What Can the European Union Do to Sharpen Its Innovative Edge in Pharmaceuticals?

I, along with two other speakers, have been asked to remark briefly on the topic, "What can the European Union do to sharpen its innovative edge in pharmaceuticals?" At first glance, this seems to be an odd question. Four of the top five firms in worldwide sales are European (Pharmaceutical Executive, May 2008). Three--GlaxoSmithKline, Sanofi-Aventis, and AstraZeneca--are headquartered in the European Union and one--Novartis--is in Switzerland. Can it really be true that the E.U. needs to worry about the health of its pharmaceutical firms, which created the world pharmaceutical industry early in the last century and seem to be thriving today? Unfortunately, there are in fact good reasons for the E.U. to worry. But fortunately, there are things the European Union can do to make things better.

What are the signs of distress? For one thing, the top European firms have been moving much of their research enterprise to the United States to take advantage of a superior research environment. Moreover, most of these firms' profits--and therefore most of the financial incentives that motivate R&D--emanate from the United States rather than from European markets. And when we look beyond traditional "big pharma" to the burgeoning world of biotechnology, Europe's situation is rather depressing. The list of established biotechnology pharmaceutical firms is nearly devoid of Europe-based firms. In the start-up sector from which most successful biotech drugs emerge, the United States continues its extraordinary dominance with distressingly little contribution from Europe.

The Research Environment

What, then, can the E.U. do to remedy its pharmaceutical R&D deficit and in so doing, help both itself and future patients worldwide? Let us begin with the research environment. Three things stand out. The first is public funding for basic research. The E.U.'s deficit in this respect is too well known to require discussion here. I simply suggest that E.U. research funding be increased several-fold--but I also suggest that this be done with care and that it not be done all at once. You will need to work hard to channel funds to the gifted researchers who can make good use of them.

Second, we should hope that the reform of graduate education continues apace. For far too long, your best newly minted Ph.D.'s languished in bureaucratic state-supported graduate schools, or--even worse for you but very good for us--migrated to the United States. And finally--still talking about the research environment--it is time for the E.U. to tackle the challenging but enriching task of facilitating the spinoff of research results from academia to the private sector. Experience has shown that this is the only reliable way to mount the onerous and financially risky clinical trials necessary to reveal a practical new treatment.

The Dynamics of Pharmaceutical Research

Now let us move to some less obvious points. I suggest that the E.U. would benefit from taking full account of three essential features of modern pharmaceutical R&D. One consists of the length and richness of the research streams for individual drugs. This is a byproduct of extraordinary advances in the scientific understanding of the biology underpinning pharmaceuticals. Much more is involved than simply testing a new cancer drug on other types of cancer, although it is worth noting that the biotech cancer drug Avastin is currently in literally hundreds of cancer trials. Sometimes the science behind a new drug suggests that it may work for several very different conditions. For example, success against one immunological condition may call for trials against other diseases that in some way involve the immune system. These can range as far afield as Crohn's disease, rheumatoid arthritis, cancer, and multiple sclerosis. One such drug, Rituxan, has already been approved for rheumatoid arthritis and non-hodgkin's lymphoma (a form of cancer) and has provided striking results against multiple sclerosis.

No one has yet devised a reliable way to use price controls to achieve a reasonable balance between short-run savings and long-run research incentives.

All this is expensive. I suspect that for many drugs, more will be spent on post-approval trials than on the research that first enabled the drug to be brought to market. That may be the only way to uncover the full therapeutic potential of an innovative drug.

A second research dynamic involves follow-on drugs, which are sometimes maligned as "me-too" drugs. The arrival of the first drug in a new therapeutic class does more than offer advances in patient treatment. It also opens up a new domain of research focused on the underlying biological mechanism. This research requires time and money. The pioneer drug may have no more than ten to twelve years of patent life remaining, but several years may be needed to complete just one crucial trial to shed new light on the relevant biological mechanism. We now know that research on the pioneer drug may only provide a start toward understanding the scientific and therapeutic properties of the therapeutic class. Often, most of the new learning will come from research on follow-on drugs. The statin class of cholesterol-reducing drugs is the classic example. A long series of clinical trials, some lasting a full five years each, has revolutionized preventive cardiology and perhaps even more important, has fundamentally altered scientific understanding of the causes of heart attacks. Most of that transforming research was performed by manufacturers of follow-on drugs, not the pioneer manufacturer.

That brings to mind a third component of pharmaceutical R&D, one that is too often neglected. Many drugs serve as research tools. They give scientists a way to manipulate something important in the human body--LDL cholesterol, for example, or the tumor necrosis factor--and test hypotheses. This has already generated numerous results in what might be called basic science, and far more is in the works. The role of LDL cholesterol and inflammation in cardiovascular disease is just one example. After close to two decades, this remains an area of extremely active research as evidenced by a multitude of fascinating results now emerging from the JUPITER trial of Crestor, a potent statin.

R&D and Competition

One of the least appreciated aspects of pharmaceutical R&D is the potent effect on competition of aggressive and far-reaching research on newer drugs. Such research bolsters competition in two ways. One is to accelerate the process of "inventing-around." It can start as soon as when a pioneer drug manufacturer releases striking clinical trial results, often well before the drug is even submitted for regulatory approval. By digging into the drug's biological foundations, competing manufacturers can often find their own way of attacking the same biological mechanism without infringing on the pioneer's patents. The result can be quick competition after the pioneer reaches market. There is nothing new about this kind of competition, but it seems to be happening much faster than it used to, especially with innovative biotech drugs. Examples include TNF-inhibitors and angiogenesis-inhibitors, two extremely important classes where several drugs are in testing or have been approved to compete with pioneers.

A second component of the new research-driven competitive environment is what might be called "crossover" competition. It occurs when research on one drug reveals new uses that compete with uses for another drug. In fact, two drugs that start out by targeting very different conditions--cancer and rheumatoid arthritis, for example--may end up competing with each other when both are proven effective for a third condition, such as Crohn's disease.

What the European Union Can Do

Clearly, there are things the E.U. can do to help restore its pharmaceutical industry's competitive edge. I have already suggested that the E.U. should increase basic research funding, pursue reform of academic graduate training and research, and create a better pathway from public and academic research toward private drug development. That would both bolster the basic research environment and put research results to work for the benefit of patients.

There is much more. E.U. member nations should rethink their policy of pushing down the prices of follow-on drugs. That policy pursues short-run financial gain at the greater cost of disincentivizing much of the most important research on individual drugs and on their underlying biologic mechanisms. The current ban on direct-to-consumer advertising of prescription drugs makes things worse by keeping patients from learning about the advantages of many newer drugs.

Also in order is a revamping of national price controls. No one has devised a reliable way to use price controls to achieve a reasonable balance between short-run savings and long-run research incentives. The result is that political forces cause controls to sacrifice too much in the way of benefits from future innovation. The situation is greatly complicated by the tendency for price controls to suppress crucial post-approval research which is highly unpredictable in its results but sometimes provides extraordinary social value. This is yet another reason why price controls are deeply hostile to long-term research and development.

Finally, it is time to respect the competitive dynamics of modern pharmaceutical R&D, especially when the tools of biotechnology are brought to bear. We have entered an era in which branded on-patent drugs compete with each other, and do so far more quickly than ever before. E.U. competition policies should respect this.

John E. Calfee is a resident scholar at AEI.

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About the Author


John E.
  • Economist John E. Calfee (1941-2011) studied the pharmaceutical industry and the Food and Drug Administration (FDA), along with the economics of tobacco, tort liability, and patents. He previously worked at the Federal Trade Commission's Bureau of Economics. He had also taught marketing and consumer behavior at the business schools of the University of Maryland at College Park and Boston University. While Mr. Calfee's writings are mostly on pharmaceutical markets and FDA regulation, his academic articles and opinion pieces covered a variety of topics, from patent law and tort liability to advertising and consumer information. His books include Prices, Markets, and the Pharmaceutical Revolution (AEI Press, 2000) and Biotechnology and the Patent System (AEI Press, 2007). Mr. Calfee wrote regularly for AEI's Health Policy Outlook series. He testified before Congress and federal agencies on various topics, including alcohol advertising; biodefense vaccine research; international drug prices; and FDA oversight of drug safety.

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