CORDIS Archive

EIMS Studies
Europe's Pharmaceutical Industry: An Innovation Profile: Summary

Margaret Sharp and Pari Patel

SPRU, University of Sussex

Abstract

This paper maps the recent innovation record of the European pharmaceutical industry vis-à-vis its US and Japanese counterparts. On the whole it is a story of success. German and Swiss chemical firms were amongst the world's first pharmaceutical manufacturers, establishing the tradition of a research-based industry. That tradition still survives, and although in the post-war world US multinationals came to dominate world markets, European companies have held their own and remain amongst world leaders with UK firms, in particular, rising up the rankings. A number of factors - the rising cost of R&D needed to meet regulatory requirements, the squeeze imposed on public health care budgets and the introduction of biotechnology - have combined to challenge the established routines of the industry in the 1980s. Firms have responded with a series of strategies - collaborations and alliances; mergers and attempts to develop new markets. The paper analyses the innovative performance and strategies adopted by different European firms in the face of these challenges. It examines different measures of innovation - R&D, patenting, the introduction of new chemical entities, and sales of top selling drugs - and finds none of them wholly satisfactory as a measure of innovation. In particular they fail to pick up new developments in biotechnology which is increasingly dominating routes to new drug discover and new treatments. The paper concludes that Europe's industry is at present holding its own through a mixture of collaboration and international merger. However, it is vital for the industry to be underpinned by a vibrant and creative science base if it is to meet the challenge of the coming decades.

Executive summary

Sectoral comparisons of innovative performance between Europe, Japan and the United States show that the European pharmaceutical industry is one of Europe's most competitive sectors. Yet the continued success of this sector depends on its ability to meet the challenge of five key trends: cut-backs in health care budgets, the rising cost of R&D, the globalisation of R&D, the increasing importance of external sources of knowledge, and the influence of biotechnology, particularly on drug discovery methodologies.

Average R&D intensities in the pharmaceutical industry have been rising, resulting in a squeeze on profits in an industry which has enjoyed above average profits for a considerable time. Between the 1970s and 1990s average R&D intensities in the main drug-producing countries rose from 7-8% to 10-12%. The main causes are increased regulatory requirements combined with the difficulty of testing drugs for chronic long-term diseases, and diminishing returns to the drug discovery process. A recent estimate suggests that current levels of R&D spending are untenable, given average spending of $US360 million for each drug that passes all regulatory requirements. Current drug sales and likely growth rates are just not high enough to support such expenditures (Lehmann Bros, 1995). Market growth rates are in any case likely to fall in the future because of intense budgetary pressure to reduce health care costs.

These trends have created turmoil in an industry that has been dominated by approximately 30 firms for the past 50 years. In the early 1990s these firms were responsible for 75% of business expenditures on R&D in the pharmaceutical sector and 60% of global sales of an estimated $US200 billion. The industry has responded to this squeeze on profits by successfully lobbying for an extension of patent life, by new methodologies to reduce drug development costs, including collaboration on R&D, and through mergers, though there are doubts as to how far mergers can lead to real savings in R&D costs. Another strategy has been to move into new areas of potential profit, such as over-the-counter (OTC) products in order to maintain sales of brand-name products in the face of competition from generic drugs.

Market and Technology Trends

As shown in Table 1, the EU is both the world's largest single pharmaceutical market and largest producer. The EU as a whole is a marginal net importer, with Germany and especially the UK substantial net exporters. Switzerland, though not an EU member, is also a major European player. Per-capita expenditures differ substantially between countries and are highest in Japan and Germany and relatively low in the UK as well as in the Netherlands and Norway. These per-capita expenditures depend to a considerable degree on the type of health care system and their price regimes. World-wide, total R&D spending was 18.7 billion dollars in 1992. The EU share has been falling from around 40% in the early 1980s to current levels of 36%, while the US share has increased from the same level to 47% in 1992. As shown in Table 1, the UK accounted for approximately one-third of R&D expenditures in the EU.

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.

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.

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.

Conclusions

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.

Empirical studies and the Community Innovation Survey (CIS)