Europe’s Drug Industry Is Model for U.S. to Avoid

Published February 1, 2006

What happened to Europe’s vibrant drug industry?

Just a decade ago, more than two-thirds of all drug research was conducted in Europe. Now, 60 percent is conducted in the United States.

Major European drug makers–such as Aventis, Novartis, and GlaxoSmithKline–have shifted significant portions of their research operations from the Continent to the U.S. and beyond. Human talent is following the research money: Some 400,000 European science and technology graduates now live in the United States, with thousands more leaving every year.

For all this, European investors, scientists, and patients have their own political leaders to blame. Deliberate government policy, in the form of price controls imposed by national health care systems, is slowly choking off a once-thriving economic sector.

Europe’s government-run and -dominated health care systems are virtually monopsonies. As the primary buyers in their national markets, they have the power to set drug prices 40 percent to 60 percent lower than the free-market prices in the United States. These price controls have a serious negative effect on innovation.

Price Controls Hamper Research

Research and development are expensive. Researchers at Tufts University in Boston determined drug makers spend at least $800 million just to develop a new medicine, and there is a high risk that a drug could fail after years of testing or flunk the government approval process. In the United States, companies are allowed to recoup their investments and make a profit by charging a price that incorporates their research costs. In Europe, that is seldom the case.

The loss to research caused by price controls was quantified in a recent study by the U.S. Department of Commerce. The study looked at the impact of pharmaceutical price controls in 11 countries, including Holland, France, and Germany, and found they caused a $5 billion to $8 billion annual reduction in funding for drug research and development.

What could that amount buy? According to the study, it could lead to the discovery of three or four new potentially life-saving drugs each year. So it’s no surprise that from 1998 to 2002 there were only 44 new drug launches in Europe, compared to 85 in the United States.

U.S. R&D Threatened

But now is no time for Americans to be smug. Ironically, there is a bipartisan move afoot in the United States to implement the same policies that have dried up pharmaceutical research in Europe, by having the government “negotiate” drug prices.

The U.S. Congress passed legislation in 2003 that added a new prescription drug benefit for the disabled and elderly participating in the country’s Medicare program. It also created a novel system to deliver the drug benefit, encouraging private, competing companies to negotiate the best prices they can with drug makers.

Congress included in its legislation a “non-interference” clause that preserves the right of these drug plans to negotiate prices freely with the drug companies, without intervention from the federal government. While Americans have mixed opinions about this gigantic government drug program, one thing is clear: Repealing non-interference would put the U.S. pharmaceutical industry on the European path. Yet it is a top priority of liberals in Congress, who plan to bring up such legislation this year.

If non-interference is reversed, it will allow the federal government to step in and set prices for all 40 million Medicare recipients. Since they consume almost half of all prescription medicines sold in the United States, this would effectively amount to nationwide price controls.

Industry Driven East

We’ve already seen such policies force drug makers out of Europe.

Roche Chairman Franz Humer has pointed out that the research-based pharmaceutical companies could just as easily move on to Asia, where technology and education are steadily improving. In fact, Roche has just opened a research center in Shanghai, while other drug makers are flocking to Singapore and India.

Of course, if the United States gives drug makers a reason to go on the move again, European governments could make their own pitch by eliminating the interventionist policies that have been undercutting drug innovation in their countries.

Grace-Marie Turner ([email protected]) is president of the Galen Insitute. This article appeared in December 28, 2005, issue of The Wall Street Journal Europe and is reprinted with permission.