Locations for R&D investment
The U.S., Japan and Europe are the key markets for the international pharmaceutical industry and make up around 80% of global pharmaceutical sales¹. However, during the last decade there have been major differences in the manner that the healthcare systems in these countries have developed, and this has affected the way in which pharmaceutical companies invest in R&D in these regions. The pharmaceutical industry believes that its ability to discover and develop innovative new drugs depends on the competitive nature of the markets in which it operates and the availability of scientific talent.

In theory, as the pharmaceutical industry operates on a global basis, it could invest its R&D in any region and sell its products in the regions where it is not based. Therefore, if it felt that a region was particularly unattractive for R&D investment, it would be assumed that the industry would seek to avoid it. However, this is not the case. In practice, the industry maintains a strong presence in most of the major markets. As Sir Tom McKillop, chief executive officer of AstraZeneca, explained, “There is an interesting relationship between R&D investment in a region and product acceptance there. One of the benefits of operating in a region is that clinicians gain experience of working with a product as it is developed.” Thus companies seek to work in the world’s leading countries and with the best clinicians, as it is important to gain the confidence of the opinion leaders if the product is to be successful.

This viewpoint is shared by Mr. Shuji Inoue, managing director of Fujisawa and also chairman of the international affairs committee at the JPMA (Japan Pharmaceutical Manufacturers Association). “We are not concerned about the location of R&D, but we are concerned about where we can achieve the best results in the target areas of R&D,” he stated. “In the case of research, it is now very much diffused geographically.”

The Shifting Patterns of R&D
In the last few years, there has been a steady shifting of R&D investment out of Europe to the U.S., something that has worried European politicians and industry experts alike. According to figures from the European Federation of Pharmaceutical Industry Associations (EFPIA), in 1990, pharmaceutical R&D investment in the U.S. represented less than 70% of that in Europe, but R&D investment in the U.S. has now overtaken that in Europe⁷. EFPIA believes that excessive interventions by European national governments to control pharmaceutical spending is denting confidence among multinational pharmaceutical companies to invest in the region⁷.

In a recent example of this situation, Novartis set up the Novartis Institute for Biomedical Research in Cambridge, MA, rather than selecting a European location⁸,⁹. Dr. Daniel Vasella, chairman and chief executive officer of Novartis AG, expressed how it was the entrepreneurial nature of the U.S., coupled with a better pricing and product approval climate conducive to drug research and commercialization, that influenced the company’s decision to open its research center in the U.S.⁸,⁹.

These trends in R&D investment were highlighted at the 2000 Global Competitiveness of the Pharmaceutical Industry Symposium convened by the Directorate General Enterprise, in which EFPIA took part¹⁰. The main finding of the report was that, as a whole, Europe was lagging behind the U.S. in its ability to generate and sustain the innovation processes necessary for pharmaceutical R&D. It noted that the situation needed urgent attention as R&D was becoming increasingly expensive and organizationally complex.

Retaining Talent
The highly competitive pharmaceutical marketplace has created a need for companies to develop new ways to hire and retain the top talent needed to expand their product leadership. Pharmaceutical companies face an ongoing challenge in putting together qualified and skilled technical teams. Despite the technological advances in R&D, human judgement continues to play a vital role in maintaining innovation. As companies grow larger and the chains of command become increasingly stretched, the presence of talented individuals who can effectively communicate ideas and results can make the difference between the company’s R&D performance and that of its opposition. As such, much more attention is being paid to the concept of intellectual and human capital within organizations.

Thus the employment situation within the European pharmaceutical industry must also be considered when looking at competitiveness. For example, throughout the 1980s, employment in the European pharmaceutical industry grew steadily, at an average annual rate of just over 2% (representing about 10,000 new jobs each year), a rate that far outstripped that in other European manufacturing industries¹. In 1994 this growth rate was suddenly reversed with 13,500 job losses (2.6% of the total employment). This rapid decline was linked with healthcare reform and cost containment measures imposed by governments in certain European countries¹. For example, Italy’s cost-cutting measures were estimated to have resulted in 7,000 job losses—a 10% reduction in total employment between 1992 and 1995¹.

Rixt Meines of Nefarma (the Dutch pharmaceutical industry association) believes that more emphasis must be placed on training if Europe is to remain a successful recruiting ground for talent. “Science is essential for a knowledge-based economy. More money will need to be invested in education and professional training. We realize that the public profile of science should be enhanced.” He noted optimistically, “The U.S. has a long lead in the (bio)pharmaceutical field, but the European Union member states are among its most determined and goal-oriented competitors.”

In the U.S., the pharmaceutical industry remains a major contributor in terms of new jobs. In 2000, the industry directly employed 247,000 people, with 51,588 of these working in R&D¹,². On average, job employment within the U.S. pharmaceutical sector is growing at around 4.5%². This buoyant employment situation helps to increase the pool of talent from which companies can draw staff as it encourages people towards careers in the industry.

Why the U.S. Has Prospered
The Pharmaceutical Research and Manufacturers of America (PhRMA) notes that eight of the current top 10 worldwide prescription pharmaceutical products have their origins in U.S. R&D, whereas only two have their origins in European R&D². Furthermore, the U.S. pharmaceutical industry has generated more novel drug substances than its European and Japanese counterparts in each five-year period since 1965¹¹.

A major factor in the attractiveness of the U.S. for pharmaceutical R&D investment is that companies are relatively free in the manner that they price their drugs¹². This helps them recoup their R&D investment and thus encourages further productivity. In Europe, the situation is very different, with myriad complex pricing systems and regulations for companies to follow before they can place their products on the market¹². This can cause a substantial delay in products reaching patients and has thus discouraged the industry in its investment decisions. As Mr. Shuji Inoue of Fujisawa stated, “Even European companies are shifting their R&D to the U.S. because of the heavily government controlled pharmaceutical market in Europe.”

One of the features of pharmaceuticals is that governments are often directly or indirectly involved in paying the consumer’s bills. This means that, in countries where the government burden is high, there is a strong incentive for them to try and reduce the per capita cost. A study by the Massachusetts Institute of Technology Industrial Performance Center found that, while the European governments of the UK, France and Germany pay between 60 and 90% of their respective national drug bills, the U.S. government pays for only about 40%¹¹. The authors concluded that the U.S. government had the least budgetary incentive to keep drug spending low¹¹. There is therefore a relatively high spending on pharmaceuticals by U.S. consumers, which makes the market of prime importance for pharmaceutical companies looking to launch new products¹¹,¹².

Furthermore, once products are on the European market they are at risk from parallel importation—something that cannot occur in the U.S.¹². EFPIA believes that the practice, which involves the purchase of medicines at low prices in one Member State and their subsequent resale at higher prices in another Member State deprives the pharmaceutical industry of valuable resources to fund R&D for new products. It puts the financial loss to R&D-based pharmaceutical companies at ¤1 billion¹³.

The U.S. has also prospered thanks to its general attitude to innovation. As Sir Tom McKillop remarked, “Culturally, the U.S. is more receptive to innovation. If a new product is promoted in the U.S., there is a level of excitement amongst people as it is seen as progress. In Europe, the public tend to be more conservative and careful when it comes to a new product. They want to see it validated and regulated before they will accept it.”

Mr. Shuji Inoue of Fujisawa believes that the existence of a single regulatory body in the U.S., the FDA, is advantageous to companies compared with the situation in Europe. He noted, “. . . even after the establishment of the EMEA (European Agency for the Evaluation of Medical Products) there are so many local and country specific regulations that are enforced by local regulatory bodies, that European procedures become slow and complex. Furthermore, there are also many differences in medical practice and language barriers to deal with.”

However, it is also the general availability of appropriately trained scientific personnel and access to technologies that has persuaded companies to look to the U.S. As Sir Tom McKillop explained, “The U.S. is at the leading edge of biomedical research. There is a tremendous talent base for companies to make use of.” The importance assigned to science in the U.S. is highlighted by the level of research spending by the National Institutes of Health (NIH), which dwarfs that of any similar institutions in Europe. The NIH research budget is currently around $24 billion and the work of the NIH has significantly contributed to advances in the healthcare sciences².

There is no doubt that the competitiveness of U.S. industry has also benefited from a more vigorous exploration of new technological opportunities. Increased professional technology transfer from the public research sector and the establishment of a vibrant biotechnology industry are fuelling innovation². The U.S. biotech industry spent $15.6 billion on R&D in 2001, which greatly exceeded the amount spent by the European biotech industry¹⁴. In general terms of productivity and in terms of attracting finance, U.S. biotech companies are well ahead of their nearest rivals in Europe. Around 72% of the global biotech revenues are from U.S. companies¹⁴.

Yet the U.S. market remains highly competitive, which means that, although the conditions for R&D investment may be favorable, commercial success is not guaranteed. As Sir Tom McKillop pointed out, “The U.S. is a fast-moving market, with a strong generics industry, and so people who are slow in their decision-making will lose out. Even though the rewards are large, it is expensive to operate in the U.S. and promote your product. If you want to be successful in the U.S. you must have total belief in your product and be prepared to stand by it.”

A Balancing Act
Many economists have speculated that, if spending on healthcare continues to in-crease at the current rate, the economies of most countries will be severely affected¹². In particular, European governments have begun to implement cost-containment measures to slow the rate of healthcare spending and have concentrated to a larger degree on pharmaceutical spending than other areas of healthcare ¹².

The pharmaceutical industry believes that it is being unfairly targeted through many of the European cost-containment measures. It has suggested that recent increases in pharmaceutical spending have been caused by the accumulated need for innovative therapies. It states that the high prices for its medicines reflect the high level of R&D required to bring them through the complex drug development process. It also argues that the high costs of therapies should be viewed in light of the considerable direct and indirect costs of the complex diseases being treated. Medicines that actually modify the course of the disease might lead to net healthcare savings in the long term because of reduced hospitalization rates, as well as reduced mortality and morbidity¹².

As the pharmaceutical industry is a major contributor to European economies and is a major employer, its decline is in no one’s interest. For example, in Europe, in 2001, the pharmaceutical industry employed more than 560,000 people (with 88,200 of these working in R&D) and generated a trade surplus of ¤28,000 million. In fact, the pharmaceutical industry in Europe is the only high technology sector to consistently show a growing positive trade balance⁷. Thus, European governments face a delicate balancing act to ensure that, while spending on pharmaceuticals does not spiral out of control, the pharmaceutical industry must be encouraged to increase its investment in the region.

As European governments struggle to come up with a formula to boost industry competitiveness in line with public health objectives, companies are having to find advantages in the European system where they can. As Dr. Paul Stuart-Kregor, director of The MSI Consultancy, and formerly of Wyeth and Bayer, put it, “If companies want to be successful commercially in Europe, clinical studies run in Europe to meet the needs of European regulators and, more importantly, prescribing stakeholders will become increasingly important.”

Europe Attracts the Japanese Companies
While much publicity has been given to the shifting of R&D to the U.S., the inward investment into Europe by new players has sometimes been overlooked. In particular, a number of Japanese companies have found that Europe offers them significant opportunities in their plans to grow. As Mr. Shuji Inoue of Fujisawa explained, “More than 30 Japanese companies in North America and more than 20 companies in Western Europe are carrying out research through their own laboratories or through local ventures companies. Depending on the project, companies look for the most suitable partners to establish a network so that they can save time and money in reaching their goals.”

The public statements regarding globalization from Japanese company executives are in line with the latest industry figures from Japan. A survey by the JPMA demonstrated that a considerable number of Japanese companies have established themselves in Europe¹⁵. In 1990, there were 18 Japanese pharmaceutical companies operating in the major European markets of Germany, France and the UK¹⁵. In 2000, the number of Japanese pharmaceutical companies operating in these European markets grew to 46, representing around 19% of their foreign presence around the world¹⁵. Japanese companies are also employing a greater number of European personnel
in their operations. In Europe, the number of employees working for Japanese companies rose from 3,600 in 1998 to 5,300 in 2000, which represented nearly 26% of their total global workforce¹⁵.

In 1999, Fujisawa announced ‘Vision 2005’, a long-term management policy aimed at carrying the company’s growth toward 2005 and through to 2010¹⁶. As part of this plan, Fujisawa aims to be a global company, competing with major global companies in targeted therapeutic areas. It aims to have sales of 400 billion yen by 2005 (split 50/50 between Japan and overseas)¹⁶. Europe has been an important region for investment, particularly in the area of clinical development.

As Dr. Joachim Kempeni, vice president, R&D of Fujisawa Europe, explained, “Fujisawa does believe that Europe is a competitive region to perform clinical trials in all development stages. Fujisawa recently made a global decision to perform Phase I studies preferably in Europe given the fast entry into man and the reasonable costs of PK studies compared to the U.S. We have also seen repeatedly that not only Proof of Concept studies but also large studies in our core franchise, transplantation, can be performed in a very competitive and cost efficient way.” Despite this enthusiasm, Japanese companies are paying close attention to the regulatory climate in Europe and have been as concerned as their western counterparts that it is not always conducive to their ability to innovate. As Dr. Kempeni cautioned, “It will however be of outmost importance that the regulatory requirements for clinical trials will not be further aggravated.”

Yamanouchi has also been transforming itself into a more global company, having established important operations in Europe through the late 1990s. The launch of tamsulosin in the Netherlands under the trade name Omnic was considered highly significant as this was the first Yamanouchi product to be clinically developed and marketed by the company in Europe¹⁷.

Contrasting fortunes: UK and Germany
The performance of European countries in attracting R&D investment has not been uniform. Germany, in particular, has suffered considerably in recent times. In its own words, the German Association of Research-based Pharmaceutical Companies, the VFA, has described the cost containment policies of the government as putting Germany among the “also-rans” in terms of competitiveness¹⁸. The VFA’s annual survey revealed that more than half of its member companies expect their sales in Germany to decline in 2003. This has important ramifications for R&D investment in the country. The VFA survey showed that almost half of the companies (48.1%) intended to decrease their R&D expenses in Germany next year, with another quarter (25.9%) planning on freezing R&D spending¹⁸. The VFA’s chairman Professor Dr. Bernhard Scheuble has warned that the government’s policies are putting the industry at risk, adding, “The interim legislation of the German red-green government is a program to obstruct innovation, to stop capital spending and to reduce jobs¹⁹.”

A significant reduction of jobs in the German pharmaceutical industry began with the Health Sector Act of 1992 and increasing price regulation¹⁸. Of about 136,000 employees in 1992, about 23,000 jobs were eliminated up until 1999. From 1993 to 1995, the VFA member companies lost approx. 6,500 jobs¹⁸. Although Germany still remains a dominant R&D force and its 2001 performance has been promising, it now lies third in Europe behind the UK and France in terms of total R&D expenditures¹⁸.

Given the difficult European operating conditions, the UK continues to perform rather well in terms of innovation and R&D investment. In 2002, R&D investment in the UK reached £3.2 billion, with clinical development accounting for almost two-thirds of companies’ expenditure²⁰. As Dr Philip Wright, director of science and technology at the Association of the British Pharmaceutical Industry (ABPI), notes, “The cornerstones of the UK remaining an attractive place for inward investment are access to skills and access to knowledge. Increasing government investment in the research base, positive attitudes to encouraging exploitation and incentives for R&D should help to sustain our competitive position in the future.”

Figures from the ABPI show that 15 of the world’s top 75 medicines were discovered and developed in Britain, more than any country except the U.S.²⁰. The strong performance of the UK in terms of R&D investment is illustrated by the fact that it receives a third of the total European investment. While the rest of Europe has struggled to remain attractive to companies, UK R&D expenditure has maintained itself at a steady 9% as a proportion of global R&D expenditure²⁰. In fact UK R&D expenditure as a proportion of estimated global R&D expenditure has remained relatively unchanged (within a range of 7-9%) since 1990¹.

In a report commissioned by the ABPI and produced by CMR International, it was found that the increase in R&D investment was due to major players in the global pharmaceutical industry having invested in the UK²⁰. AstraZeneca, GlaxoSmithKline and Pfizer accounted for more than 70% of total R&D expenditure in the UK and other companies with a significant presence in the UK included Merck, Sharp and Dohme, Organon, Lilly and Novartis²⁰.

Sir Tom McKillop believes that one of the reasons for the UK’s success has been the emphasis on staff having the right skills for R&D. “Historically, the UK has been very successful in terms of pharmaceutical R&D. The UK has a tradition of being very strong in terms of the chemical, biological and clinical sciences. It has a better confluence of these sciences than other EU countries,” he stated.

The UK also has a different pricing system to those found in the rest of Europe and this has attracted companies to the country. The UK’s Pharmaceutical Price Regulation Scheme (PPRS) covers all licensed branded prescription medicines, but excludes generics and OTCs¹². Under the scheme, companies must set prices to ensure that they earn a specific rate of return on their NHS capital stock of between 17% and 21%¹². Reviews of the system take place irrespective of the changes in government¹². Pharmaceutical companies have found this a more favorable system to deal with as the scheme regulates the profitability of companies but does not affect the ability of companies to get their products to market.

Turning the Corner
The UK is seen by industry to be making proactive moves to improve conditions for European R&D activity further through initiatives like the Pharmaceutical Industry Competitiveness Taskforce (PICTF)²¹. PICTF brought together representatives from UK industry and government to examine the steps that could be taken to make the UK more attractive for R&D investment. The PICTF approach centered on identifying key areas of competitiveness where progress could be made and set up six working parties to examine these (see Table 1). The work of PICTF meant that reliable competitiveness indicators were identified by which the future performance of the industry could be gauged.

As well as looking at the future of the industry, PICTF also delivered a number of outputs on key issues identified. For example, industry representatives had helpful discussions with the treasury on a range of fiscal and taxation issues. PICTF identified a number of issues that were outstanding and would require further evaluation. These included tensions within the EU Single Market for pharmaceuticals and patient access to new medicines.

Although much remains to be done in order to maintain the competitiveness of the UK for pharmaceutical R&D, PICTF represents an important step forward with industry and government trying to find a common position. As Sir Tom McKillop remarked, “Politicians in other EU countries have expressed interest in the PICTF initiative, but so far none of them have carried out such an exercise in the open, public fashion that the UK government has.”

There has however been a similar initiative, carried out at an overall EU level, by the G10 Medicines Group. In late 2002, the G10 Medicines Group brought together top European industry and public health decision makers to consider ways of improving competitiveness in line with social and public health objectives. One of the important achievements of the group was setting up a system of EU indicators that allowed comparisons to be made between the EU and its major competitors as a basis for establishing best practice within the EU and uptake in each Member State. The group also published a report on its findings for the European Commission, outlining proposals for concrete action to be taken²².

Given that the European pharmaceutical industry is still almost on terms comparable with the U.S. in terms of pharmaceutical output, and is still ahead of Japan, there is hope that it can respond to the current situation¹. As EFPIA’s director general put it, in the context of the review of the European pharmaceutical legislation, “Europe’s future will be secured by its ability to innovate, not by its ability to copy. We must stay in the race with the U.S. and use our brains to defeat disease.”

References

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11. Trumball J. G. (2000). Institutions and Industrial Performance: The Pharmaceutical Sector in France, Germany, Britain and the US. MIT IPC Working Paper 00-0002. Massachusetts Institute of Technology Industrial Performance Center. http://web.mit.edu/ ipc/www/pubwp.html

12. Kermani F. (2000). Global Pharmaceutical Pricing: Strategic Issues and Practical Guidelines. Urch Publishing. http://www.urchpublishing.com

13. Anon (2001). Parallel trade. European Federation of Pharmaceutical Industry Associations. http://www.efpia.org

14. Beyond Borders. The Global Biotechnology Report 2002. Ernst & Young.

15. The 2002 JPMA Data Book. http://www.jpma.or.jp

16. Anon. Japanese Drugmakers Take Stock in Difficult Times. Pharma Marketletter 19 April 1999; p3.

17. New Stage in Globalization Marked by Omnic Launch and Opening of Plant in Meppel. Yamanouchi Newsletter http://www.yamanouchi.com/eg/news/let07.html

18. Statistics 2002: The pharmaceutical Industry in Germany; Facts & Figures. Der Verband Forschender Arzneimittelhersteller (VFA). http://www.vfa.de

19. Red-green actionism results in a reduction of jobs, a decline in sales and shifts in research projects. Der Verband Forschender Arzneimittelhersteller (VFA). http://www.vfa.de/en/index_en. html/art_2002-03_004.html

20. UK sees healthy growth in investment, but European levels decline. http://www.abpi.org.uk/press/press%20releases_03/ 030129.asp

21. Europe must follow ‘impressive’ PICTF. April 10, 2002. Pharmafocus. http://www.pharmafile.com/pharmafocus/

22. Pharmaceutical Industry Statement on Conclusion of “G10” High-Level Group on Innovation and Provision of Medicines. European Federation of Pharmaceutical Industry Associations (February 2002). http://www.efpia.org