Comparing Pharmaceutical and Biotechnology Innovation in the United States and Europe : The Key Player is Venture Capital Financing and not Patents

It is often claimed that the liberal granting of patents is essential for the development of the pharmaceutical industry, especially modern biotechnology. The facts do not support that view.

NGP's Mind the gap? writes:

"Fast facts

For most of the past century, Europe has been leading the world in pharmaceutical innovation. But over the last decade, the US gradually overtook Europe both in terms of innovative efforts (R&D investment) and in terms of the output of its innovative activity (New Molecular Entities).

Europe is still leading the world in pharmaceutical production, which has risen fivefold in value over the last 20 years, with exports accounting for 60 percent of total production.

More than 400,000 Europe-born scientists are estimated to have crossed the Atlantic, where they account for 40 percent of scientists working in the US.

About 40 percent of the new active substances launched nowadays on the world market have been discovered and developed in Europe, whereas 30 years ago Europe’s share of pharmaceutical discoveries was 65 percent."

The reason for the mass exodus of pharmaceutical scientists from Europe to the USA is the lure of more money, enabled by exorbitant U.S. pharmaceutical profits as engendered by a failed and exploitative patent policy. As written by Marcia Angell in Excess in the pharmaceutical industry:

"Although the pharmaceutical industry claims to be a high-risk business, year after year drug companies enjoy higher profits than any other industry. In 2002, for example, the top 10 drug companies in the United States had a median profit margin of 17%, compared with only 3.1% for all the other industries on the Fortune 500 list. Indeed, subtracting losses from gains, those 10 companies made more in profits that year than the other 490 companies put together. Pfizer, the world's number-one drug company, had a profit margin of 26% of sales. In 2003, for the first time in over 2 decades, the pharmaceutical industry fell slightly from its number-one spot to third, but this was explained by special circumstances, including Pfizer's purchase of another drug giant, Pharmacia, which cut into its profits for the year. The industry's profits were still an extraordinary 14% of sales, well above the median of 4.6% for other industries. A business that is consistently so profitable can hardly be considered risky.

Excess profits are, of course, the result of excess prices — and prices are excessive principally in the United States, the only advanced country that does not limit pharmaceutical price increases in some way. Of the top 10 drug companies in the world, 5 are European and 5 are American, but all of them have the US as their major profit centre. In the US, uninsured patients (of which there are many) are charged more for drugs than those who have large insurance companies to bargain for them, and the prices of prescription drugs are generally much higher to start with than in other advanced countries. Moreover, the prices of top-selling drugs are routinely jacked up in the US at 2 to 3 times the general rate of inflation."

In reality, biotechnology patents are not an issue of health, invention or patent law, but rather a matter of greed for money, as discussed in the Journal of Intellectual Property Law & Practice by Katherine A. Helm in her article, The battle over global drug markets: enforcement of pharmaceutical patents in the United States, Europe, and Japan.

The facts also tell a different story about the alleged relationship of patents to innovation. Margaret Sharp and Pari Patel, SPRU, University of Sussex, write as follows in their article Europe's Pharmaceutical Industry: An Innovation Profile: Summary as part of EIMS (European Innovation Monitoring System):

"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....

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."

Accordingly, the surely short-lasting biotechnology edge that American firms obtained in the last decade was largely a product of more lenient American venture capital financing practices. Biotechnology innovation has had little to do with patents and patent law.