I have been asked to address the question, "What role will Germany play in the medical revolution?" The short answer to that question is, we don’t know. If current trends continue, however, German will be left behind. Germany will be an observer and a consumer of the fruits of the pharmaceutical revolution, but it will not be one of its leaders. If that happens, the losers will be not only Germans but also Americans and the citizens of all other nations -- because the pharmaceutical revolution will move more slowly if Germany fails to play a strong and vigorous role.

This bleak future is not inevitable, however. Germany can resume its place as a world leader in pure and applied biological science. But it will not be easy, and some changes will be necessary.

Any analysis of the pharmaceutical revolution must start with a simple fact: Virtually all new drugs, indeed almost all new medical technologies, arise directly from the profit motive. Who has navigated the difficult and costly process of laboratory research, clinical trials, and regulatory scrutiny that is necessary to bring breakthrough drugs to the market? It has been almost entirely pharmaceutical firms in search of profits, not government agencies or universities or non-profit agencies. The future of German pharmaceutical research therefore comes down to one question: will Germany provide financial incentives sufficient to motivate her most talented scientists and business people to play a crucial role in the pharmaceutical revolution?

Trends

Everyone in this room must be aware of how ironic it is that an American is offering advice to Germans on how to lead the world in developing medical technology. Not long ago, Germany was the worldwide leader. That was certainly true in the late 19th century and the first three decades of the 20th century. Germany was still a leader 20 years ago, when Hoechst was the largest pharmaceutical manufacturer in the world. Much has changed in the past 20 years, however. Today, Hoechst is part of Aventis and is based in France. Other well-known German pharmaceutical firms are also in trouble, struggling to compete in the world market.

The entire European pharmaceutical enterprise has been moving to the United States. This is partly because American firms are growing faster than European firms. But that is not the only reason. Even European firms are focusing on the American market. Look at the two largest German pharmaceutical firms. One of them, Bayer, is growing its German operations at the rate of 5% annually, while its American operations are expanding at the rate of 10% annually. The other, Boehringer Ingel, is growing at 1.3% annually in Germany and at a 24% rate in the U.S. Of course, it is not just German firms that are focusing their energies on the U.S. market. Organon, the only large research-based drug firm in the Netherlands, has just relocated to New Jersey. When a series of mergers created Glaxo-SmithKline as the largest pharmaceutical firm in the U.K., the newly appointed CEO refused to move his office from Philadelphia to London. He runs the firm from Philadelphia.

Here are some numbers. In 1988, American manufacturers accounted for 19 of the 50 best-selling drugs worldwide. By 1998, they sold 33 of the top 50 drugs. By the year 2002, American firms will sell 20 of the top 25 drugs, according to a recent report from a respected market research firm.

This trend is not about to stop. That is because the ultimate source of pharmaceutical revenues is research, and European research and development has fallen behind. In 1990 -- just eleven years ago -- European pharmaceutical firms outspent American firms in research and development by 8 billion Euros to 5 billion Euros. By the year 2000, European research and development had doubled, to 17 billion Euros. That is good. But in the meantime, U.S. research and development expenditures increased nearly five-fold, to 24 billion Euros, fifty percent higher than the European figure. And by the way, German firms spent only 3 billion Euros on research and development in 1999, even though the German economy is nearly one-fourth as large as the U.S. economy. The data on capital formation in the biotechnology industry are also very relevant. While European biotech firms raised $US 7 billion in 2000, American firms raised an amazing $US 33 billion. The research and development gap between Europe and America is not getting smaller; it is getting larger.

Consequences

The consequences of these trends are inescapable. Germany and other European nations are coming to rely primarily on U.S. research and the U.S. market for new drugs. Sometimes, this means that Germans have to wait for innovative therapies. I have been informed, for example, that under current budget restrictions, only sixty per cent of ovarian cancer patients in Germany receive state-of-the-art drug treatment as recommended by the German Cancer Society.

Germany also fails to obtain the more subtle benefits of the research and development process. For example, if new drug research were being done here in Germany instead of in America, German doctors would test new drugs on German patients in German clinics in the unique conditions of the German health care system. Germany is also losing out on such new developments as disease management supervised by pharmaceutical firms and health care organizations working together.

Germany, Canada, and other advanced nations are becoming pharmaceutical hangers-on. They use the best new drugs, but they play only a limited role in creating them, and they give far too little consideration to the costs of developing them. Having started down that path, these nations are tempted to push prices ever downward -- as Germany now proposes to do. Then American politics can come into play. American consumers are very aware of the fact that they often pay higher drug prices than Europeans do. Already, Congress has passed legislation to permit the importation of low-priced Canadian drugs back into the United States where they were developed and manufactured. That law proved unworkable, but events have not stopped there. Congress and state legislatures are certainly looking closely at drug prices in Europe as well as in Canada.

No one knows where this will lead. But we do know that in the meantime, everyone suffers from the slowdown in new drug development that has occurred because of the unfortunate fact that in the large and prosperous nation of Germany, with its unparalleled intellectual history, the best scientists have been discouraged from contributing fully to the drug development process.

Why?

Clearly, something has gone wrong, and we need to understand why. To be sure, the dark years of 1933 through 1945 left a heavy intellectual burden. But that era is gone. German science today is led by vigorous new generations of scholars and entrepreneurs who have no reason to restrain their ambitions to compete and excel in the world market. The rest of the world should wish them well.

Another problem has been the anti-intellectualism that greeted the new science of biotechnology. For a decade and more, the German pharmaceutical market was deprived of the powerful synergies that occur when biotechnology and traditional pharmaceutical research are pursued simultaneously. Also lost was the fierce competitive spirit that small biotechnology firms bring to the marketplace.

Fortunately, political opposition to biotechnology drug research in Germany appears to be well past its peak -- and no wonder. It is one thing to attack biotechnology drugs in theory. It is quite another thing to march into the home of a diabetic and remove his supply of life-saving insulin created by biotechnology.

One might think that one cause of the drug research lag in Germany is globalization and international mergers. But there is no reason for globalization to work to Germany’s disadvantage. After all, it was Daimler that took control of Chrysler; it was not Chrysler that took control of Daimler. Yes, big American pharmaceutical firms have gotten even bigger, partly through mergers, just as some European firms have. But by itself, this is hardly a decisive cause for the migration of pharmaceutical research away from Germany.

More important have been limits on economic freedom in Germany’s pharmaceutical industry. Regulation inhibits the rapid rise and decline of firms. This prevents the efficient allocation of resources -- including scientists and support staff. Regulation also tends to prevent rapid shifts in strategy within large firms. Mergers and joint ventures are too difficult, making markets insufficiently attentive to the profit motive in developing innovative new drugs. Capital markets, including venture capital, are less flexible and less risk-taking than in America.

The German pharmaceutical market also suffers from making too little use of modern marketing methods. These methods include personal sales to physicians and health care organizations, and the provision of essential information directly to consumers. Most people do not realize how much good is done by marketing. Tough, competitive marketing helps firms discover new opportunities more rapidly, motivates firms to exploit those opportunities, and accelerates the adoption of breakthrough medical therapies. Marketing also keeps manufacturers closer to patients and their needs.

Another problem is that the German infrastructure for pharmaceutical research has been relatively weak. Germany has lagged in bioinformatics, in the computerization of pharmaceutical research, and in the development of a dynamic for-profit clinical trials industry for testing new drugs. The German health care system is lacking in such modern developments as efficient managed care organizations and pharmaceutical benefit managers. These organizations could provide many benefits. They could provide extensive data on the effectiveness of drug therapy, for example, and they could devise clever ways to save money by using new drugs. They would also reward pharmaceutical firms that bring valuable new drugs to market, while putting poorly run firms at a competitive disadvantage.

Finally, there is the threat of price controls. A few years ago, the situation in Germany looked encouraging when prices for patented drugs were deregulated. But then came attempts to penalize physicians for prescribing state-of-the-art medications. Now the system is moving toward direct price controls. I understand that the Ministry of Health has proposed, among other measures, to cut the prices of all innovative drugs by 4%. This would be counterproductive. It would strike hardest at the companies with the most innovative portfolios. It would also tend to politicize new drug reimbursement and would drastically increase the level of uncertainty surrounding the returns to innovation. Manufacturers embarking on new drug development would not be able to count on the German market, and the German people would have less influence on drug development.

It is hard to overestimate the potential harms from price controls. Even when controls start out simple, they always become incredibly complex. For example, price regulations in the United States Medicare system for the elderly began less than 20 years ago as a simple adjustment for inflation. Now those regulations occupy thousands of pages and are incomprehensible to doctors and patients. Even the lawyers cannot decipher them. Price controls also create vested interests, because someone always discovers how to use controls to their advantage against competitors. Controls tend to become permanent, no matter how much harm they cause. The New York City housing market, for example, is still plagued by temporary rent controls established in World War II. Worst of all, price controls are a constant reminder that innovation may not be rewarded -- or more precisely, that innovations will be rewarded according to the dictates of a bureaucracy or a legislature, which will set prices only after a new drug has been developed at great cost.

Looking Forward

What changes can help restore Germany’s role as a leader in the medical revolution? First of all, reimbursement for new drugs should be determined by market forces. Health care providers and insurance companies should compete to buy the best new drugs, and manufacturers should compete to sell them. Manufacturers need to know that if they develop a cure for breast cancer, the price for their innovation will be determined by the marketplace, not by a government staffer whose goal is to cut the health care budget.

Equally important is economic freedom in the health care system overall. A more competitive health care market would increase the incentives to develop new medical technology of all types and to make more efficient use of that technology. This is especially important in a nation such as Germany with an aging population.

Germany and the European Union should also consider relaxing the restrictions on pharmaceutical marketing. The situation today is that German patients who read English can obtain detailed information on new drugs from U.S.-based websites, whereas patients lacking English fluency are deprived of this information. It would make more sense to let manufacturers provide information directly to consumers in their own language. Experience in the United States strongly suggests that direct‑to‑consumer information provided in an ethical manner accelerates the use of better therapies, provides essential safety information to patients, and improves patient compliance with drug therapy -- while also making markets more competitive by increasing the payoff to fast, innovative research.

What does the future look like? Notwithstanding everything I have said, it is easy to foresee a wonderful future for German pharmaceutical research. German research talent and entrepreneurship are more plentiful than ever. The problem has been that this talent has been stifled at home and dispersed abroad. But medical talent, like all talent, responds to financial incentives. If your scientists and entrepreneurs are confident of obtaining a payoff from finding new cures -- even when the search is difficult, time-consuming, and fraught with risk -- they will find cures. Of course, we cannot know exactly what they will find, but we can be confident that a rejuvenated German pharmaceutical industry would resume the old German habit of making path-breaking discoveries and putting them to practical use.

In the meantime, the German biotechnology industry is finally on the move. While it has far to go, investment and revenues are increasing rapidly. Impressive results from German biotechnology research are already available. Just last week, the renowned New England Journal of Medicine released an article on its website in advance of publication because of its great clinical importance in the treatment of hepatitis C. That article described spectacular results from a German biotechnology drug, based on research conducted in Hannover.

This anecdote is a reminder of the basic point. There is good money to be made in curing diseases -- or at least there ought to be. There is much work to be done in finding cures for Alzheimers, arthritis, cancer, and heart disease. There is no good reason for Germans facing old age to leave their fate completely in the hands of American research laboratories. There is no good reason for the most talented German biologists and entrepreneurs to take their skills to fields other than medical technology, or to face the necessity of working elsewhere. I for one hope your world-class scientists have the freedom and financial incentives to bring Germany back to where it belongs, in the forefront of the development of miraculous new medicines.