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2 Competitive Position of the U.S. Pharmaceutical Industry A fundamental charge for this study is to assess the competitive position of U.S. pharmaceutical firms against their major foreign counterparts. Three complexities immediately beset the panel's efforts to execute this assessment: 1 ~ The extensive and increasing multinational diffusion o f i ndividual pharmaceutical firms has rendered "U.S. pharmaceu- tical industry" a term of unclear meaning. The larger pharma- ceutical houses founded in America have long since developed extensive facilities in dozens of foreign markets. Conversely, f oreign-based firms have established operations in the United States; in fact, the largest U.S. firm in the mid-1970s in terms of pharmaceutical sales to American consumers was Roche Laboratories, a subsidiary of the Swiss-based f irm Hoffman La Roche. The widespread practices of licensing innovations, marketing agreements, and joint ventures among firms of many nationalities further complicates the assignment of specific facilities and specific products to individual nations. 2) The "competitive position" of firms in an industry that exhibits rapid growth of markets and radical product innovation is a multidimensional phenomenon that is not easily characterized. From one perspective, current rates of return are an overal 1 summary measure of competitive position. Yet, these returns actually appraise past corporate performance and achievements rather than indicate future industrial strength. From a second perspective, current market shares provide a reasonable proxy for competitive position in the immediate future. For the longer horizon, however, the intensely innovative nature of th e pharmaceutical industry makes the extent and vitality of corporate research a crucial determinant of competitive success. Reduction of these and other dimensions of competitive position into a single univariate index is in no way a simple task. 21

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22 3) Finally, the charge to "assess" the pharmaceutical industry presumes a coherent perspective for evaluation. Yet, several substantially varying perspectives immediately present themselves. American labor will assess the pharmaceutical industry on the basis of the number of jobs and the volume of salaries generated domestically, investors on the basis of future Drofits. and consumers on the basis of variety. safety. effective ness, and costliness of remedies. _ , . . . From a broader national perspective, the level of export earnings, the industrial con- centratlon of output, and the level ot long-run expenditures tor national health care are factors which must validly be considered in assessment. Difficult choices are faced in reducing these potentially conflicting goals into a single "public interest." The strategy of this report for coping with these complexities i s as follows. Six aspects of industrial performance are con- sidered: research effort, innovational output, production, sales, m arket structure, and international trade. Relevant data for these six aspects are reported for the post-1960 era for pharma- ceutical institutions aggregated in two ways: first, by country of location, and second, by country of ownership. Thus, for purposes of this report, "U.S.Aocated firms" refer to all pharmaceutical facilities that physically operate within the territorial boundaries of the U.S. regardless of national ownership, while "U.S.-owned firms" refer to the pharmaceutical facilities of the U.S.-based multinational firms regardless of their geographic locations. In many cases, data limitations allow only one of these two aggrega- tions. In other cases, common sense dictates that only one definition of nationality be used; export data necessarily refer to pharmaceutical activities within national boundaries, while market share data necessarily refer to sales of multinational firms owned by the same country (e.g., the U.S. share of the Japanese market). Each aggregation is important. though for different DurDoses. A _ _ _ ~ . ~ ~ Aggregations by country of location enable comparison of the different economic experiences and public policies of variou s national governments and how these affect the pharmaceutical industry. Aggregations by country of ownership enable evaluation of differing national management strategies and modes of industrial operation. However the issue of nationality is settled, the relative position of U.S. firms has been at best stable and has at worst deteriorated with regard to each of the six criteria considered. In other words, the U.S. share of world pharmaceutical research, innovation, production, sales, and exports and the number of U.S. firms that are active participants in the ethical drug markets have all been constant or declined since 1960; in some instances, this decline has been dramatic. The unidirectional nature of these

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23 trends somewhat relieves the second and third difficulties raised above. Since all of the chosen measures indicate stability o r decline of the American competitive position, complex problems of the relative importance of each measure are minimized. It is important to realize that any decline of American firms discussed In this report Is relative to their foreign counterparts and not absolute. For example, during the 1970s, levels of produc- tion and research for pharmaceutical facilities within the territorial U.S. gradually increased. Yet, during this same period, production and research expenditures increased extremely rapidly abroad. As a consequence of these differing growth rates, the U.S. share internationally of both research expenditures an d production markedly declined. RESEARC H Research is the foundation of competitive strength for modern pharmaceutical firms. As shown earlier, growth in sales an d profits for major ethical drug companies are derived from a handful of commercially successful new products discovered and developed through industry research efforts. Pharmaceutical research may be divided into four phases: 1 ) Basic research- - dvancement of basic pharmacological knowledge. This is the only phase not directly regulated by government, although government regulation has a substantial indirect impact. About 1 2 percent of the pharmaceutical research performed in the United States is basic.1 2) Discovery effort--the synthesis of active substances and -the establishment of biological effect. 3) Applied research--the extensive biological (animal) and clinical (human) testing of substances to determine pharmacological activity and risk of adverse effects. 4) Development--the determination of dosage form, th e development of manufacturing processes, and the production of drug product. Pharmaceutical research is characterized by substantial risks and lengthy time requirements. For research that will lead to completely new products, the process begins with assemblage of a research team to consider a therapeutic problem, to review the literature, to examine hundreds of chemical substances, and to select a handful of these substances for further investigation. The chosen substances or potential drug candidates will be tested in animals for pathological and toxic effects. Only about 2 percent of those compounds tested biologically will be subsequently .

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24 tested in humans, although the attrition rate varies enormously across different therapeutic fields.2 Most compounds will fail to demonstrate suitable therapeutic advantages, or will not be commercially promising. Two to four years on average will elapse from the selection of a potential drug candidate to the initiation of human testing. Once the stage of clinical testing is reached, regulatory review of the research design is required in many nations--in the United States, an Investigational New Drug (IND) exemption is required, in the United Kingdom, this requirement was labeled the Clinical Trial Certificate (CTC). In early 1981 the U.K. CTC was replaced by the Clinical Trial Exemption procedure, which is now quit e different from the U.S. IND. Clinical testing under the IND proceeds in three phases. In Phases I and II, healthy volunteers are administered the drug to examine basic pharmacological effect and safety, and a limited number of patients receive the drug to examine its efficacy in treatment of a specific illness. Expanded studies are conducted in Phase III to confirm the findings of Phase II and to uncove r uncommon adverse reactions. After the first three phases of clinical trial are completed, the compound is submitted to the regulatory authority for permission to market the drug. Id the United States, this submission is entitled the New Drug Application (NDA). Only about 10 percent of those drugs that are initially included in clinical trials will subsequently be the subject of an NDA. Average total time for the IND/NDA period of testing and approval in the United States is currently in excess of eight years. As of 1976 the mean duration of the IND/NDA period for New Chemical Entities (NCEs) self -originated by U.S.-located firm s was in excess of nine years. However the mean duration of the IND/NDA period for acquired NCEs was about 4.5 years.3 In short, the full period from initiation of basic research into a particular pharmacological problem to the commercial launching of a new product may exceed 15 years. Recently, an additional Phase IV of studies have been required on consumers of a few drugs after marketing. Research expenditures by pharmaceutical firms have substan- tially increased during the past two decades, but at greatly divergent rates among facilities. Table 2-1 presents basic data on expenditures for pharmaceutical RED by corporate facilities aggregated by national location. While there are inevitable complications for interpretation caused by exchange rate fluctuations, it is clear that growth rates for such R&D have been significantly higher for facilities in Western Europe and Japan than in the United States. More recent data are presented in Table 2-2 and indicate that higher rates of growth have persisted

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26 TABLE 2-2 Pharmaceutical R&D Expenditures by Nationality (Location), Recent Years Year Federal United States United Republic Kingdom Germany Japan 67 64 87 102 106 124 France Italy 1973 1974 1975 1976 1977 1978 1979 Annual rate of growth l.l~o 906 857 893 927 947 968 967 950 942 1,000 1,148 1,243 1,389 na 87.5 81.8 95.3 112.9 129.3 na 941 789 1,021 1,073 1,138 73.9 63.5 73.7 na na 79.6 13.1% 7.9% 8.1% 4.8% 1.5% NOTES: Data are in millions (except for Japan and Italy, in billions) of constant (1975 base) local currency and represent expenditures for both human and veterinary research. Deflator is the wholesale price index in each country as compiled by Me International Monetary Fund. SOURCES: Pharmaceutical Manufacturers Assoc~ation,Annual Survey Report, PMA, Washington, D.C., venous years. Association of the British Pharmaceutical Industry, Annual Report, ABPI, London, venous years. Bundesverband der Pharmazeutischen Industry, Pharma Jahresber~cht, BPI, Frankfurt, various years. Droit et Pharmacie, "Research," June 1980. International Monetary Fund, International Financial Statistics Yearboo*, IMP, Wash~ng- ton, D.C., 1979. at least for Japan, West Germany' and the United Kingdom. It is clear from these data that the share of world pharmaceutical research that is located in the United States has fallen from about two-thirds in the early 1960s to about one-third today. The U.S.-owned share of world pharmaceutical RED expendi- tures may be marginally larger than the U.S.-located share, as U.S. multinational pharmaceutical firms appear to spend more for research abroad than do foreign~wned firms in the United States. Reports from U.S.-owned multinationals indicate that the foreign subsidiaries of these firms spent Ally million for research in 1973 and $238 million in 1978, or approximately a constant 6 percent share of world expenditures.4 Thus, note by way of example that if foreign~wned firms conducted absolutely no pharmaceutical RED in U.S.Aocated laboratories, then the U.S.-owned share of ethical drug R&D would be simply the U.S.-located share (given above) plus 6 percent. the U.S. figures plus 6 percent thus pro- vide an upper bound on the U.S.-owned share of world RED. However foreign-owned firms do maintain large research

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27 facilities in the United States, though, unfortunately, the exact division of U.S.-located R&D between that of U.S. - wned and foreign~owned firms is not available. In any case, industry con- sensus indicates that, although the foreign~wned share of U.S.- located pharmaceutical RED has not dramatically changed, if anything it has slightly increased. Hence, while the trend in the U.S.-owned share of world pharmaceutical R6cD cannot be exactly estimated, it is clear that this share has markedly dropped. In sum, while U.S.-owned expenditures for pharmaceutical research at home and abroad are large and growing, they have not increased nearly enough to match the exceptional expansion of foreign-owned research efforts. The upshot, measured by either location or ownership, is a significant decline in the U.S. share of RED, the foundation of competitive position in this industry. INNOVATION The enormous increase in world pharmaceutical RED expenditures might be expected to yield a comparable surge of new products for consumers. Unfortunately, levels of innovative productivity in the industry, at least as measured by the number of NCEs brought to the market, have been, at best, stable for the last two decades and have sharply dropped since the 1950s. Figure 2-1 demonstrates these trends for the United States. Although the medical or thera- peutic value of today's NCEs is probably better than in the past, it is a straightforward conclusion that the average cost per inno- vation has drastically risen in the last 20 years. An overview of six economic studies that examined the increased costs of phar- maceutical innovation found the cost per NCE to have risen in constant (1980) dollars from approximately 56.5 million before 1962 to about $44.7 million in 1980 (excluding the cost of capital). The average RED expenditure per NCE (including capital cost) has been estimated by the most prominent of these six studies at $70 million in 1980 dollars.5 The fundamental reason for the dramatic increase in innova- tion costs lies in the substantially greater clinical trials an d toxicology testing performed in the process of bringing a new compound to market. Advances in medical science have vastly improved the abilities of pharmaceutical researchers to identify potential adverse reactions and to predict therapeutic efficacy. While most of these costly procedures have been mandated by national regulatory authorities, some would have been adopted by industry in any case. The decline in NCE introductions is thus not totally indicative of a decline in basic pharmaceutical innovation. Indeed, patent

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28 filings in the United States would indicate that basic innovation has increased in pace with increased research expenditures. Patent filings by U.S. firms have roughly doubled since 1963, while filings of foreign firms have quadrupled. Instead, the costly expense of premarket testing has forced firms to be much more selective of those compounds to be brought to market. Fewer compounds will possess sufficient market potential to recoup the substantial and increasing RED costs incurred for each marketed substance. One indication of this greater selectivity is the decline in the ratio of INDs filed to patents granted, which is now at half of its level in 1963 (see Table 2-3~. While the number of compounds entering clinical testing is not observable prior to the 1962 imposition of the IND requirement, there is every reason to believe that the 1950s equivalent of this ratio was even higher. 75 50 C' of 25 o _~ it/ / R&D ~ A A .~ ~ \ \ /\ / \ lotal Nub Introductions V/\\ /~/ Domestic Discovered NCE Introductions / \~/ I/ / /- 1 1 1 1 O 1979 1 955 1 960 1 965 1 970 1 975 YEAR 600 500 o CO 400 a, c o ._ ._ E 300 ,,, 200 z UJ X LU 1 00 ci25 FIGURE 2-1 Domestic U.S. Introductions and Discoveries of New Chemical Entities (NCEs) and Pharmaceutical R&D Expenditures, U.S.-based Firms, 1955-1979 N OTE: RED figures exclude veterinary efforts but include overseas expenditures of U.S.-based firms. SOURCE: Henry Grabowski, " Public Policy and Innovation: The Case of Pharmaceuticals." Technovation. 198 2.

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29 TABLE 2-3 Total U.S. Patent Registrations, Drugs and Medicines, and Total U.S. IND Filings, 1963-1977 IND-Patent Year Patents INDs Ratio 1963 1,532 1,066 0.69 1965 1,865 751 0.40 1967 - 2,438 671 0.28 1969 2,630 956 0.36 1971 2,417 923 0.38 1973 3,166 822 0.26 1975 4,385 876 0.20 1977 4,168 925 0.22 SOURCES; (Patents) U.S. Patent and Trademark Office, Office of TechnoLogy Assessment and Forecast, Active Patent Ctassif- cation in R&D Intensive Industries and Fifty-two Standard In- dustrial Classif cation Categories, U.S. Government Printing Office, Washington, D.C., 1976. (INDs) Pharmaceutical Manufacturers Association, Prescrip- tion Drug Industry Factboo* 1980, PMA, Washington, D.C., 1981. The upward trend in costs of innovation is of course an international phenomenon that has led in all industrial nations to comparable extensive pretesting and selectivity in pursuit of new drugs. The inevitable consequence has been a worldwide decline in introduction rates (see Figure 2-2~. While research costs have risen in all countries, the increased has apparently been higher in the United States than elsewhere. When the greater expense of innovation in the United States is considered alongside of rela- tively decreasing U.S. levels of research expenditure, it is not surprising to find that the U.S. share of pharmaceutical innovation has dropped over the last two decades--in other words, that foreign levels of innovation have declined less severely since the 1950s than those of the United States. Relative national success with pharmaceutical innovation may be documented at three distinct points during the innovation process: patent filing, IND filing, and actual introduction--due to the fact that data are systematically collected at these points. Each of these three sets of statistics presents advantages and disadvantages for use as indicators of contemporary competitive advantage. Because of the lengthy time lag between discovery and marketing, data on currently introduced drugs will be indica- tive of economic conditions and management decisions of as much as a decade ago. The introduction data are, however, available for most major national markets. IND filings and patents issued will more nearly reflect current circumstances, but are readily available only for the United States. While there is little reason

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30 to expect trends in these filings for the United States (the world's largest market for pharmaceuticals) to be unrepresentative o f worldwide conditions, it would have nonetheless been useful to have corroborating evidence from other nations. Turning first to the U.S. - wned share of drugs actually marketed, data on NCEs introduced over the past few decades are given in Table 2-4 for the IJnited States and in Table 2-5 for the world. Both tables demonstrate stability in the U.S. share o f introductions, except for a downturn around 1970 in the U.S.- owned share of introductions into the United States. This temporary downturn (or increase in foreign~wned share) in the United States is also illustrated in Figure 2-3. 60 _ \\ \\N 50 - if:\ : `~ ~ a.'\\/ 40 Us Cal 30 c 20 10 ) _ _ O 1 V-. ~ , U.S. England ~ France .~.~. Germany ,_,>..~ .. ~ ~ ~~ i9 OCR for page 21
31 TABLE 2-4 NCEs Marketed in U.S. by Year of First Introduction and Nationality (Ownership) of Innovating Company, 1951-1980 United States Foreign Time Intenral Number of NCEs Origin Percentage Origin Percentage 1951-56 172 109 63 63 37 1957-62 188 109 58 79 42 1963-68 88 53 60 35 40 1969-74 76 37 49 39 5 1 1975-80 94 54 57 40 43 SOURCE: Center for Study of Drug Development, University of Rochester. Quite different findings emerge from examination of data that are collected for an earlier stage in the innovation process and thus are more representative of the contemporary economic environment for pharmaceutical research. Patent data are given in Table 2-6 and show a drop in the U.S. - wned share of drug patents from 65 percent to about 50 percent during the 1970s. Breakdowns for IND filings in the United States are given in Table 2-7 and in Figure 2-4 and require a brief word of explanation. INDs in Table 2-7 are given by country of ownership, defined here on the basis of the firm holding patent rights, and not necessarily the firm actually marketing the NCE. An example of this differ- ence is provided by Motrin, an extremely successful drug discov- ered and developed by the British firm Boots, but marketed under license in the United States by Upjohn. INDs in Figure 2-4 are given in terms of nationality by location, indicating the country in which synthesis physically occurred regardless of ownership 0 f facilities housing this research. All IND data count only original filings for new chemical entities. Both Table 2-7 and Figure 2-4 show a continued decline in U.S. - wned or located INDs alongside rough stability in levels of foreign INDs. The comparative trends in levels (downwards vs. stable) that are visible in Figure 2-4 are even more revealing in this case than the simple percentages. In conclusion, the sharp decline in the U.S. share of world pharmaceutical RtcD expenditures in the 1960 to 1970 period was followed by a significant drop after about 1967 in the U.S. - wned share of medicinal patents filed in this country and a continued decline after 1960 in the U.S. share of NCEs started in American clinical trials. By the end of the 1970s, no comparable decline in the U.S. - wned share of marketed NCEs had occurred and indeed that share remained at levels prevailing since the 1960s. Con- tinued stability in this share is at best uncertain.

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44 TABLE 2-12 Concentration of Sales in Domestic Pharmaceutical Markets, United States and United Kingdom Concentration of Sales in the U.S. Ethical Drug Industry, 1957-1973 Year 4-Firm 8-Firm 20-Firm N.E. 1958 28.8 50.9 79.5 24.27 1959 26.8 48.0 75.5 27.32 1960 25.8 47.3 75.4 28.25 1961 25.8 45.6 75.3 29.07 1962 25.4 44.3 74.5 29.76 1963 24.5 43.5 74.6 30.40 1964 23.7 42.2 74.1 31.06 1965 23.4 42.3 73.7 31.25 1966 24.4 42.7 74.1 31.15 1967 24.5 41.8 72.3 32.70 1968 25.4 43.6 74.4 30.86 1969 26.1 43.9 74.4 30.12 1970 26.3 43.2 73.6 30.77 1971 26.5 43.7 76.0 28.99 1972 27.6 43.6 75.4 28.90 1973 27.8 43.5 75.7 28.65 Concentration of Sales in U.K. Ethical Drug Market and Percentage of U.S. Market Accounted for by U.S. Firms, 1962-73 Share of U.S. Market Held Year 4-Firm 8-Firm 20-Firm N.E. by U.S. Firms 1962 29.9 46.8 80.7 24.63 46.9 1963 28.9 45.8 81.1 25.44 47.2 1964 27.9 44.7 79.6 26.95 45.9 1965 27.0 44.0 78.2 28.57 45.9 1966 26.3 42.9 76.7 28.65 45.2 1967 28.0 43.0 75.1 28.74 44.0 1968 29.7 44.4 75.1 27.78 42.8 1969 29.5 43.9 73.2 26.52 40.1 1970 29.7 44.1 73.2 28.65 39.4 1971 30.1 46.9 76.1 26.25 38.1 1972 29.1 45.9 75.2 . 27.22 38.6 1973 28.8 45.5 75.3 27.56 38.4 SOURCE: Henry Grabowski and John Vernon, "Structural Effects of Regula- tion on Innovation in the Ethical Drug Industry," in Robert Masson and David Qualls, eds. Essays on Industrial Organization in Honor of Joe Rain, Ballinger, Cambridge, 1976.

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45 TABLE 2-13 Concentration of Innovation in Domestic Pharmaceutical Markets, United States and United Kingdom - Concentration of Innovational Output in the U.S. Ethical Drug Industry Total Number Number of Concentration Ratios of of New Chemical Firms Having Innovational Output Period Entities(NCEs) an NCE 4-Firm 8-Firm 20-Firm 1957~1 233 51 46.2 71.2 93.1 1962-66 93 34 54.6 78.9 97.6 1967-71 76 23 61.0 81.5 97.8 Innovational output is measured as new chemical entity sales during the first three full years after product introduction. Data Sources: List of New Chemical Entities in each year obtained from Paul de Haen Annual New Product Parade, various issues; all information on ethical drug sales obtained from Intercontinental Medical Statistics. Concentration of Innovational Output in the U.K. Ethical Drug Industry Total Number Number of Concentration Ratios of of New Chemical Firms Having Innovational Output Period Entities (NCEs) an NCE 4-Firm 8-Firm 20-Firm 1962~6 115 48 63.1 76.6 94.1 1967-7 1 95 44 42.7 66.4 91.1 Innovational output is measured as new chemical entity sales in U.K. during the first three full years after product introduction. NOTE: Preliminary calculations suggest that innovative concentration in the United States has been declining in recent years in contrast to the apparent trend in this table which ends with 1976. SOURCE: Henry Grabowski and John Vernon, "Structural Effects of Regulation on Innovation in the Ethical Drug Industry," in Robert Masson and David Qualls, eds. Essays on Industrial Organi- zation in Honor of Joe Rain, Ballinger, Cambridge, 1976.

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46 TABLE 2-14 Source of Approved NC Es Marketed by U.S.-Owned Firms Stratified by Firm-Size 1963-1 968 1969-1974 1975-1 980 Self-Originated (DO) Small 50.00 51.72 41.67 Middle-sized 55.56 26.67 52.63 Large 77.27 80.00 83.33 Acquired from U.S. Sources (%) Small 20.59 17.24 22.22 Middle-sized 0.00 26.67 21.05 Large 4.55 0.00 0.00 Acquired from Foreign Sources (Jo) Small 29.41 31.03 36.11 Middle-sized 44.44 46.67 26.32 Large 18.18 20.00 16.67 Source of INDs Filed by U.S.-Owned Firms Stratified by Firm-Size ~~ 1969-1974 1975-1980 1963-1968 Self-Originated (O Small 74.19 69.72 56.00 Middle-sized 74.24 85.71 78.57 Large 96.39 93.67 89.74 Acquired from U.S. Sources (%) Small 7.26 3.67 4.00 Middle-sized 4.54 4.40 1.79 Large 2.41 0.00 0.00 Acquired from Foreign Sources (ho) Small 18.55 26.61 40.00 Middle-sized 21.21 9.89 19.64 Large 1.20 6.33 10.26 - NOTE: The ranking of B=ns is based on their total domestic U.S. pharmaceutical sales for 1977-1978 as described and listed in the 1978 edition of the Medical and Healthcare Market- place Guide. SOURCE: Center for the Study of Drug Development, University of Rochester.

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47 two reasons. First, lower rates of return may be incurred on licensed drugs due to license fees that must be paid to the innova- tor. This smaller cash flow provides less funding for internal research to self-originate new drugs. Second, the substantial reliance on foreign firms for licensed NCEs is based on the fact that few foreign~wned firms (other than the Swiss) have until recently established extensive subsidiaries in the United States. Should this arrangement be altered by establishment of suc h U.S.-located subsidiaries, a substantial source of sales for U.S.- owned, U.S.-located firms could gradually disanDear. In fact. ~ , . . numerous foreign wned firms have indeed entered the U.S. market in recent years, often by purchasing smaller U.S. firms. Table 2-15 indicates the extent of this multinational diffusion into the United States. It is interesting to note that almost all of the indicated entry has derived from suggesting that should Japanese-owned firms later attempt such entry, fewer appropriate small firms will be available for similar entry by merger or purchase. It is in fact the increased multinational diffusion of nationally owned pharmaceutical firms which makes it difficult to interpret the British concentration data previously given in Table 2-13. The entry of foreign-owned subsidiaries into the British market could offset any contraction in innovation or sales by smaller British- owned firms. Nonetheless, it is interesting to know that in a period when U.S.-1 ocated innovation became concentrated into fewer firms, no such concentration was observed in certain foreign markets. Iddeed, roughly during this period, the West German-located market became slightly more competitive, with the market share of the five leading firms falling from 27 percent in 1975 to 26 percent in 1979, and more significantly the share of the top ten firms falling from 45 to 40 percent during the same time period.10 EuroDean-o wned firms, TRADE Pharmaceutical products have traditionally provided a surplus for the U.S. trade balance (see Table 2-16~. Yet, this surplus in absolute terms is not significantly greater than that of Switzer- land, West Germany, or the United Kingdom, despite the sum stantially larger level of U.S. production. This imbalance arises because the U.S. exports a much smaller fraction of production than do its prime competitors (as shown in Table 2-17~. This lower level of exports as a proportion of domestic production provides the United States with a currently roughly equivalent share of world pharmaceutical exports (see Table 2-18), a share that has markedly deteriorated since 1950. In part, this low

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48 TABLE 2-15 Foreign-Based Participants in the U.S. Pharmaceutical Marketplace . Foreign Company U.S. Subsidiary Year of Entry Long-standing Participants AB Astra Astra Pharmaceuticals Hoffmann-La Roche Roche Labs The Wellcome Foundation Burroughs-Wellcome Sandoz, Ltd. Sandoz Pharmaceuticals Dorsey Labs Akzona, Inc. (AKZO) Organon Pharmaceuticals Ciba~eigy AG Ciba Geiger Alza 1977 S. J. Tutag 1979 Recent Entrants HoechstAG Hoechst-Roussel about 1966 Calbiochem Corp. 1977 Bayer AG Cutter Labs 1973 Miles Labs 1978 Dome Labs 1978 C. H. Boehringer Sohn Boehringer Ingelheim Ltd. 1973 Hexagon Labs 1975 Philips Roxane 1979 Fisons, Ltd. Fisons Corp. 1973 ICI Ltd. Stuart Pharmaceuticals about 1968 Beecham, Inc. Beecham Labs 1969 Byk~ulden, Inc. Savage Labs ? Montedison Adna Labs (kilo) 1974 Warren-Teed 1977 Boots, Ltd. Rucker Pharmacal 1977 Glaxo Group, Ltd. Meyer Labs 1977 Nestle Alimentana SA Alcon Labs 1977 Lafayette Pharrnacal 1978 Burton Parsons 1979 SANOFI SA Towne Paulsen 1975 Generic Pharm. Corp. 1976 Western Research Labs 1976 Connaught Labs, Ltd. Swiftwater Biological Unit 1978 Rhone-Poulenc, SA Nonvich-Eaton (10.5~o) 1978 Green Cross Corp. Alpha Therapeutics 1978 Mitsubishi Chem. Ind. Key Pha~maceuticals (lO~o) 1979 Schering AG Berlex Labs 1979 Kali~hemie AG Purepac Labs 1979 SOURCE: Merck & Co., Inc., MSD Strategic Planning, West Point, PA. proportion of production devoted to exports is associated with the relatively more extensive multinational scope of U.S.-owned firms, and their reliance on sales rather than exports. Equally important is the traditional relative unimportance of exports to U.S. producers, as may be seen by comparison of total U.S. exports to Gross National Product (GNP). From this perspective, the U.S. pharmaceutical industry is typical of other sectors of the American economy. Only the United Kingdom and Switzerland

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49 TABLE 2-16 Balance of Pharmaceutical Trade, Current Account, Selected Nations (millions of dollars) 1965 1970 1975 West Germany 164 316 528 United States 198 335 639 United Kingdom 156 254 611 Switzerland 147 251 669 France 55 86 293 Italy 2 11 40 Japan -27 -150 -316 SOURCE: United Nations, Yearbook of International Trade Statistics, UN, New York, various years. export a significantly higher share of pharmaceutical production than of total GNP. An interesting feature of international pharmaceutical markets is the relative isolation of the United States and especially Japan from direct international trade in ethical drugs (see Tables 2-17 and 2-19~. SUMMAR Y A basic conclusion of any overview of the preceding data is that the competitive position of the U.S. pharmaceutical industry has TABLE 2-17 Exports as a Proportion of Domestic Production, Selected Nations (percentages) 1965 1970 1975 Pharm. GNP Pharm. GNP Pharm. GNP West Germany 25 19 28 22 24 26 United States 6 5 6 5 11 8 United Kingdom 27 18 45 22 55 26 Switzerland 90 30 91 35 na 30 France 11 14 18 16 21 18 Italy 11 17 17 19 17 21 Japan na 11 2 11 2 14 NOTE: Pharmaceutical figures give the ratio of pharmaceutical exports to domestic pharmaeeu- tieal production, while GNP figures give the ratio of dollar volume of all exports to dollar value of GNP. SOURCES: Organization for Economic Cooperation and Development, The Chemical Industry, OECD, Paris, various years. United Nations, Yearbook of International Trade Statistics, UN, New York, venous years. International Monetary Fund, International Financial Statistics, VXXXIII, No. 8, August 1980.

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50 TABLE 2-18 Exports of Pharmaceuticals, Selected Nations Market Share (percentages) 1955 1960 1965 1970 1975 West Germany 10 12 16 19 16 United States 34 30 16 15 13 United Kingdom 16 14 13 13 13 Switzerland 14 13 14 13 13 France 12 11 11 9 10 Netherlands 3 5 5 6 5 Italy 3 4 5 6 6 Japan 1 2 3 2 2 SOURCE: United Nations, Yearbook of International Trade Statistics, UN, New York, various years. deteriorated, especially in the earliest phases of the discovery/ development marketing process. The trend of this decline has not been constant, but rather has proceeded rapidly in the early 1960s, followed by more gradual movement. The initial decline occurred roughly in the years 1962 to 1968. During this period, the U.S. share of world pharmaceutical exports was halved, market shares for sales deteriorated markedly, the number of firms producing NCEs was halved, and the U.S. share of nationally located RED dropped significantly. Subsequently there has been rough stability in terms of shares of innovation, exports, and national market sales and of number of innovating firms, while U.S. shares of production, patent, clinical trials, and research have exhibited continued gradual decline. TABLE 2-19 Pharmaceutical Exports as a Proportion of Domestic Consumption, Selected Nations (percentages) 1965 1970 1975 Japan West Germany 8 12 13 United States 2 2 3 United Kingdom 6 16 24 Switzerland 64 70 na France 7 12 13 Italy 11 16 16 na 7 7 NOTE: Apparent consumption is computed as the sum of production and imports minus exports. SOURCES: Organization for Economic Cooperation and Development, The Chemical Industry, OECD, Paris, various years. United Nations, Yearbook of International Trade Statistics, UN, New York, various years.

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51 For the near future, there are numerous indications that recent stability in U.S. shares of introduction and sales may not persist. Declining U.S. shares of RED expenditures and NCEs beginning clinical trials should, in time, lead to falling U.S. shares of introductions and sales, though the exact magnitudes and timing of these downturns are impossible to predict. By way of conclusion, it should once again be stressed that for the foreseeable future U.S. pharmaceutical firms will remain innovative and growing. Available data simply indicate foreign firms in this industry will be even more innovative and will grow even more rapidly. The result is a diminished though still vital U.S. presence, one of the more significant of high-technology industries. NOTES 1. Charles River Associates, op. cit., p. 56. 2. Figures by the U.S. Pharmaceutical Manufacturers' Association, cited in Barrie James, The Future of the_ Multi- national Pharmaceutical Industry to 1990, New York, John Wiley, 1977, p. 71. 3. William M. Wardell, et al., "Development of New Drugs Originated and Acquired by United States-Owned Pharmaceutical Firms, 1963-1976," Clinical Pharmacology and Therapeutics, Vol. 28,no. 2. 4. U.S. Pharmaceutical Manufacturers' Association, Fact- book, 1980, P. MA, Washington, D. C., 1981 . 5. See Peter Barton Hutt, "The Importance of Patent Term Restoration to Pharmaceutical Innovation," Health Affairs, Vol. 1, No. 2, Spring 1982. and especially Ronald Hansen "The Pharma- ceutical Development Process: Estimates of Development Costs and Times and the Effects of Prepared Regulatory Changes," in Robert Chein, ea., Issues in Pharmaceutical Economics, D. C. Heath dc Co., 1979. Hansen's original estimate was 654 million in 1976 dollars, which converts to 570 million in 1980 dollars. 6. A recent study at the Center for the Study of Drug Development shows that the number of compounds entering clinical testing between 1958 and 1962 was more than double the number entering clinical testing between 1963 and 1979. These data are based on approximately 50 percent of all NCE research by U.S.-located pharmaceutical firms. See M. S. May and W. M. Wardell, ~~ t After a Period of Regulatory Change: Research Activity Its Pharmaceutical Firms, 1958 to 1979. 7. Estimates of the higher average cost of domestic U.S. pharmaceutical RED have been provided by Lewis Sarett, "FDA

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52 Regulations and Their Influence on Future R&D," Research Management? March 1974. data on absolute production levels, see The Chemical Industry, OECD, Paris, annual issues. 9. For a study of returns to scale in pharmaceutical innovation, see Henry Grabowski and John Vernon "Structural Effects of Regulation on Innovation in the Ethical Drug Industry," in Robert Masson and David Qualls, eds., Essays on Industrial Organization in Honor of Joe Bain, Bullinger, Cambridge, MA., 10. IMS, Pharmaceutical Marketletter, September 22, 1980.