatively low R&D intensity and ties with Glaxo for the largest number of top-selling drugs. This illustrates how a high R&D intensity is not necessarily a sign of innovative success. Instead, it can mark an attempt to move to a virtuous cycle in which R&D leads to a high number of successful products.
The large number of drugs that are being developed under license is not a sign of weakness in innovation, but is related to the trend for large firms to ally themselves with small dedicated biotechnology firms that do not have the knowledge to take drugs through the clinical trial process.
It is worth emphasising the importance of companies to innovation in the pharmaceutical industry. The infrastructure and environment of a country may be conducive to innovation, as it appears to be for the UK which has attracted both foreign firms and allowed domestic firms to grow, but each company has its own profile of innovation. Merck, for example, is widely regarded as the most innovative pharmaceutical firm in the world and certainly scores well on the indicators given in Table 3.
Table 3: Top European Firms in Terms of Pharmaceutical R&D Expenditures
|R&D (1993)||US Patents (90-94)||Drugs in R&D 93/94||Products in top 50|
|$m||% Sales||Number||per $m sales||Own||Under License|
Source: SPRU/OTAF Patent Database, SPRU Large Firm Database, Scrip Magazine, January 1995; Capel, 1994.
NB: The figures in this table relate to the period before some of the major mergers - eg, Glaxo-Wellcome; Hoechst-Marion Merrell Dow - went through.
The Impact of Biotechnology
Biotechnology offers a new route to drug discovery that could potentially reduce R&D costs and development times. A large number of small, dedicated biotechnology firms (DBFs) have been established in the United States in response to a conducive environment characterised by a developed venture capital market, lenient stock exchange rules, and a well-funded research base in the life sciences (Irvine et al , 1990). In contrast, few DBFs have flourished in Europe, while Europe's large pharmaceutical and chemical firms were latecomers to biotechnology, although several built up research teams in the early 1980s in order to keep abreast of developments. Since the late 1980s an important route for European firms to access biotechnology expertise has been through the purchase of American DBFs or the establishment of research laboratories in the US. However, case-study research shows that there is no systematic tendency for leading-edge biotechnology research by European firms to move to the United States (Senker et al , 1996). On the contrary, European firms are building up strong research capabilities in biotechnology, using links with American DBFs in areas where Europe is weak.
Few DBFs have been able to become fully integrated pharmaceutical firms and as of 1993 only about 3.9% of all pharmaceutical sales were due to biotechnology drugs (Ernst & Young, 1994). Most DBFs survive through a synergistic relationship with larger firms, where the DBF supplies potential new products to a large firm which in turn takes them through clinical trials and helps defend patents. This has meant that there has been a shift over the past decade from R&D agreements to alliances based on marketing and licensing.
Innovation in the pharmaceutical industry is difficult to measure. Too much R&D is devoted to duplicating the work of other firms and much patenting is defensive. Counts of drugs under development is not a satisfactory innovation indicator because they can reflect poor management as much as real innovation. The best measure is perhaps to take the number of top-selling drugs, but the drawback with this measure is that it measures past rather than present innovation. By this measure German firms have been lagging while British firms are the leading innovators in the EU. All EU firms have been rather slow at making the shift from a drug development paradigm based on chemistry to one that also includes biotechnology, although most are now moving in this direction, partly through establishing links with American DBFs.
The priority for European policies to support innovation in this sector is to create an environment conducive to innovation. Several policy measures would assist the European pharmaceutical industry: continued substantial support for the public research base in the life sciences; encouraging the full exploitation of that base by Europe's major firms (who still tend to know too little about what lies beyond national boundaries); the reinforcement of the single market and in particular the construction of a European rather than a national regulatory system, the easing of financial restrictions on venture capital financing; and finally, the promotion of other mechanisms to support and fund new, technology-based firms.