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Determinants of National Pharmaceutical
Competitive Acivantage
Essentially, four broad hypotheses may be presented as explana-
tions for the recorded shifts in competitive position of U.S.
pharmaceutical firms.
· M icroeconomic factors--basic conditions of cost, input
supply, and output demand have operated adversely for U.S.
pharmaceutical firms.
· Macroeconomic factor~-the relative decline of the U.S.
pharmaceutical industry is simply part of an economy-wide
deterioration of American industrial position.
· Regulatory factors--the comparatively more costly and
extensive regulations of the U.S. Food and Drug Administration
(FDA) have disadvantaged U.S. firms.
~ A ~ ' do- _ · ~ · .
if
- ~rT~c~a~ economic supports and restraint~-the discrim-
~ natory tax and trade policies of foreign governments have
unfairly advantaged foreign-located firms.
Of these hypotheses, the first would appear to be of little explana-
tory value, while the second provides an important but only partial
accounting for the documented relative decline. The sequence of
hypotheses considered below begins with three microeconomic
aspects (1 abor costs, domestic growth of demand, and national
supply of qualified scientists), next introduces macroeconomic,
then regulatory aspects, and concludes with two discriminatory
policy aspects (taxation and trade barriers).
LABOR COSTS
Comparative levels of wages and salaries are a generally impor-
tant determinant of industrial location. The relative levels of
compensation for both manufacturing and research staff among
North America, western Europe, and Japan are thus potentially
53
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54
TABLE 3-1 Manufactunng Wages (1970=100)
Hourly Earnings in
Manufacturing
Gross Earnings per Monthly Earrings
Production Worker Hourly Rates in Manufactunng in Manufactunng
West
U.S. Germany U.K. France Italy Switzerland Japan
1960 67 44 57.0 44.9 41.2 60 31.1
1965 78 69 71.8 64.4 67.5 78 50.3
1970 100 100 100.0 100.0 100.0 100 100.0
1975 143 160 220.1 188.3 241.4 155 230.3
1980 216 216 439.9 374.4 63 1.7 180 345.2
SOURCE: "Main Economic Indicators," OECD, Pans, venous years.
important sources of explanation for differential patterns of
growth in research and production. Data on trends of general
national compensation in manufacturing are reported in domestic
currencies in Table 3-1. While rates of growth of wages in
domestic currencies have varied widely during the last two
decades, these domestic trends are mostly offset by opposite
movements in exchange rates. Thus, while Swiss manufacturing
compensation has risen more slowly than that in the United States,
the Swiss currency has (until quite recently) persistently
appreciated against the dollar. As a consequence, the dollar cost
of Swiss labor relative to U.S. labor has moderately increased.
Thus, this first potential explanation of the deterioration of the
U.S. competitive position fails to account for the observed
decline, as U.S. wages have not risen more rapidly than foreign
costs.
MARKET GROWTH
Consumer demands for pharmaceutical products have increased in
all nations, but at widely divergent rates (see Table 3-23. Data on
consumption levels indicate that foreign markets have uniformly
grown more rapidly than those of the United States. However, the
parallel, extensive growth of foreign production is not com-
pletely explained by these figures as they fail to indicate the
reason this growth was met by production abroad rather than by
U.S. exports.
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55
TABLE 3-2 Domestic Pharmaceutical Sales, Selected Countries, Selected
Years (millions of dollars)
1965 1970 1975 Growth
United States 3,121 4,701 7,387 9
Japan 1,298 2,975 6,402 17
West Germany 742 1,408 3,952 18
France 967 1,207 2,731 11
Italy 514 920 2,181 16
Spain 236 597 1,652 21
United Kingdom 300 408 815 10
NOTES: Growth figure is annual percentage growth rate. Sales are apparent consump-
tion (production plus imports minus exports) except for US and UK.
SOURCES: US PMA,PrescnptionDrugIndustryFactbook, PMA,Washington,D.C.,
1976.
ABPI, Annual Report, London, venous years.
NATIONAL SCIENTIFIC CAPACITY
The general research base of a nation would be expected to affect
strongly the extent and success of industrial RED. One aspect of
this research base is illustrated in Table 3-3, where the U.S.
proportions of articles published in various fields are shown. Such
American accomplishments not only fail to provide an explanation
for the falling U.S. share of industrial pharmaceutical research
and innovation, but suggest that no such trends should exist.
A crucial aspect of the national scientific base is "over n-
m ental and nonprofit expenditures on research, which in the
United States amounts to about 75 percent of all healthrelated
RED. Data on these expenditures are presented in Table 3-4 and
demonstrate the stunningly large proportion of world health
expenditures that the U.S. government funds. Indeed, it would
appear (based on plausible extrapolation from Table 3-4) that the
U.S. government expends, by itself, virtually as much for health
research as do all other sources, both industrial and governmental,
in the western developed nations.
GENERAL RELATIVE DECLINE OF U.S. INDUSTRY
The relative decline of the U.S. pharmaceutical industry is unfor-
tunately not unique. Numerous American industries, if not our
entire economy, have exhibited sustained decay of relative
position over the past two decades. Several reasons exist for the
relatively more vibrant growth of foreign economies. Much of
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56
TABLE 3-3 U.S. Proportion of the World's Articles,
1973-1977 (percentages)
Field 1973 1975 1977
All 39 38 38
Clinical medicine 43 43 43
Biomedicine 39 39 39
Chemistry 23 22 22
Biology 46 45 42
NOTE: Articles are counted from the 271,000 to 279,000 articles,
notes, and reviews per year from over 2,100 of the influential jour-
nals of the Science Citation Index, Corporate Tapes of the Institute
for Scientific Information.
SOURCE: National Science Board, Science Indicators 1976, Na-
tional Science Foundation, Washington, D.C., 1977.
European and Japanese manufacturing capacity was devastated by
World War II, and postwar recovery of these economies brought on
inevitable correction to the early 1950s economic dominance of
the United States. Secondly, particularly in the case of Japan,
standards of living abroad were historically below those of the
United States, and the international diffusion of manufacturing
technology brought a leveling of national productivities that
implied more rapid growth abroad. Finally, differences in national
industrial policies and management procedures contributed to the
differential national economic records. By the mid-1970s, three
decades after World War II, the latter policy differences were
probably preeminent in significance.
Tables 3-5 and 3-6 indicate that decay in U.S. shares of sales
and innovation has occured for many industries, not just pharma-
ccuticals. These general relative declines suggest that if deterior-
ation of competitive position in the pharmaceutical industry is no
worse nor no better than that of most industries, especially most
high-technology industries, then there is no need for arguments
unique to the pharmaceutical industry to explain these firms'
relative decline. Instead, contemporary economy-wide factors
such as taxation, investment policy, export policy, national levels
of savings and investment, and so on must be invoked as
hypotheses. From this viewpoint, Tables 3-5 and 3-6 would
suggest precisely that no such additional industry-specifi c
explanations are needed in the case of the pharmaceutical industry
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57
TABLE 34 Sources of Expenditures for Health Research and Development,
Selected Nations (millions of dollars)
Pharmaceutical
Year Industry University Government
France 1969 63 7 na
West Germany 1972 310 na 168
Switzerland 1975 244 17 na
United Kingdom 1972 108 3 200
United States 1972 535 50 2,223
SOURCE: Organization for Economic Cooperation and Development, Impact of Multina-
tional Enterprises on National Scientif c arid Technical Capacity: Pharmaceutical Industry,
O.E.C.D., Paris, 1977.
Figure 3-1 and Table 3-7 suggest otherwise. Figure 3-1
demonstrates that the pharmaceutical industry has behaved
uniquely among the west European and Japanese chemical induce
tries, while in the United States, the performance of the pharma-
ceutical industry is literally indistinguishable from other com-
ponents of the general chemical industry. Something unique
indeed has occurred. More significantly, Table 3-7, when com-
pared with Table 2-1, suggests an even more profound difference.
The U.S. share of world chemical R&D has fallen only moderately
during roughly the same time period when the U.S. share of phar-
m aceutical R&D has drastically dropped. Indeed, none of the
industries subject to the OECD study that underlies Table 3-7
exhibits a fall or research share that in any way parallels the
severity of the drop in the pharmaceutical industry. For an
explanation of those factors that have so severely affected
relative U.S. pharmaceutical R&D, attention must be turned
elsewhere.
I NDUSTRIAL POLICY: REGULATION
The costliness and success of pharmaceutical innovations ar e
vitally affected by regulation of drug safety and effectiveness.
The detail and pervasiveness of this regulation in the United
States are almost unique, both in comparison with U.S. regulation
of other industries and with foreign regulation of pharmaceutical
markets. Further, the scope and volume of U.S. pharmaceutical
regulations have dramatically expanded since 196 0, suggesting
that changes in this component of U.S. industrial policy may well
have provided substantial effect on the competitive position of
U.S. firms.
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58
TABLE 3-5 Sales of Major U.S. Corporations as a
Proportion of Major World Corporations, Selected
Industnes, 1959 and 1978 (percentages)
1959
1978
High Technology Industries
Aerospace 95.4 90.1
Chemicals 66.3 31.9
Electron~cs-appliances 75.6 46.9
E'harmaceubcals 61.1 35.0
Other Industries
Automotive 84.3 59.7
Food products 66.6 55.7
General machinery 61.7 51.8
Metal manufacturing 89.9 32.4
Metal products 66.8 43.2
Paper and paper products 92.2 70.6
SOURCE: Nestor Terleckyj, "Technology and the Changing Posi-
tion of U.S. Firms Among the World's Largest Companies," paper
Oven at the December 1979 meeting of the New York State Bar
Association, Antitrust Law Section.
Original data from Fortune (Jlily, August 1960 and May, July,
August 1979).
Legislative foundations for regulation of ethical drugs in the
United States are the Food and Drugs Act (1906), the Federal
Food, Drug, and Cosmetic Act (1938), and the (Kefauver-Harris)
Drug Amendments (1962~. The essence of this regulation, since
1938, has been premarket approval by the U.S. Food and Drug
Administration (FDA) for any new drug product. In other words,
commerce for a new drug is prohibited until it is adequately tested
for safety and, since 1962, for effectiveness in treatment for
indications prescribed on its label. Exemptions to this require
ment are allowed only for investigational use by qualified scien-
tific experts. The basic mechanics of this requirement involve
submission of data in the form of an N DA.
Before 1962, unless the FDA acted to reject the NDA within
90 days of submission, the new drug could be marketed. Impor-
tant changes in FDA requirements emerged after adoption of the
1962 Amendments. Central provisions of the Amendments are:
.
Effectiveness must be demonstrated by the manufacturer
through "adequate and welLcontrolled investigations" to obtain
FDA approval of an NDA.
· FDA monitors investigational drug studies in humans by
requiring data in the form of a Notice of Claimed Investigational
Exemption (IND). If FDA vetoes the IND, testing in humans may
not begin.
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59
TABLE 3-6 Patents Granted to U.S. Applicants as Proportion of Total
U.S. Patents, Selected Industries, 1963 and 1973 (percentages)
1963 1973 Change
.
All industries 80.5 68.2 -12.3
Aerospace 74.9 58.8 -16.1
Chemicals 74.3 63.1 -11.2
Electrical 83.6 69.8 -13.8
Pharmaceuticals 64.0 54.7 -9.3
SOURCE: Nestor Terleckyj, "Technology and the Changing Position of U.S.
Firms Among the World's Largest Companies," paper given at the December 1979
meeting of the New York State Bar Association, Antitrust Law Section.
.
FDA must affirmatively approve an NDA, rather than
allowing automatic approval after 90 days.
· FDA must establish good manufacturing practice
regulations.
Many scholars have argued that the 1962 Amendments were
responsible for greatly increasing FDA regulation. Following the
1962 Amendments, the scope and intensity of U.S. pharmaceutical
regulation significantly increased. A closer examination suggests
that the specific requirements of the 1962 Amendments do not
fully account for all post-1962 changes in FOA regulation. Some
of the contemporary structure of regulation for new drugs might
have emerged without congressional adoption of the Amend-
ments. In a recent essay, David Weimar has postulated how the
IND procedure might have developed:
Under Section 505(i) of the 1938 Law, the FDA had
authority to promulgate regulations that governed th e
distribution of drugs for investigational use. The regula-
tions initially issued by the FDA required manufacturers to
keep records of the distribution of drugs for investigational
purposes, investigators to sign statements that they had
adequate training and facilities to safely conduct the invest
tigations, and labels to contain the statement, "Caution:
New Drug--Limited by Federal Law to investigational
use." These regulations permitted the distribution of
thalidomide to over 1200 physicians. The same furor that
led to passage of the 1962 Amendments prompted the FDA
to revise its regulations for investigational drugs. In
August of 1962, prior to passage of the Kefauver-Harris
Amendments, the FDA published regulations that in effect
established an IND procedure. They required that only
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60
280
260
240
220
180
160
140
120
100
80
Western Europe
;
r
.
l
Hi_ ,11
Japan
t
.
1 1 1
1970 1972 1974 1976 1970 1972 1974 1976 1970
YEAR
United States
Chemical industry
· ~ Ethylene
- Sulphuric acid
— 0~0 Dyestuffs
·—·— Plastics materials
Paints and varnishes
Soap and detergents
Pharmaceutical products
.
!
.
!
row I
!
1 1 1
1972 1974 1976
FIGURE 3-1 Trends in Production in the Major Branches of the
Chemical Industry
SOURCE: OECD, The Chemical Industry, Paris, 1978.
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61
TABLE 3-7 U.S. Share of industrial R&D Expenditures in Nine
OECD Countnes, 1967 and 1975 (percentages)
1967 1975 Change
Aerospace 81.5 72.6 -8.9
Electrical 66.3 57.4 -8.9
Chemical 44.5 40.2 -4.3
Other transport 58.7 48.7 -10.0
Machinery 55.2 53.2 -2.0
Basic metals 37.8 40.1 +2.3
Chemical-linked 43.0 43.1 +0.1
Other manufacturing 49.7 49.8 +0.1
NOTE: Countnes surveyed include U.S., Japan, West Germany, France, U.K., Bel-
gium, Italy, Canada, and Sweden.
SOURCE: Organization for Economic Cooperation and Development, Trends in
Industrial R&D in Selected OECD Member Countries, 1967-1975, OECD, Paris,
1979.
qualified investigators be used; that their qualifications be
filed with the FDA; that drugs be tested on humans only
after animal testing; that the FDA be kept fully informed
of the results of the testing, and that special precautions be
taken in the testing of drugs intended for use by children or
pregnant women. This is one of several instances we will
encounter where proposed legislative changes have been
anticipated in FDA regulations.]
Nonetheless, it is clear that the 1962 Amendments and
particularly the new requirement of affirmative FDA approval of
an NDA-~ad a major impact on regulatory requirements for new
drugs.
An uninterrupted series of requirements (some explicitly
required by the 1962 Amendments and others adopted as adjuncts
to those Amendments) have been issued since that year, a partial
listing of which follow:
1963 Regulations specify good manufacturing practice.
1966 Preclinical guidelines issued for
teratology and Derinata1 and Dostnatal studies
reproductive,
1968 Preclinical guidelines issued for toxicity testing.
1970 Regulations specify requirements for '~welFcontrolled
investigations" to produce '"substantial evidence" of efficacy.
1970 flay delay for initiation of testing in humans after
submission of IND.
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62
1972 Preclinical guidelines issued for chemistry, expanding
requirements for drug manufacture. and aualitv control.
1 975
1 977
1978
~ _ _ _ _ , _ , _ , _
Freedom of Information Act regulations issued.
Clinical guidelines issued for various drug classes.
Regulations specify Good Laboratory Practices.
These regulations issue standards for test protocols, quality
control, recordkeeping, equipment, buildings, and facilities, etc.
The impact of the 1962 Amendments was heightened by two
factors. A first factor has been scientific advancement- in medic
Cal technology that enables Norm acute detection of potential
adverse reactions. As the ability of researchers to test for safety
and efficacy improved, the expectations and requirements of the
FDA increased for the volume and quality of premarket testing.
The second and most critical element, however, has been
intense political pressure on the FDA. The very nature of the
premarket approval system confronts the FDA with difficult
choices. The limited clinical trials used statistically to ascertain
safety and effectiveness of new drugs cannot possibly provide,
with certainty, estimates of the extent of therapeutic benefits and
of adverse reactions. Any drug potent enough to be effective
carries some risk of adverse reaction in humans and adverse
results in test animals. It is widely known, for example, that
penicillin has fatal effects on guinea pigs and aspirin has term
tological effects on animals (suggesting that either product would
today encounter severe regulatory obstacles for approval by the
FDA). Under these circumstances, the FDA must weigh patient
risk of adverse reactions against patient risk of disease due to
inferior or no pharmaceutical treatment.
This complex calculus must inform FDA decisions as to what
tests, guidelines, and requirements should be enforced on pharma-
coutical firms seeking clearance for new products. Yet, the
American political process places substantial pressure on the FDA
not to approve new drugs. The Congressional Information Service
Index for 1969 and 1970 reports congressional hearings on FDA
decisions concerning 38 specific drugs or drug classes. Of these
hearings, only two questioned FDA decisions not to approve
marketing of drugs; one of the latter hearings was on laetrile.
Former FDA Commissioner Schmidt, in 1974, summarized the
impact of this political pressure as follows:
In all our history, we are unable to find one instance where
Congressional hearings investigated the failure of FDA to
approve a new drug...iT]he message conveyed by this situation
could not be clearer....Until perspective is brought to the
legislative oversight function, the pressure from Congress for
F DA to disapprove new drugs will continue to be felt,
could be a major factor in health care in this country.2
and
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63
The process of regulation in other nations differs significantly
in several respects from that in the United States, generally being
m ore flexible and prompt. A recent U.S. General Accounting
Office (GAO) report has identified several key distinctions in
operation of pharmaceutical regulation abroad, some of the more
important of which are excerpted below.
Greater Use of Expert Committees
In most European nations, decisions on approval o f
n ew drugs are not solely the responsibility of career
bureau officials; but instead, these decisions are either
substantially advised or formally made by committees of
independent medical experts.
According to European regulatory and industry
officials, using a committee of experts insulates th e
regulatory authority from public criticism, gives credence
to the final decision, and expedites the review and
approval of drugs.
Some European committees of experts are mandated
to review all drug applications and either approve a drug
when it is shown to be safe and efficacious or recommend
to the regulatory agency that a drug should or should not
be approved. In three countrie~-the Netherlands,
Norway, and Sweden--the committees had been given the
responsibility to make the decision to approve, reject, or
withdraw a drug. The United Kingdom's committee only
advises the government agency on the safety and efficacy
of a drug; however, we were told that its recommenda-
tions have always been followed.
At FDA, committees are used to provide advice on
problems or questions FDA may have concerning selected
drug applications. However, applications are not su ~
misted routinely to the committees in the United States as
they are in foreign countries. FDA has sole respo n-
sibility for making a decision on an application based on
the scientific data submitted and any advice from the
expert committee.
Greater Acceptance of Foreign Data
The traditional refusal by FDA to accept foreign data
as a basis for NDA approval has required costly delay and
new testing.
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Foreign clinical study data are accepted by most
foreign drug regulatory agencies as evidence of a drug's
safety and efficacy if the studies are welLconceived,
well~ontrolled, performed by qualified experts, and
conducted in accordance with acceptable ethical prin-
ciples. Domestic verification is sometimes required.
According to foreign government officials, the degree of
additional domestic verification depends on such factors
as the source of the original clinical trials, since medical
practices and hereditary, dietary, and other factors may
be different from those of the registering country. Some
countries--the Netherlands, Norway, and Switzerland--
accept foreign data submitted without domestic verifi-
cation depending on the source.
Other countries--
Sweden, and the United Kingdom- will normally request
some domestic verification.
Although the FDA may have accepted, in some cases,
foreign data as pivotal evidence of the safety and efficacy
of a drug, its policy in this regard is not clear. Officials
of the drug firms we visited, indicated that FDA would not
accept foreign data as primary pivotal evidence, and
required that the safety and efficacy of a drug be
supported on the basis of duplicate domestic studies.
FDA's Director of the Bureau of Drugs stated that FDA
has had a reputation for not accepting foreign data. We
believe FDA needs to formally clarify and communicate
its policy on the acceptance of foreign data.
Less Politicization of Drug Approval Process
In the European countries we visited, drug regulatory
officials told us there was no direct parliamentary or con-
sumer scrutiny on the drug regulatory process. When a
parliamentary body wishes to inquire about issues co n-
cerning drug regulatory policies, procedures, or decisions,
drug regulatory officials are not required to appear before
the parliament and thus are not subjected to parliamen-
tary pressures. Rarely, if ever, is the regulatory agency's
director or any of its employees asked to appear before
the parliament. Instead, the minister of health, who is a
m ember of the parliament, responds to inquiries from
parliament on drug regulatory matters.
Foreign drug regulatory officials advised us that
members of parliament in their countries, for the most
part, believe that the regulatory agency has primary
responsibility for regulating drugs and that parliamentary
involvement should be minimal.
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65
FDA's drug regulatory process comes under intensive
congressional oversight and scrutiny by consumer-oriented
organizations. Officials of many U.S. drug firms told us
that congressional and consumer scrutiny tends to slo w
FDA's drug approval process.
Greater Cooperation between Regulators and Industr y
M ost foreign drug industry officials explained that
they have easy access to British, West German, Swiss,
Norwegian, and Swedish experts and drug regulatory
officials for frequent and open scientific discussions off
the record. According to these officials, scientific
discussions address the tests necessary for approval and
other difficulties, and in their opinions assist in deveL
aping a framework for clinical trials.
American drug firm officials told us that FDA
appears to favor an adversary relationship with industry.
Bureau c£1 Drug reviewers, according to these officials,
review an application with the attitude that there are
errors in the application and that they must find them.
This adversary attitude is compounded by a communica-
tions problem between FDA and industry. According to
drug firm officials, FDA has become increasingly
inaccessible. One drug firm official told us "Industry is
becoming more isolated from FDA. Bureau of Drug
reviewers will not use phones to ask us questions they have
on an NDA." Another drug firm official, in comparing
F DA reviewers with their European counterparts said,
"Medical officers are a lot more open and frank in
Europe. As a result, they are able to resolve problems
with ND3A submissions in a more timely manner in
Europe. "
A clearly demonstrable effect of the totality of differences
between FDA regulation and that abroad is longer approval times
in the United States as compared with most other nations. The
above cited GAO report indicated that the mean times between
application for marketing new drugs and regulatory approval of
applications are as follows (for selected nations>.
Canada
Norway
Sweden
United Kingdom
United States
1 6 months
1 7 months
28 months
5 months
23 months
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66
TABLE 3-8 Companson of U.S. NCE Introduction Dates with UK, France, and
West Germany (all U.S. NCE introductions between 1963-1967)
Country and Year Number (Percent) Introduced
of U.S. Introduction Before U.S. Same Year After U.S. Not Abroad
United Kingdom
196~1967 30 (48) 12 (19) 21 (33) 13
1968-1975 44 (61) 14 (19) 14 (19) 26
West Germany
196~1967 21 (46) 12 (26) 13 (28) 28
1968-1975 39 (56) 17 (24) 14 (20) 30
France
196~1967 11 (27) 4(10) 26(63) 31
1968-1975 26 (45) 9 (16) . 23 (40) 43
SOURCE: Henry Grabowski, "Regulation, The Innovative Process, and International Diffusion
in the Pharmaceutical Industry," mimeograph, 1979.
The GAO report further identifies several important drugs that
have been introduced abroad significantly earlier than in th e
United States.
An inevitable effect of FDA delay in approval of new drugs is
earlier introductions of new pharmaceutical products abroad. The
United Kingdom and West Germany now receive NCEs earlier than
does the United States, and the U.S. position has moved from one
of lead to lag as regards the diffusion of pharmaceutical
innovation, as can be seen in Table 3~.
An additional impact of increased U.S. regulation of the phar-
maceutical industry has been increased costs of development for
NCEs. As the recent study for OTA by Leonard Schriffin explains:
Regulations of the sort contained in the 1962 Amend-
ments raise a firm's costs of drug development by requiring
inputs into the RED process, reduce its chances of Rtc D
success, and delay the time of paym ff for successful
innovation. Economic theor>, tells us what further to expect
from such cost increases. For one thing, they will alter the
amount of RHO activity: firms finding it commercially
infeasible to attempt to innovate will find that to be even
more the case; those finding it marginally profitable to do so,
may well find it now to be unprofitable; and firms that are
active innovators will find that fewer of the available projects
w ill remain advantageous to pursue. Thus, while the total
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67
dollar volume of RED outlays may be increased, there will be
fewer inputs and outputs than otherwise associated with R6c D
activity.
The evidence is quite clear that, although RED costs were
rising prior to 1962, the Amendments accelerated the trend.
These cost increases have influenced firm strategies dim
cernibly, if unevenly, and the overall [U.S.] rate of innovation
has been reduced as a result.4
The relatively early assessment of new drug candidates in the
clinic is a particular advantage available to firms conducting
research abroad. Probing studies of efficacy in patients must now
be preceded by long and costly laboratory studies. The clinical
usefulness of cortisone and even penicillin would have been
seriously delayed under today's regulations in that they would have
required the production of at least 20 to 30 Kg of cortisone before
it would be allowed in the clinic. With the process as it stood
from the first synthesis of about 10 to 15 grams of cortisone per
1000 pounds of desoxycholic acid, no company could have afforded
to undertake the herculean task of meeting todays requirements.
Another aspect of the same situation is the selection of the
best candidate for clinical studies. Today, it is a very sizeable
task to take several related compounds to the clinic in order to
determine which one would be the best to develop, a procedure
that can more easily be done abroad. While American companies
may be allowed the same opportunities to test several related
compounds in patients at the same time, it would be very difficult
to do so because the RED expertise and organization knowledge
able about the drug candidates are located in the United States.
This situation places American companies at a disadvantage.
INDUSTRIAL POLICY: TAXATION
Specific tax policies that benefit the pharmaceutical industry are
not common among the major OECD nations. The most prominent
examples of such policies occurin Japan. In the first place,Japan
allows special tax treatment for industrial research and develop-
m ent expenditures. The relevant regulation is Tax Special
Treatment Article 42-3. It states that a corporation can enjoy a
tax credit if its net research expense spent and tax deductible in
the current fiscal year (i.e., gross expense minus any subsidies
from affiliated companies, government and others) exceeds the
expenses of any previous fiscal year since 1967. In that event, 20
percent of the excess (i.e., current research expense minus the
maximum expense of any year since 196 7) is deducted fro m
corporate tax for the year. A simple example would be:
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68
Company Research Expense
Government Research Grant
Net Research Expense
Hi ghest Research Expense of any
year since 1967
Difference
20% of 200 = 40
Total Corporate Tax for Year (say)
Less 20% of 200
Net Tax
31,000
_ 100
900
700
200
__
1,500
40
_~
1,460
-
Further, Japan maintains not one, but two agencies for pub-
licly funding pharmaceutical research. The first is the Research
Development Corporation- of Japan, which finances technological
work in all industries. Its most recent fundings have been:
1980 Green Cross Co. 34.2 Million
1978 Kaken Yakkako Co. 3.8 Million
1977 Teijin Co. 2.9 Million
The second agency is the Council for New Drug Development
Promotion that funds only pharmaceutical research . Recen t
Council expenditures have been:
1980 Kyoto University 30.8 Million
1979 Takeda Chemical Co. Q9 Million
These findings make up a pitifully small proportion of Japanese
national expenditures on pharmaceutical research and deveL
opment. Yet, because these public grants are directed toward
basic research, their impact is presumably larger than simple
percentages of total expenditures would indicate.
INDUSTRIAL POLICY: TRADE
Tariffs are of little consequence to the pharmaceutical industry.
Rates are usually low and do not generally seriously affect trade.
Non-tariff barriers are of much greater importance. Many nations
forbid the importation of finished pharmaceuticals, and almost all
require prior authorization of any medicinal import. Further,
safety regulation may be manipulated to favor domestic producers.
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A recent OECD report provides succinct characterization of
the pharmaceutical trade policies of France:
French policy offers an interesting example of the
imaginative use of import restrictions. All phar-
maceutical imports must be assembled and packaged
in France. Ethical drugs require a visa from th e
French authorities before they can be marketed. To
obtain a visa, the manufacturer must submit com-
plete details of the production process and analytical
control methods, together with the testimony of
experts, drawn from a list of approved experts,
concerning the safety and efficacy of the product. In
practice, a visa is only granted if the material is
produced and clinically tested in France. The visa
system leaves much to the judgment of the individual
examiner; it can be and apparently often is, applied in
such a way as to favor French firms rather than the
affiliates of foreign companies.5
An additional example of non-tariff barriers derives from price
regulation for ethical drugs. In the United Kingdom, allowable
prices have been based on the costs of bringing a drug to market,
and in the mid-1 970s, British authorities allowed research and
development expenditures in the United Kingdom, but not
elsewhere, to count as "costs" for the determination of price.
Firms therefore had clear incentive to perform RED in the United
Kingdom that might otherwise have been executed in the United
States. Continental price regulations have on several occasions
been used to pressure U.S. firms into locating product facilities in
western Europe.
An additional non~tariff barrier to U.S. exports of pharmacy
ticals is, perversely enough, a U.S. policy. FDA regulations on
new ethical drugs apply to exports as well as to domestic sales
and, hence, prevent export of any new drug until it is approved for
sale in the United States. This restriction holds even if the prod-
uct has been formally approved for marketing in the importing
nation Given the substantial relative delay of the FDA in
approving new drugs, transparent incentives exist for U.S. firms to
manufacture new drugs abroad for sale, rather than export them
from the U.S. production.
SUMMARY
This assessment of possible causes for the decline in U.S. pharma-
ceutical competitive position leads to several conclusions. In the
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first place, there are numerous similarities between the drop in
pharmaceutical competitiveness and the general relative decline
of the U.S. economy against Japan and western Europe. Specifi-
cally, deterioration in U.S. shares of pharmaceutical exports,
national ethical drug sales, And some aspects of pharmaceutical
innovation such as patents are matched by comparable relative
d eclines in many U.S. industries, including others in the high-
technology sector. Adverse shifts in these specific features of
competitive position are thus best explained by the more vibrant
multi-industry growth of foreign economies and not by factors
specific to the ethical drug industry.
A second and quite important conclusion, however, is that two
aspects of pharmaceutical competitive position have not followed
this general trend but in fact have declined uniquely more severe-
ly. The U.S.-located share of worldwide production has dropped
steadily throughout the 1 960s and 1 970s in a way that is
unmatched by production shifts in other chemical industries. The
explanation for the distinctive performance of pharmaceutical
production is straightforward--more rapid growth of demand
abroad coupled with widespread non-tariff barriers in other
countries that effectively require domestic production and
drastically reduce the viability of export strategies. The largest
U.S.-owned firms have adapted to these developments by estate
fishing production facilties abroad, and thus the decline in world-
wide sales of U.S.-owned firms has been much less severe than the
drop in U.S.-located production. The outcome here is a clear loss
of jobs and income for the territorial United States and a disad-
vantage of indeterminate and possibly minor significance to r
U.S.-owned multinational firms.
The other pharmaceutical trend that differs from the general
relative decline in the American economy is both more significant
and of more ambiguous origins. The severity of the continuing
drop in the world share ' of U.S.-located (and expectedly U.S.-
owned) expenditures for pharmaceutical research and develop-
ment is apparently unmatched in ' other related industries of our
economy. This trend is particularly disturbing because ROD for
new products is the foundation of the modern ethical drug indus-
try and the essential basis for pharmaceutical competitive advan-
tage. Traditional microeconomic factors such as labor costs or
resource availability fail to explain this distinctive trend, and by
process of elimination leads to government policies as the most
likely caus - Moth U.S! government policies that relatively dis-
courage pharmaceutical innovation and foreign policies that
relatively encourage innovation abroad. To the extent that these
public policies make the U.S. economy a less conducive environ-
ment for pharmaceutical innovation, all major ethical drug firms
are affected because of the preeminent size of American con-
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gumption in the increasingly integrated global market for ethical
drugs. U.S. - wned pharmaceutical firms are, however, affected
more so because higher proportions of their sales and research are
drawn from IJ.S.-located activities. In the end, the greater sus-
ceptibility of a corporation to U.S. government policies is the
essence of what it means to be an "American" firm.
While the divergent government policies that have combined to
make the United States a less hospitable environment to r
pharmaceutical innovation can be listed, it has not been possible
within the limits of this study to determine the relative signifi-
cance of each specific policy. Given the complexity of the issue,
such detailed policy evaluation may never be feasible. This
ambiguity should be a source of caution, but not of indecision in
consideration of policy reforms. The economic stakes are large,
and the issues raised are often quite general. While refusal to
confront these issues is itself a policy option, the merits of such
an option are dubious.
NOTE S
1. David Weimer, "The Regulation of Therepeutic Drugs by
the FDA: History, Criticisms, and Alternatives," Discussion Paper
No. 8007, Public Policy Analysis Program, University of Rochester
2. Alexander Schmidt, "The FDA Today: Cities, Congress,
and Consumerism," speech to the National Press Club, Washington,
D.C., October 29, 1974, cited in Henry Grabowski "Public Policy
and Innovation: The Case of Pharmaceuticals," Technovation,
1982,pp.157-189.
3. U.S. General Accounting Office, FDA Drug ApprovaL-A
Lengthy Process that Delays the Availability of Important New
Drugs, HRD-80-64, May 1980.
4. Leonard Schriffin, "Lessons from the Drug Lag," report to
Office of Technology Assessment, June 1980.
5. Organization for Economic Cooperation and Development,
Impact of Multinational Enterprises on National Scientific
_ . .
Capacity: Pharmaceutical Industry? Paris, 1977.
Representative terms from entire chapter:
drug regulatory
