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OCR for page 21
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
OCR for page 22
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
OCR for page 23
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
.
OCR for page 24
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
OCR for page 25
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OCR for page 26
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
OCR for page 27
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
OCR for page 28
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
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Domestic Discovered NCE
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/
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1979
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1 970 1 975
YEAR
600
500
o
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E
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200 z
UJ
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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.
OCR for page 29
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
OCR for page 30
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.
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OCR for page 31
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.
OCR for page 42
42
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OCR for page 44
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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.
OCR for page 45
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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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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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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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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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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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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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.
Representative terms from entire chapter:
pharmaceutical industry
