Pharma in Europe: Going from Heartburn to Heart Attack?
Thursday, January 4, 2007
The European pharmaceutical industry is moving its research and development activities almost wholesale from continental Europe to the United States. Though most Europeans seem unperturbed, the shift has been momentous: “in 1990, the . . . pharmaceutical industry still invested 50% more in Europe than in the US . . . today, the same industry is investing 40% more in the US compared to Europe.” Alarm bells are even ringing at the European Commission; Industry Commissioner Günter Verheugen observes, “In 1992, 6 out of the 10 top medicines in worldwide sales were European, while in 2002 this figure had fallen to just 2.”
European job losses in the pharmaceutical R&D sector abound. In 2002, pharma giant Novartis said it would “move the headquarters of its worldwide research organization from Basel, Switzerland, to a new $250 million, 255,000 square-foot laboratory and office facility . . . in Cambridge, Massachusetts.” In November 2006, Novartis announced that it seeks to expand its R&D headquarters in the U.S. by adding as much as 500,000 square feet of additional R&D and office space. Europeans will not be enjoying these jobs—Americans will.
The brain drain to the U.S. that accompanies Europe’s rapidly declining R&D climate is far-reaching. Time magazine’s Jeff Chu recently noted, “Some 400,000 European science and technology graduates now live in the U.S. and thousands more leave each year.” Most European Ph.D. émigrés living in the U.S. have no plans to go back.
In the dynamic bio-tech industry, the picture is grimmer for Europe: the U.S. accounts for no less than “three quarters of the world’s biotechnology revenues and R&D spending.” Genentech, Amgen, you name it—if you’re talking about a successful bio-tech company, chances are you’re talking about a company that’s located in the United States, not in Europe.
France was once a true leader in pharmaceutical R&D, but the nation of Pasteur “has seen its contribution of new drug launches fall from around 50 in 1985-89 to just 12 in 1990-94.” Since 1994, the picture for pharmaceutical innovation in France has not improved much and the French government finally took note: in 2004, it began seeking advice on ways to make France more receptive for bio-tech investment.
The jobs that Europe has been losing to the United States are high quality jobs, and Americans are lucky to have them. American salaries for life scientists range from a comfortable $65,000 for those with a B.A. to an impressive $164,000 for those with an M.D. or Ph.D.
Why is Europe losing its pharmaceutical industry and why is the United States gaining pharmaceutical investment? In Europe, even more than in the United States, pharmaceutical companies face onerous obstacles to healthy business functions. Government price controls on drugs arguably present the greatest impediment to a flourishing European pharmaceutical industry. Thanks to the controls, pharmaceutical companies often can’t recoup their R&D costs by selling their drugs to European consumers—for that, they need higher-paying American consumers. While European consumers (and European governments) benefit from price controls in the short term because they pay less for drugs, in the long term, they suffer. New medicines sometimes no longer reach European consumers, hurting public health; and Europe is losing many quality R&D jobs to the United States, hurting employment.
European governments have also instituted far-reaching restrictions on advertising. Americans are used to seeing ads for all sorts of drugs on television (“Do your eyes itch?” “Have allergies kept you awake all night?”), but in many European countries directly advertising prescription drugs to consumers is illegal, even through websites. Pfizer, the American pharma giant, found this out the hard way when it set up a website for Dutch consumers interested in Viagra. A Dutch Socialist MP named Agnes Kant filed a complaint against Pfizer and won; Pfizer was ordered to take down the site. [SP-Dutch language.]
Why would European politicians be opposed to direct advertising of pharmaceutical drugs to consumers? Kant, the Dutch Socialist, says that “consumers are pushed by the industry to swallow a pill for every conceivable problem. Sometimes problems are imaginary,” she says, “and then an expensive pill is most often not the solution.” [SP-Dutch Language.]
That line of thinking is pernicious. Of course it’s true that some people think they have diseases when they have none, but policies custom built for hypochondriacs will fail those who are really sick. Pharmaceutical advertising encourages undiagnosed patients to seek needed medical advice. It is ultimately up to doctors to prescribe just what is needed and not a pill more.
European labor inflexibility also hurts pharmaceutical R&D. Medical drug discoveries increasingly come from bio-techs—small, dynamic, versatile companies. These companies thrive on labor flexibility and on an entrepreneurial investment environment, exactly what most of continental Europe lacks following decades of welfare-state socialism. The U.S., by contrast, has both flexible labor laws and a dynamic investment environment, and is reaping the fruits: bio-techs are proliferating with verve in the United States.
The reluctance of European academics to form partnerships with the private sector, which they often see as dirty and impure compared to academia, creates an additional obstacle to pharmaceutical R&D in Europe. Many European academics consider pharmaceutical R&D as a zero-sum game. The fact is that European academia has much to win by partnering with pharmaceutical companies and bio-tech startups to work on new discoveries—scientific prestige and global health ought to trump any concerns that profit is somehow crass.
Envious of the American biotech sector, European governments are now trying to play catch-up with the U.S. Instead of increasing economic freedom, however, European governments are engaging in state intervention to do so, pumping billions of Euros into bio-tech startups through the European Union, almost a type of bio-tech dirigisme. EU planners, alas, are not as good as venture capitalists at picking winners: “European biotech companies are more likely than their American counterparts to fail at the 3- to 5-year stage.”
Pumping public funds into European R&D will do little to help R&D if European governments do not change the underlying economics. Europe could begin by tackling price controls—even small changes would be a good start—and lifting the heaviest restrictions on direct advertising. Unless Europe takes truly drastic measures, pharmaceutical R&D will continue its rapid emigration to the United States.
Jurgen Reinhoudt is a Research Assistant at the American Enterprise Institute. His father has worked for many years in the research and development area of the pharmaceutical industry.
Image credit: "Pills_test 1" by Flickr user fredcamino
Image credit: "Magic pills" by Flickr user e-magic