The Competitive Status of the U.S. Pharmaceutical Industry The Influences of Technology in Determining International Industrial Competitive Advantage (1983) / Chapter Skim
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2. Competitive Position of the U.S. Pharmaceutical Industry
2. Competitive Position of the U.S. Pharmaceutical Industry
Pages 21-52
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From page 21... ...
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.
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From page 22... ...
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)
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From page 23... ...
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.
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From page 24... ...
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.
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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)
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From page 27... ...
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.
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From page 28... ...
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 50 C' of 25 o _~ it/ / R&D ~ A A .~ ~ \ \ /\ / \ lotal Nub Introductions V/\\ /~/ Domestic Discovered NCE Introductions / \~/ I/ / / 1 1 1 1 O 1979 1 955 1 960 1 965 1 970 1 975 YEAR 600 500 o CO 400 a, c o ._ ._ E 300 ,,, 200 z UJ X LU 1 00 ci25 FIGURE 2-1 Domestic U.S.
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From page 29... ...
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.
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Germany ,_,>..~ .. ~ ~ ~—~ i9
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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.
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From page 32... ...
For U.S.-owned firms, overseas production increased from 50.7 billion in 1963 to over $6 billion in 197& Growth rates of overseas production for U.S.-owned firms thus substantially exceeded those of domestic production, insuring that by 1978 foreign production accounted for 40 percent of the U.S multinational total. Comparable figures for other nations are not available.
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From page 33... ...
Similarly, foreignoriginated NCEs were NCEs that were either self-originated by foreign-owned firms or licensed/acquired from foreign forms by U.S. - wned firms or by other foreign firms.
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By 1979, the market share of U.S. - wned firms had not yet turned upwards despite the pronounced recovery in the U.S.
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is associated with rough stability in the U.S. - wned share of pharmaceutical sales in France, West Germany, Italy, and Japan.
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In the upper insert, the percentage contribution of NCEs synthesized by foreign firms is described as a thre~year moving average by year of IND filing. SOURCE: Center for the Study of Drug Development, University of Rochester.
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From page 37... ...
as those of most foreign firms. This similarity in growth rates is of course reflected in the stability in the market shares of nationally located sales for U.S.-owned firms and is based on the extended stability in the U.S.-owned share of world introductions of NCEs.
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38 cot o o U3 o ce ce ED Al ce c, .
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In other words, economies of scale persist until there is some large scale of research operations entailing simultaneous study of numerous promising NCEs.9 Current industry estimates of the annual level of research expenditures at which average innovational costs cease to decline range as high as 5100 million a year. Only very few firms maintain annual research budgets of that magnitude.
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From page 41... ...
This trend has particularly serious consequences for nationally owned pharmaceutical industries based on smaller and medium-size firms, such as those in Belgium and Sweden. Data on the concentration of sales and innovation for th e pharmaceutical industry shed light on this issue.
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27.22 38.6 1973 28.8 45.5 75.3 27.56 38.4 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 Organization in Honor of Joe Rain, Ballinger, Cambridge, 1976.
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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.
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From page 46... ...
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 (%)
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From page 47... ...
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.
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From page 48... ...
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.
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From page 49... ...
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)
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From page 50... ...
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.
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From page 51... ...
Pharmaceutical Manufacturers' Association, cited in Barrie James, The Future of the_ Multinational Pharmaceutical Industry to 1990, New York, John Wiley, 1977, p.
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From page 52... ...
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.
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