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The Competitive Status of the U.S. Pharmaceutical ~nclustry The influences of Technology in Determining international industrial Competitive Advantage Prepared by the Pharmaceutical Panel, Committee on Technology and international Economic and Trade issues Office of the Foreign Secretary, National Academy of Engineering Commission on Engineering and Technical Systems, National Research Council Charles C. Edwards, Chairman Lacy Glenn Thomas, Rapporteur NATiONAE ACADEMY PRESS Washington, DC 1933

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N ational Academy P ress ~ 2 101 Constitution Avenue, N.W Washington, DC 20418 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the Councils of the National Academy of Sciences, the National Academy o f Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the N ational Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The National Research Council was established by the National Academy of Sciences in 191A to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and of advising the federal government. The Council operates in accordance with general policies determined by the Academy under the authority of its congressional charter of 1863, which establishes the Academy as a private, nonprofit, self-governing membership corporation. The Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Enaineerina in the . . .. . . ~ ~ conduct of their services to the government, the public, and the scientific and engineering communities. It is administered jointly by both Academies and the Institute of Medicine. The National Academy of Engineering and the Institute of Medicine were established in 1964 and 1970, respectively, under the charter of the National Academy of Sciences. This project was supported under Laster Agreement No. 79-02702, between the National Science Foundation and the National Academy of Sciences. Library of Congress Catalog Card Number 83-50568 International Standard Book Number 0-309-03396-9 First Printing, August 1983 Second Printing, August 1984 Copyrights 1983 by the National Academy of Sciences No part of this book may be reproduced by any mechanical, photographic, or electronic process, or in the form of a phonographic recording, nor may it be stored in a retrieval system, transmitted, or otherwise copied for public or private use, without written permission from the publisher, except for the purposes of official use by the United States Government. Printed in the United States of America

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Participants at Meetings of the Pharmaceutical Panel, Committee on Technology and international Economic and Tracie issues Panel CHARLES C. EDWARDS (Chairman), President, Scripps Clinic and Research Foundation KENT BLAIR, Vic - President, Donaldson Lulkin dc Jenrette WILLIAM NEILL HUBBARD, JR., President, Upjohn Company PETER BARTON MUTT, Partner, Covington and Burling PHILIP RANDOLPH LEE, Professor of Social Medicine, University of California Medical School, San Francisco ARTHUR M. SACKLER, Research Professor, New York Medical College, Publisher, Medical Tribune Newspapers LEWIS HASTINGS SARETT, Senior Vice-President, Merck {c Co., In c. ~ etired) WILLIAM MICHAEL WARDELL, Professor, Department of Pharmacology, University of Rochester Medical Center PAUL F. WEHRLE, Professor of Pediatrics, University of Southern California ALBERT P. WILLIAMS, Director, Health Science Program, The Rand Corporation RICHARD WOOD, Chairman of the Board and Chief Executive Officer, Eli Lilly {c Company ALEJANDRO ZAFFARONI, President and Director of Research, ALZA Corporation Rapporteur LACY GLENN THOMAS, Professor, Graduate School of Business, Columbia University . .

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Additional Participants JAMES ANDRESS, Vice President, Corporate Planning, Abbott Laboratories J. RICHARD C ROUT, Director, Bureau of Drugs, Food and Drug Administration ELI FROMM, House Science, Research and Technology Subcommittee of the Science and Technology Committee, U.S. Congress LEO R. McINTYRE, Office of Basic Industries, U.S. Department of Commerce PAUL MEYER, Assistant Director of Public Affairs for Public Policy, Pfizer, Inc. DUFFY MILLER, Editor, PMA Newsletter, Pharmaceutical Manufacturers Assoc. SUMIYE OKUBO, Policy Analyst, Division of Policy Research and Analysis Scientific, Technological, and International Affairs, National Science Foundation ROLF PIEKARZ, Senior Policy Analyst, Division of Policy Research and Analysis, Scientific, Technological, and International Affairs, National Science Foundation ALAN RAPOPORT, Policy Analyst, Division of Policy Research and Analysis, Scientific, Technological, and Internationa 1 Affairs, National Science Foundation C. MELVIN STONE, Director, International Economic Research, Pharmaceutical Manufacturing Association JULIUS SPIRO, Economist, U.S. Department of Labor Consultant BENGT-ARNE VEDIN, Research Program Director, Business and Social Research Institute, Stockholm, Sweden Staff HUGH H. MILLER, Executive [Director, Committee on Technology and International Economic and Trade Issues MARLENE R.B. BEAUDIN, Study Director, Committee on Technology and International Economic and Trade Issues ELSIE IHNAT, Secretary, Committee on Technology and International Economic and Trade Issues STEPHANIE ZIERVOGEL, Secretary, Committee on Technology and International Economic and Trade Issues i ,v

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Committee on Technology and international Economic and Trace issues (CT ET) Chairman N. BRUCE HANNAY, National Academy of Engineering Foreign Secretary and Vice-President, Research and Patents, Bel 1 Laboratories (retired) Members WILLIAM J. ABERNATHY, Professor, Harvard University Graduate School of Business Administration and Chairman, CTIETI Automobile Panel JACK N. BEHRMAN, Luther Hodges Distinguished Professor of International Business, University of North Carolina CHARLES C. EDWARDS, President, Scripps Clinic and Research Foundation and Chairman, CTIETI Pharmaceutical Panel W. DENNEY FREESTON, JR., Associate Dean, College of Engineering, Georgia Institute of Technology and Chairman, CTIETI Fibers, Textiles, and Apparel Panel JERRIER A. HADDAD, Vice-President, Technical Personnel Development, IBM Corporation (retired) MILTON KATZ, Henry L. Stimson Professor of Law Emeritus, Harvard Law School RALPH LANDAU, Chairman, Listowel Incorporated and Vice-President National Academy of Engineering* JOHN G. LINVILL, Professor, Department of Electrical Engineering, Stanford University and Chairman, E1 ectronics Panel *Formerly, Chairman of the Board, Halcon-SD Group. v

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E. RAY McCLURE, Program Leader, Precision Engineering Program, Lawrence Livermore Laboratory and Chairman, CTIETI Machine Tools Panel BRUCE S. OLD, President, Bruce S. Old Associates, Inc. and Chairman, CTIETI Ferrous Metals Panel MARKLEY ROBERTS, Economist, AFL-CIO LOWELL W. STEELE, Consultant--Technology Planning and M anagement* MONTE C. THRODAHL, Vice-President, Technology, Monsanto Company *Formerly, Staff Executive, General Electric Company. V1

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Preface In August 1976 the Committee on Technology and International Economic and Trade Issues examined a number of technological issues and their relationship to the potential entrepreneuria 1 vitality of the U.S. economy. The committee was concerned with: Technology and its effect on trade between the United States and other countries of the Organization for Economic Cooperation and Development (OECD); Relationships between technological innovation and U.S. productivity and competitiveness in world trade; impacts of technology and trade on U.S. levels of employment; Effects of technology transfer on the development of the less-developed countries (LDCs) and the impact of this transfer on U.S trade with these nations; and . security. Trade and technology exports in relation to U.S. national In its 1978 report, Technology, Trade, and the U.S. Economy,* the committee concluded that the state of the nation's competi- tive position in world trade is a reflection of the health of the domestic economy. The committee stated that, as a consequence, the improvement of our position in international trade depends primarily upon improvement of the domestic economy. The committee further concluded that one of the major factors affecting the health of our domestic economy is the state of industrial innovation. Considerable evidence was presented during the study to indicate that the innovation process in the United States is not as vigorous as it once was. The committee recom- *National Research Council, 1978. Technology, Trade, and the U.S. Economy. Report of a Workshop held at Woods Hole, Massachusetts, August 22-31,1976. National Academy of Sciences, Washington, D.C. . V11

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mended that further work be undertaken to provide a mar e detailed examination of the U.S. government policies and practices that may bear on technological innovation. The first phase of study based on the original recommenda- tions resulted in a series of published monographs that addressed government policies in the following areas: The International Technology Transfer Process.* The Impact of Regulation on Industrial Innovation.* The Impact of Tax and Financial Regulatory Policies 0 n Industrial Innovation.* Antitrust, Uncertainty, and Technological Innovation.* This report on the pharmaceutical industry is one of six industry-specific studies that were conducted as the second phase of work by this committee. Panels were also set up by the com- mittee to address automobiles, electronics, ferrous metals, machine tools, and fibers, textiles, and apparel. The objective of these studies was to (1 ) identify global shifts of industrial technological capacity on a sector-by-sector basis, (2) relate those shifts in international competitive industrial advantage to technological and other factors, and (3) assess future prospects for further technological change and industrial development. As a part of the formal studies, each panel developed (1) a brief historical description of the industry, (2) an assessment of the dynamic changes that have been occurring and are anticipated as occurring in the next decade, and (3) a series of policy options and scenarios to describe alternative futures for the industry. The primary charge to the panel was to develop a series of policy options to be considered by both public and private policymakers. The methodology of the studies included a series of panel meetings involving discussions between (1) experts named to the panel, (2) invited experts from outside the panel who attended as resource persons, and (3) government agency and congressional representatives presenting current governmental views an d summaries of current deliberations and oversight efforts. The drafting work on this report was done by Dr. Lacy Glenn Thomas, Columbia University. Professor Thomas was responsible for providing research and resource assistance as well as producing a series of drafts, based on the panel deliberations, that were reviewed and critiqued by the panel members at each of their three meetings. *Available from the National Academy of Engineering, Office of the Foreign Secretary, 210 1 Constitution Avenue, N.W., Washington, D.C. 20418. . vail

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Contents SUMMARY 1 OVERVIEW OF U.S. PHARMACEUTICAL INDUSTRY Emergence of the Modern Pharmaceutical Industry, 7 Nature of Pharmaceutical Competition, 12 Benefits and Risks of Technical Change, 14 Overview and Limitations of this Study, 17 2 COMPETITIVE POSITION OF THE U.S. PHARMACEUTICAL INDUSTRY Research, 23 Innovation, 27 Production, 32 Sales, 32 Structure, 37 Trade, 47 Summary, 49 3 DETERMINANTS OF NATIONAL PHARM ACEUTICAL COMPETITIVE ADVANTAGE Labor Costs, 53 Market Growth, 54 National Scientific Capacity, 55 General Relative Decline of U.S. Industry, 5 5 Industrial Policy: Regulation, 57 Industrial Policy: Taxation, 6 7 Industrial Policy: Trade, 68 Summary, 69 1X 21 53

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4 NEW DEVELOPMENTS AFFECTING THE INDUSTRY 72 Scientific Advances, 72 Japanese Developments, 75 5 OPTIONS FOR AMERICAN INDUSTRIAL POLICY Trade Options, 78 Domestic Economic Options, 79 Regulatory Options, 81 BIOGRAPHICAL SKETCHES INDEX x 77 89 93

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The Competitive Status of the U.S. Pharmaceutical ~ nclustry

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