Magazine Article | April 1, 2013

Let's Incentivize Innovation – Before It's too Late

Source: Life Science Leader

By Rob Wright, Chief Editor, Life Science Leader magazine

What do the U.S. auto and pharmaceutical industries have in common? For starters, both have traditionally held positions of world dominance. For example, after WWII the United States supplied about 75% of the world’s autos. The U.S. pharmaceutical market is presently the largest market in the world at $300+ billion. Both experienced significant consolidation. Between 1896 and 1930, there were more than 1,800 automobile manufacturers. Today there are only three major manufacturers — Chrysler, Ford, and General Motors (GM). For the pharmaceutical industry, the transformation occurred between 1940 and 1950, from a collection of several hundred small, geographically based companies, the largest of which accounted for less than 3% of the total market, to fewer than 20. Both industries have become increasingly dependent upon outsourcing. Well into the 1990s, most automotive manufacturers were vertically integrated, building a majority of the components for their products in their own factories. The same could be said for pharma, which until the mid-2000s, primarily researched, developed, manufactured, and sold their own medications. Another similarity is that both have served as lightning rods for political policy, such as the 2009 federal auto bailout shepherded by President Obama or the Medicare Prescription Drug, Improvement and Modernization Act (Medicare Part D) enacted by President Bush in 2003. The two industries both face competition from emerging markets as well. However, for the automotive industry, the threat is already a reality, as the U.S. is no longer the top producing country. In the pharmaceutical industry, the U.S. is clearly the number one market, and U.S.-based Pfizer is still the largest pharmaceutical company in the world, but for how long?

China recently surpassed Japan as the third-largest pharmaceutical market. Over the next five years, China is expected to grow at a pace of more than 20% annually. At this rate, it won’t take long for it to catch and surpass both the EU, growing at an anemic 1% to 3%, and the U.S., which anticipates growth of 3% to 5%. What can be done? What should be done?

In recent reports, I found it interesting that the automotive industry is taking a page out of the pharmaceutical playbook — seeking innovation. On a per-employee basis, the motor vehicles, trailers, and parts manufacturing subsectors invest $15,704 annually. The biopharmaceutical industry is the most R&D-intensive, investing $105,428 per employee annually. This has resulted in drug discovery costs rocketing past the $1 billion mark. Thus, simply investing more in innovation is not the answer. Neither is foreign policy focused on protectionism and trade restrictions. Both industries have tried these unsuccessfully. What is needed is pro-innovation political and regulatory policy making, not just for pharma, but for U.S. industry in general. If you want more innovation, more jobs, greater economic growth, and stability, implement policies which encourage U.S.-based companies to do those things. The FDA has been doing a good job, as evidenced by the implementation of FDASIA (Food and Drug Administration Safety and Innovation Act) and the tropical disease voucher program within FDAAA (Food and Drug Administration Amendments Act). But we need more. The greatest management principle in the world espoused by Michael Leboeuf is, “Things that get rewarded, get done.” Let’s incentivize innovation, and we can start by providing pharma with longer patent exclusivity.