Innovation in Pharmaceutical Biotechnology: Comparing National Innovation Systems at the Sectoral Level

Innovation in Pharmaceutical Biotechnology COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL ORGANISATION FO...

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Innovation in Pharmaceutical Biotechnology COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members.

This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries.

Also available in French under the title: Titre de l’ouvrage Sous-titre

© OECD 2006 No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to OECD Publishing: [email protected] or by fax (33 1) 45 24 13 91. Permission to photocopy a portion of this work should be addressed to the Centre français d'exploitation du droit de copie, 20, rue des Grands-Augustins, 75006 Paris, France ([email protected]).

FOREWORD –

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Foreword The OECD Working Party on Innovation and Technology Policy (TIP) launched three case studies in 2002 with the goal of developing analytical work aimed at: • Improving the understanding of innovation processes in specific technology fields or sectors within the overall National Innovation Systems (NIS) framework. • Drawing policy conclusions concerning the balance between horizontal innovation policies and more customised measures that take into account the specific characteristics in selected technology fields or sectors. The three case studies included pharmaceutical biotechnology, energy technology as well as knowledge-intensive service activities (KISA). This report presents a synthesis of the case study on innovation in pharmaceutical biotechnology. The purpose of the pharmaceutical biotechnology case study was to: • Investigate the specific characteristics of national innovation systems for pharmaceutical biotechnology. • Examine the structure and dynamics of the innovation networks generating knowledge, technologies and products • Analyse the role of demand-side factors in the innovation process. • Identify the systemic imperfections related to interactions between actors and the absence or inappropriate functioning of specific elements in the innovation system with special emphasis on R&D funding, public-private partnerships, IPRs, product-related regulation and the configuration of lead markets. • Perform cross-country analysis to develop recommendations that enhance the effectiveness of policies to encourage the performance of the national systems for pharmaceutical biotechnology. The pharmaceutical biotechnology case study comprised eight participating countries: Belgium, Finland, France, Germany, Japan, the Netherlands, Norway and Spain. The Netherlands, Germany and Norway chaired the focus group. National experts from participating countries prepared national reports based on a common framework (for a list of country studies and their authors, see below). The case study greatly benefited from focus group workshops and discussions of the OECD Committee for Scientific and Technological Policy (CSTP) and its Working Party on Innovation and Technology Policy (TIP). This report was prepared by focus group co-ordinators Christien Enzing (Netherlands), Thomas Reiss (Germany) and Terje Gronning (Norway), in co-operation with the OECD Secretariat. The chapters were prepared by the following authors:

INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

4 – FOREWORD • Chapter 1: Christien Enzing (TNO-STB, Netherlands) and Thomas Reiss (Fraunhofer ISI, Germany) • Chapter 2: summaries prepared by the authors of the national reports (see list of national project teams below) • Chapter 3: Thomas Reiss (Fraunhofer ISI, Germany) • Chapter 4: Mark Knell (University of Oslo, Norway) • Chapter 5: Terje Gronning (University of Oslo, Norway) • Chapter 6: Christien Enzing and Sander Kern (TNO-STB, Netherlands) • Chapter 7: Christien Enzing and Sander Kern (TNO-STB, Netherlands) • Chapter 8: Christien Enzing (TNO-STB, Netherlands). The eight national reports and their summaries in Chapter 2 were prepared by the following country project teams:1 • Belgium2 Eric Cantarella Politique Scientifique Fédérale, Brussels • Finland Malin Brännback Abo Akademi University Gabriela von Blankenfeld-Enkvist, Riitta Söderlund and Marin Petrov Turku School of Economics and Business Administration/Innomarket, Turku • France Alain Rochepeau French Ministry of Research and New Technologies, Technology Directorate, Bio-engineering Department, Paris • Germany Thomas Reiss and Sybille Hinze Fraunhofer Institute for Systems and Innovation Research, Karlsruhe • Japan Kazuyuki Motohashi Research Centre for Advanced Science and Technology, University of Tokyo • Netherlands3 Christien Enzing, Sander Kern and Annelieke van der Giessen TNO Strategy, Technology and Policy, Delft

1.

The full-length country studies are available on line at www.oecd.org/sti/innovation under the heading “Case Studies in Innovation”.

2.

Belgium did not contribute a full-length national report.

3.

The full Netherlands country study also includes the food sector; the summary only addresses the biopharmaceutical sector.


FOREWORD –

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• Norway4 Eva Dobos, Terje Grønning (project manager), Mark Knell Dorothy Sutherland Olsen and Bjørg Kristin Veistein, Centre for Technology, Innovation and Culture, University of Oslo • Spain Author: Emma Gutiérrez Mesa Departamento de Empresa, Faculdad de Economía, Derecho y Empresariales, Universidad Europea de Madrid Co-ordinator: Dr. Emilio Muñoz Consejo Superior de Investigaciones Científicas CSIC, Madrid The data collection and calculations of the bibliometric and patent analysis presented in the national reports and in Chapter 3 of this report are by Sybille Hinze of Fraunhofer ISI. Françoise Laville (Observatoire des sciences et des techniques – OST, Paris) contributed statistical information. From the OECD Secretariat, Emmanuel Hasan and Sandrine Kergroach provided statistical support and analysis. Gernot Hutschenreiter, following Jean Guinet, supported the work of the focus group and co-ordinated the preparation of this publication.

4.

A complementary national case study on innovation in marine biotechnology was prepared by Terje Gronning with Eva Dobos, Ingeborg Frogner Dahl-Hilstad, Mark Knell, Ovar Andreas Johansson, Mark Knell and Dorothy Sunderland Olsen of the Centre for Technology, Innovation and Culture, University of Oslo.


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TABLE OF CONTENTS –

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Table of Contents

Foreword........................................................................................................................................3 Executive Summary.......................................................................................................................9 Note de synthèse ..........................................................................................................................15 Chapter 1. Introduction................................................................................................................21 Chapter 2. Summary of Country Studies.....................................................................................33 Belgium ..................................................................................................................................34 Finland....................................................................................................................................41 France .....................................................................................................................................50 Germany .................................................................................................................................62 Japan.......................................................................................................................................70 The Netherlands .....................................................................................................................75 Norway ...................................................................................................................................86 Spain.......................................................................................................................................95 Chapter 3. Comparison of Performance in National Biopharmaceutical Innovation Systems..................................................................................................105 Chapter 4 .Openness of the Biopharmaceutical Innovation System .........................................121 Chapter 5. Comparison of Selected Demand-side Factors ........................................................131 Chapter 6. Structure, Dynamics and Performance in National Biopharmaceutical Innovation Systems ..................................................................147 Chapter 7. Systemic Imperfections in Biopharmaceutical Innovation Systems........................165 Chapter 8. Policy Implications ..................................................................................................179



EXECUTIVE SUMMARY –

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Executive Summary

Innovation policies and sectoral innovation systems

Biotechnology has become the driving force of radical changes in innovation processes in various sectors. This is best illustrated by the pharmaceutical industry where the traditional chemical paradigm of drug discovery and development is being replaced by a new biotechnological paradigm. This has important consequences for the structure and functioning of the biopharmaceutical innovation system: biotechnology firms and public sector research organisations are becoming key actors generating new knowledge, tools and substances for the pharmaceutical industry. Regulations, standards and intellectual property rights (IPR) schemes have to deal with new types of components, and, on the demand side, new solutions are emerging for as yet unmet needs. For this reason the biopharmaceutical sectoral innovation system was chosen as one of the pilot sectors of the OECD Case Studies in Innovation.1 Building on previous work on national innovation systems (NIS), the OECD Case Studies in Innovation are aimed at improving the understanding of the idiosyncratic properties of particular areas of technology and sectoral innovation systems, so that a consistent and transparent policy mix can be designed that combines generic innovation policies with customised policies adapted to the characteristics of a specific area of technology or of a sectoral innovation system. Aims of the case study

The general aim of the case study on pharmaceutical biotechnology was to provide a systematic comparison of biopharmaceutical innovation systems in a number of OECD countries. In particular, the characteristics of the national biopharmaceutical innovation systems that relate to the structure and dynamics of the systems, the role of demand factors and markets, and the openness of the systems were investigated, including an assessment of the performance in science as well as in innovation and industrial development and an assessment of the influence of incentives and other framework conditions shaped by government policies. In addition, systemic imperfections hampering the functioning of innovation systems were identified. Based on this analysis, the study aimed at developing recommendations that enhance the effectiveness of policies to foster the economic competitiveness of national biopharmaceutical innovation systems. On the basis of a cross-country analysis and an identification of systemic imperfections which vary across countries, policy conclusions were drawn as to how to achieve a balance between horizontal innovation policies

1.

The other two pilot sectors are energy technology and knowledge-intensive service activities (KISA).


10 – EXECUTIVE SUMMARY applying across industries and fields of technology and measures that take into account the sectoral or technological characteristics of biopharmaceutical innovation systems. A case study approach, combining quantitative and qualitative methods

Advancing the understanding of innovation systems requires a methodology which makes it possible to study these systems in depth as well as to make comparisons across innovation systems. The explorative and comparative nature of the study renders a case study approach most appropriate. A case study requires the description of the working, structure and dynamics of a sectoral innovation system in developing, producing and delivering products and services to satisfy demands of users and consumers, and of the way a sectoral system changes over time. However, a methodology which makes it possible to systematically compare innovation systems also requires quantitative information. In order to facilitate comparability across countries, a common methodology was developed for the national case studies combining both qualitative and quantitative methods. National reports – following a common structure – were prepared for Belgium, Finland, France, Germany, the Netherlands, Norway, Japan and Spain. National performance in science and in innovation and industrial development

The analysis of the eight countries shows that in terms of overall performance in science as measured by a set of five indicators related to publications and citations, Belgium, Finland, the Netherlands – all smaller countries – take a leading position. Japan and Spain are ranked at the lower end of this scale, both with performance below the European average. For performance in innovation and industry development as measured by patent applications, the number of drugs in the pipeline, venture capital invested in biotechnology and the number of new biopharmaceutical firms (all per million population), Belgium and the Netherlands are among the leading countries. Spain, Japan and Norway, on the other hand, do not seem to perform very well. Combining the rankings of each country for performance in “science” on the one hand and “innovation and industrial development” on the other reveals different clusters of countries. It turns out that Belgium scores highest in terms of “innovation and industrial development” and second in “science”. Finland and the Netherlands are rather strong in “science” but have medium performance in “innovation and industrial development”. Germany performs relatively well in “innovation and industrial development” but less so in “science”. France and Norway do not excel in either “science” or “innovation and industrial development” but France still performs better in “innovation and industrial development” and Norway better in “science”. Japan and Spain are performing poorly in both “science” and “innovation and industrial development”. Structure and dynamics of national biopharmaceurical innovation systems: openness

The openness of national biopharmaceutical innovation systems can be studied from different perspectives. International trade data seem to indicate that Finland, Japan and Norway tend to be more import-oriented while France, Germany and the Netherlands INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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tend to be more export-oriented. Activities of large multinational pharmaceutical companies help explain these patterns. It can be shown that the value added of pharmaceutical production was predominantly realised by foreign-owned firms in France, Norway and Spain, while domestic enterprises were more prominent in Finland and the Netherlands. However, very few of the small dedicated biotechnology firms were foreign-owned, reflecting the domestic origin of these firms as spin-offs from universities, public research organisations and other firms. The third and fourth indicators for openness focus on the international dimension of collaboration. The pharmaceutical industry is one of the most global industries in terms of alliances and collaborative activities. The surveys of dedicated biotechnology firms found that a majority of these firms that were involved in collaborative arrangements with other firms had foreign partners. The percentage of patent applications in biopharmaceuticals that involved international co-operation was high in Europe when compared to the United States and Japan. During the late 1990s there was a noticeable shift towards greater reliance on domestic knowledge sources. This could have been caused by the entry of many new dedicated biotechnology firms that were spun off from universities, firms, etc. Biotech firms that are active in the biopharmaceutical sector and which do not have alliances with large pharmaceutical firms tend to rely more heavily on domestic sources in their innovative activities, including universities and public research organisations. Structure and dynamics of national biopharmaceutical innovation systems: demand-side factors

The analysis of the role of the demand side in national biopharmaceutical innovation systems, interpreting demand as “market pull” in a broad sense, shows that while market size may function as an attraction to industry, it is not necessarily conducive to innovation. This is because less innovative products may be sold in suitable volumes. In a more narrow sense corresponding to the “lead market” concept, a market may exert a pull effect if it is “demanding”, i.e. if it requires sophisticated products. Such requirements may be articulated by customers themselves, or by their representatives, i.e. physicians, or they may be set by regulatory authorities. The necessity of cost containment measures, however, dictates a different strategy, leaving hardly any incentives to develop innovative products. Rather, incentives predominantly work towards the use of generic products. This may in turn have an adverse impact on industrial strategies. Another main finding is that the influence of “users” is extremely limited in all countries studied. This is perhaps not surprising given the complex nature of the products in question. In order to stimulate diversification and the diffusion of innovative products, decisions to reward product differentiation and products developed for specific niches may be warranted in the future. Structural and dynamic characteristics and the performance of the systems

There is no single “optimal” configuration of the national innovation system leading to superior performance measured by indicators based on either science or innovation and industrial development. For this reason, the structural and dynamic characteristics of the biopharmaceutical innovation system of countries with similar performance in science as well as in innovation and industrial development may vary widely. Some features, however, appear to be conducive to performance in innovation and industrial development in a rather robust manner. With respect to framework conditions, INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

12 – EXECUTIVE SUMMARY institutional set-up and policy, such factors appear to be, for example, the maturity of the national private equity markets, the existence of policies and instruments for the commercialisation of technology and the biotechnology-specific character of these commercialisation policies. Policies creating and sustaining an advanced knowledge base tend also to be crucial for commercialisation, but the reverse is not true. Countries adopting a comprehensive policy approach using a broad set of policies to promote biotechnology that address all functions of the innovation system tend to perform better than countries with patchy and fragmented policies. Systemic imperfections

Systemic failures can raise barriers or lead to severe disadvantages in the innovation process. Systemic imperfections include the absence or inappropriate functioning of actors in the production, diffusion and application of new knowledge, the absence of linkages and interactions between parts of the system, etc. The national case studies have identified a large number and variety of systemic imperfections in all parts of the innovation system, but most are related to the exploitation and commercialisation of knowledge and to framework conditions. Examples are the lack of biotechnology expertise in technology transfer offices, inappropriate models for attributing the ownership of and returns from intellectual property between the researcher and the research organisation, insufficient valorisation and exploitation policies of public research organisations, inadequate public-private linkages, the shortage of risk capital, the availability of specific expertise in human resources. Most of the systemic imperfections do not seem to be caused by a single category (actors, functions, institutions and interaction) but rather are rooted in a combination of factors. Policy recommendations

The role of governments in innovation policy making has changed considerably over the last decades. Based on the linear model of innovation, first generation innovation policies in the post-war period were focused on funding R&D, especially basic – i.e. generally applicable – research as its major policy instrument. This funding – “at a certain distance from the market” – was designed to compensate for market failures leading companies to underinvest in R&D. Since the mid-1990s the complexity of the innovation system requires governments to address “systemic failures”. Recognition was given to the diffusion of innovation, the interactive character of the innovation process (with many feedback loops between the different stages of the process) and the regional and/or sectoral specificity of innovation processes. Policies are designed to address systemic failures which block the functioning of the innovation process. These failures provide a rationale for government involvement not only through the funding of basic research, but also – and here the second generation of innovation policies comes in – more widely in ensuring that the innovation system performs well as an entity. A new role of government involvement in the coming years is to recognise the importance of innovation in the innovation policy governance system itself. The focus of first and second generation policies was on the research and education system, the business system, framework conditions, infrastructure and intermediaries. The focus of third generation policies will be on government itself. An important function is to close the “co-ordination gap” within the government between the separate departments that



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each deal with specific aspects of the innovation chain, but also between national, international and regional governments. Given the systemic failures that have been identified in the national biopharmaceutical innovation systems in the national case studies and the need for an integrated innovation policy approach that includes first, second and third generation policies, recommendations have been formulated that address: • Coherent and consistent innovation policies: combine objectives such as improving international competitiveness through innovation policies towards pharmaceutical biotechnology on the one hand, and a high-quality and affordable public health care system on the other hand. • Public governance: facilitate a more active role of patients and/or their organisations in innovation processes, clinical trials and market access; potentially important sources of innovation remain untapped. • Promote co-operation and networking: create network linkages throughout the biopharmaceutical innovation system, especially between actors in science and the business system. • Support for an innovative industry: develop instruments that provide incentives for private financers to invest in biopharmaceutical firms. • Regulatory framework: develop transparent and stable regulations with short application procedures and good information on procedures and the development of an adequate system for protecting biopharmaceutical innovations. • Technology transfer: stimulate the exploitation of public sector biopharmaceutical research, include IPR indicators in review and evaluation procedures, establish qualified supportive infrastructure for start-ups (legal, business, marketing expertise, incubator and technical facilities). • Stimulate sound science systems: the persistence of market imperfections associated with basic research requires a role for government research policies and research funding.



NOTE DE SYNTHESE –

15

Note de synthèse

Politiques de l’innovation et systèmes sectoriels d’innovation

Les biotechnologies sont désormais le moteur de changements radicaux dans les processus d’innovation de divers secteurs. La meilleure preuve en est que, dans l’industrie pharmaceutique, le paradigme traditionnel de la découverte et du développement d’un médicament fondé sur la chimie a été remplacé par un nouveau paradigme fondé sur ces nouvelles technologies. Ce phénomène s’accompagne de conséquences importantes pour la structure et le fonctionnement du système d’innovation biopharmaceutique : les entreprises de biotechnologie et les organismes de recherche du secteur public sont en passe de devenir des acteurs essentiels produisant du savoir, des substances et des outils nouveaux pour l’industrie pharmaceutique. La réglementation, les normes et les régimes de droits de propriété intellectuelle (DPI) doivent porter sur de nouveaux éléments et, sur le plan de la demande, de nouvelles solutions se dessinent pour répondre à des besoins non satisfaits jusqu’à présent. C’est pour cette raison que le système sectoriel d’innovation biopharmaceutique a été choisi comme l’un des secteurs pilotes des Études de cas de l’OCDE sur l’innovation [les autres étant les technologies de l’énergie et les activités de services à forte intensité de savoir (KISA)]. S’inspirant des travaux antérieurs consacrés aux systèmes nationaux d’innovation (NIS), les Études de cas de l’OCDE sur l’innovation visent à mieux comprendre les propriétés idiosyncrasiques de domaines technologiques particuliers et de systèmes sectoriels d’innovation. A partir de là, on doit pouvoir élaborer une panoplie de mesures cohérentes et transparentes conjuguant des politiques génériques d’innovation et des politiques « sur mesure », adaptées aux caractéristiques de tel ou tel domaine technologique ou système sectoriel d’innovation. Objectifs de l’étude de cas

Globalement, l’objectif de l’étude de cas sur les biotechnologies pharmaceutiques était d’effectuer une comparaison systématique entre les systèmes d’innovation biopharmaceutique dans un certain nombre de pays de l’OCDE. Nous nous sommes penchés sur les caractéristiques des systèmes nationaux d’innovation biopharmaceutique du point de vue de la structure et de la dynamique de ce type de système, sur le rôle des facteurs relatifs à la demande et des marchés, ainsi que sur l’ouverture des systèmes. Nous avons notamment procédé à une évaluation des résultats affichés par ces systèmes en matière de sciences mais aussi d’innovation et de développement industriel, ainsi que de l’influence des incitations et autres conditions-cadres déterminées par les politiques publiques. En outre, nous avons recensé les imperfections entravant le bon fonctionnement des systèmes d’innovation.


16 – NOTE DE SYNTHESE S’appuyant sur cette analyse, l’étude visait à formuler des recommandations sur la manière de renforcer l’efficacité des politiques destinées à favoriser la compétitivité économique des systèmes nationaux d’innovation biopharmaceutique. D’une analyse transnationale et du recensement des imperfections systémiques – qui varient d’un pays à l’autre – nous avons tiré des conclusions à l’intention des pouvoirs publics sur les moyens d’équilibrer les politiques transversales d’innovation qui s’appliquent à tous les secteurs d’activité et domaines technologiques, d’une part, et les mesures tenant compte des caractéristiques sectorielles ou technologiques des systèmes d’innovation biopharmaceutique, d’autre part. Approche par études de cas combinant des méthodes quantitatives et qualitatives

Pour progresser dans la compréhension des systèmes d’innovation, il faut une méthodologie permettant d’étudier ces systèmes de manière approfondie et d’effectuer des comparaisons entre différents systèmes. Le fait que l’étude revête un caractère à la fois exploratoire et comparatif rend l’approche par études de cas particulièrement appropriée. Une étude de cas exige la description du fonctionnement, de la structure et de la dynamique d’un système sectoriel d’innovation en matière de mise au point, de production et de distribution de produits et de services pour satisfaire la demande des usagers et consommateurs, ainsi que de la manière dont un système sectoriel évolue au fil du temps. Toutefois, une méthodologie permettant de comparer les systèmes d’innovation de manière systématique nécessite aussi des informations d’ordre quantitatif. Pour faciliter la comparabilité internationale, une méthodologie commune a été mise au point pour les études de cas par pays, combinant méthode qualitative et méthode quantitative. Des rapports par pays – tous structurés de la même manière – ont été établis pour l’Allemagne, la Belgique, l’Espagne, la Finlande, la France, le Japon, la Norvège et les Pays-Bas. Performances nationales en matière de sciences, et d’innovation et développement industriel

L’analyse des huit pays révèle que sur le plan des performances scientifiques globales, mesurées au moyen d’un ensemble de cinq indicateurs fondés sur les publications et les citations, ce sont la Belgique, la Finlande et les Pays-Bas (tous des petits pays) qui se classent en tête. Par contre, l’Espagne et le Japon se classent en bas de l’échelle, tout deux affichant des résultats inférieurs à la moyenne européenne. S’agissant des performances en matière d’innovation et de développement industriel mesurés d’après les demandes de brevets, le nombre de médicaments en préparation, le montant du capital-risque investi dans les biotechnologies et le nombre de jeunes entreprises biopharmaceutiques (toutes les valeurs étant exprimées par million d’habitants), la Belgique et les Pays-Bas figurent parmi les pays de tête. En revanche, l’Espagne, le Japon et la Norvège ne semblent pas enregistrer des résultats très probants. Si l’on combine les classements de chaque pays au regard de leurs performances en « science », d’une part, et en « innovation et développement industriel », d’autre part, les groupes de pays que l’on observe se présentent différemment. Il s’avère que c’est la Belgique qui se classe au premier rang pour « l’innovation et le développement industriel » et au second pour la « science ». La Finlande et les Pays-Bas sont assez bien placés en « science » mais n’obtiennent que des résultats moyens en « innovation et INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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développement industriel ». L’Allemagne affiche d’assez bons résultats en « innovation et développement industriel » mais se classe moins bien en « science ». La France et la Norvège n’excellent ni en « science », ni en « innovation et développement industriel » mais la première obtient de meilleurs résultats en « innovation et développement industriel » tandis que la seconde est mieux placée en « science ». L’Espagne et le Japon enregistrent tout deux des performances médiocres à la fois en « science » et en « innovation et développement industriel ». Structure et dynamique des systèmes nationaux d’innovation biopharmaceutique : ouverture

On peut étudier le degré « d’ouverture » des systèmes nationaux d’innovation biopharmaceutique sous différents angles. Les chiffres du commerce international semblent indiquer que la Finlande, le Japon et la Norvège privilégient plutôt les importations alors que l’Allemagne, la France et les Pays-Bas sont plutôt axés sur l’exportation. Observer les activités des grands groupes pharmaceutiques multinationaux nous aide à expliquer ces schémas. On peut ainsi montrer que la valeur ajoutée de la production pharmaceutique a été réalisée principalement par des entreprises sous contrôle étranger en France, en Espagne et en Norvège alors que les entreprises nationales occupent une place prépondérante en Finlande et aux Pays-Bas. Toutefois, très peu des petites entreprises dédiées aux biotechnologies sont des sociétés sous contrôle étranger, ce qui témoigne de l’origine nationale de ces entreprises qui ont en fait « essaimé » des universités, des organismes publics de recherche ou d’autres entreprises. Les troisième et quatrième indicateurs du degré d’ouverture se rapportent à la dimension internationale de la collaboration. L’industrie pharmaceutique est l’une des industries les plus « mondialisées » en termes d’alliances et d’activités en collaboration. Les enquêtes auprès d’entreprises à vocation biotechnologique révèlent qu’une majorité de celles qui sont parties prenantes à des arrangements de collaboration avec d’autres entreprises ont des partenaires étrangers. Le pourcentage de demandes de brevets sur des produits biopharmaceutiques impliquant une coopération internationale est élevé en Europe, comparé aux États-Unis et au Japon. A la fin des années 90, on a pu observer un net revirement en faveur du recours plus fréquent à des sources de savoir nationales. Ce phénomène s’explique peut-être par l’arrivée sur le marché de nombreuses jeunes entreprises à vocation biotechnologique ayant essaimé des universités, d’autres entreprises, etc. Les sociétés biotechnologiques dont l’activité se situe dans le secteur biopharmaceutique et qui n’ont pas conclu d’alliances avec de grands groupes pharmaceutiques s’en remettent généralement davantage aux sources de savoir nationales quand elles innovent, y compris les universités et les organismes publics de recherche. Structure et dynamique des systèmes nationaux d’innovation biopharmaceutique : facteurs liés à la demande

L’analyse du rôle du volet « demande » des systèmes nationaux d’innovation biopharmaceutique (la demande s’entendant comme le facteur tendant à tirer le marché au sens large) montre que si la taille des marchés exerce probablement un effet d’attraction pour l’industrie, elle n’est pas nécessairement propice à l’innovation. En effet, certains produits même moins novateurs peuvent se vendre en quantités appropriées. Dans un sens plus strict correspondant à la notion de « marché porteur », un marché peut exercer un INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

18 – NOTE DE SYNTHESE effet d’attraction s’il est « en demande », autrement dit s’il exige des produits élaborés. Ces exigences peuvent être exprimées par les clients eux-mêmes, ou par leurs représentants, c’est-à-dire les médecins, ou bien être fixées par des autorités de régulation. La nécessité d’éviter la dérive des coûts impose une stratégie différente. C’est alors à peine s’il subsiste quelque incitation pour stimuler la mise au point de produits innovants. Les incitations ont plutôt pour effet d’orienter le choix vers les produits génériques, ce qui peut avoir un impact défavorable sur les stratégies industrielles. Parmi les principales observations, il ressort aussi que l’influence des « consommateurs » est extrêmement limitée dans tous les pays étudiés. Il ne faut peut-être pas s’en étonner étant donné la complexité des produits considérés. A l’avenir, pour stimuler la diversification et la multiplication des produits innovants, il pourrait se révéler nécessaire d’opérer une différenciation en fonction de principes plus explicites, fondés sur la notion de « niche », récompensant l’innovation. Caractéristiques structurelles et dynamiques et performances des systèmes

Il n’existe pas de configuration « optimale » unique de système national d’innovation permettant d’obtenir de plus hautes performances mesurées par des indicateurs fondés soit sur la science, soit sur l’innovation et le développement industriel. C’est pourquoi on peut observer des écarts considérables entre les caractéristiques structurelles et dynamiques des systèmes d’innovation biopharmaceutique de pays affichant des résultats analogues en matière de science, et d’innovation et développement industriel. Il semble toutefois que certains facteurs soient extrêmement propices aux performances en matière d’innovation et de développement industriel. S’agissant des conditions-cadres, du contexte institutionnel et de la politique publique, ces facteurs pourraient être, par exemple, la maturité des marchés nationaux des actions, l’existence de politiques et d’instruments de commercialisation de la technologie et l’orientation proprement biotechnologique de ces politiques de commercialisation. En outre, les mesures visant à créer et à entretenir une base de connaissances de pointe sont généralement primordiales pour la commercialisation mais l’inverse n’est pas vrai. Les pays qui adoptent une stratégie d’action globale en recourant à une large panoplie de mesures pour promouvoir les biotechnologies correspondant à la totalité des fonctions du système d’innovation affichent généralement de meilleurs résultats que ceux qui appliquent des politiques fragmentaires, au coup par coup. Imperfections des systèmes

Les défaillances systémiques peuvent créer des obstacles au processus d’innovation ou le fragiliser gravement. Parmi les imperfections des systèmes, on citera l’absence ou l’intervention inappropriée des acteurs de la production, de la diffusion et de l’application du nouveau savoir, l’absence de liens et d’interactions entre les différentes parties du système, etc. Les études de cas par pays ont répertorié des imperfections systémiques aussi nombreuses que diverses dans toutes les parties des systèmes d’innovation. Toutefois, la majorité d’entre elles sont liées à l’exploitation et à la commercialisation du savoir, ainsi qu’aux conditions-cadres. En voici quelques exemples : absence de maîtrise des biotechnologies par les organismes de transfert technologique, inadéquation des modèles d’attribution des droits de propriété et de répartition des avantages économiques de la propriété intellectuelle entre le chercheur et l’organisme de recherche, carences des politiques de valorisation et d’exploitation des organismes publics de recherche, mauvaise INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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articulation entre les secteurs privé et public, insuffisance du capital-risque, manque de compétences spécialisées en ressources humaines. Il semble que la plupart des imperfections systémiques ne puissent être imputées à une seule catégorie de causes (acteurs, fonctions, institutions et interactions) mais qu’elles relèvent de la combinaison de plusieurs facteurs. Recommandations à l’intention des pouvoirs publics

Au cours des dernières décennies, le rôle des pouvoirs publics en matière de politique de l’innovation a considérablement changé. En prenant un modèle d’innovation linéaire, on voit que la politique d’innovation de la première génération (dans la période d’aprèsguerre) a privilégié le financement de la R-D, en particulier la recherche fondamentale, c’est-à-dire la recherche d’application générale. Ce financement « prenant une certaine distance avec le marché » était destiné à compenser les défaillances du marché, ce qui a conduit les entreprises de pointe à investir insuffisamment dans la R-D. Depuis le milieu des années 90, les systèmes d’innovation sont devenus si complexes que les pouvoirs publics doivent s’attaquer aux « défaillances systémiques ». La diffusion de l’innovation, le caractère interactif du processus d’innovation (et les multiples phases de rétroaction entre les différents stades du processus) ainsi que la spécificité régionale et/ou sectorielle des processus d’innovation sont désormais reconnus. Les politiques sont conçues pour remédier aux défaillances systémiques entravant le fonctionnement du processus d’innovation. Ce sont précisément ces défaillances qui justifient l’intervention des pouvoirs publics, non seulement par le biais du financement de la recherche fondamentale mais aussi (et c’est là qu’interviennent les politiques d’innovation de deuxième génération) de manière plus large afin de s’assurer que le système d’innovation, considéré comme un tout, obtienne de bons résultats. Dans les années à venir, un nouveau rôle échoira aux pouvoirs publics, à savoir d’admettre l’importance de l’innovation dans le système de gouvernance des politiques d’innovation lui-même. Les politiques de première et de deuxième générations visaient le système d’enseignement et de recherche, le monde des entreprises, les conditions-cadres, l’infrastructure et les intermédiaires. Les politiques de troisième génération seront axées sur les pouvoirs publics en tant que tels. Il s’agit tout particulièrement de combler, au sein des gouvernements, le « déficit de coordination » entre les différents ministères qui, chacun, s’occupent d’aspects particuliers de la chaîne de l’innovation, mais aussi entre les administrations nationales, internationales et régionales. Compte tenu des défaillances systémiques recensées dans les systèmes nationaux d’innovation biopharmaceutique à l’occasion des études de cas par pays, et de la nécessité d’adopter une approche intégrée englobant les politiques d’innovation des première, deuxième et troisième générations, un certain nombre de recommandations ont été formulées qui portent respectivement sur les aspects suivants : • Cohérence et homogénéité des politiques de l’innovation : conjuguer des objectifs tels que l’amélioration de la compétitivité internationale par le biais de politiques de l’innovation axées d’une part, sur les biotechnologies et, d’autre part, sur l’existence d’un système de soins de santé de grande qualité et d’un coût abordable. • Bonne gestion des affaires publiques : faire en sorte que les patients et/ou leurs représentants jouent un rôle plus actif dans les processus d’innovation, les essais


20 – NOTE DE SYNTHESE cliniques et l’accès au marché. (D’importantes sources potentielles d’innovation demeurent inexploitées à ce jour). • Promotion de la coopération et du travail en réseau : tisser des liens pour bâtir un réseau au sein du système d’innovation biopharmaceutique, en particulier entre les acteurs du monde scientifique et de la communauté des entreprises. • Soutien à un secteur innovant : élaborer les instruments qui inciteront le secteur privé à investir dans les entreprises biopharmaceutiques. • Cadre de réglementation : élaborer des réglementations transparentes et stables n’exigeant pas de lourdes formalités et offrant un bon système d’information sur les procédures et la mise au point d’un régime adéquat pour protéger les innovations biopharmaceutiques. • Transfert de technologie : stimuler l’exploitation des fruits de la recherche biopharmaceutique du secteur public, inclure les indicateurs de DPI à l’examen ainsi que les procédures d’évaluation, et mettre en place une infrastructure idoine pour épauler les « jeunes pousses » (connaissances spécialisées sur le plan juridique, des entreprises et de la commercialisation, pépinières d’entreprises et autres infrastructures techniques). • Stimulation de systèmes scientifiques solides : la persistance des imperfections du marché liées à la recherche fondamentale indique aux pouvoirs publics qu’ils ont un rôle à jouer en matière de politiques et de financement de la recherche.


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Chapter 1 Introduction

This chapter sets the stage for the subsequent examination of eight cases studies on biotechnology and the pharmaceutical sector in the context of the national innovation systems in OECD countries. It presents the methodology used and points out the main areas in which biotechnology plays an active role in the pharmaceutical sector.


22 – INTRODUCTION Background Building on previous work on national innovation systems, the OECD Case Studies in Innovation are designed to study specific sectors or fields of technology in order to understand the idiosyncracies of specific areas of technology and sectoral innovation systems. On this basis, policies can be developed that complement generic innovation policies, which may have limited effects in the context of specific areas of technology or sectoral innovation systems (OECD, 2002). The development of new policy initiatives that stimulate and support the rapid development of national innovation systems calls for an understanding of these specific properties. Hence, the challenge for innovation policy is to develop a consistent and transparent policy mix which takes due account of these specificities. In accordance with these considerations, the OECD Case Studies in Innovation are designed to contribute to the analysis and development of concrete policy initiatives in specific areas. As the development of new policy initiatives requires an understanding of the sector and the specific properties of innovation systems, a methodology is needed that enables in-depth study and systemic comparisons of various innovation systems. Such a methodology requires a combination of both quantitative and qualitative information. This conforms to the view that deeper insight into the practical functioning of individual innovation systems is needed and can be gained through case studies. The functioning of an innovation system and its performance can to a certain extent be identified by quantitative analyses but qualitative information is also needed to arrive at a deeper understanding. This requires a description of the working, structure and dynamics of a sectoral innovation system in developing, producing and delivering products and services to meet demand from users and consumers, and the way a sectoral system changes over time. Biotechnology has become the driving force of dramatic changes in the innovation process in various sectors. This is best illustrated by the pharmaceutical industry, where the traditional chemical paradigm of drug discovery and development is replaced by a new biotechnological paradigm. This has important consequences for the structure and functioning of the biopharmaceutical innovation system: biotechnology firms and public sector research organisations are becoming key actors generating new knowledge, tools and substances for the pharmaceutical industry. Regulations, standards and IPR schemes have to deal with new types of components, and on the demand side, new solutions are emerging for hitherto unmet needs. For that reason, the biopharmaceutical innovation system was chosen as one of the pilot sectors for the Case Studies in Innovation. The other two pilot sectors are energy technology and knowledge-intensive service activities (KISA). The current state of biotechnology differs considerably between countries. A number of factors are responsible for these differences. In the case of pharmaceutical biotechnology, diverse health-care systems, product approval regulations and procedures, or demand configurations can generate different feedbacks into the R&D process. The growing internationalisation of the pharmaceutical industry may have profound impacts on national biopharmaceutical innovation systems. Public support for R&D might compensate unfavourable demand conditions. Education systems are adapted differently to the changing requirements of the national life sciences industry, and public perceptions of biotechnology have developed along different paths. In order to understand the role of these and other forces in shaping the configuration, dynamics and performance of the INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

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various national biopharmaceutical innovation systems, international comparisons are required. The general aim of the study was to provide a systematic comparison of biopharmaceutical sectoral innovation systems in OECD countries. On the basis of crosscountry analysis and an explanation of national differences, policy conclusions can be drawn as regards the balance between horizontal innovation policies and measures that take into account the more specifically sectoral or technological characteristics of the biopharmaceutical innovation processes. In order to achieve this goal, the following specific aims of this case study on biopharmaceutical innovations systems were set: • To investigate the specific characteristics of the national biopharmaceutical innovation systems, especially the structure and dynamics of innovation networks and the role of demand factors and the market. This includes the influence of government incentives and governmental/public framework conditions that affect innovation performance of the national biopharmaceutical innovation systems and to assess the performance of the system. • To develop recommendations enhancing the effectiveness of policies to encourage the economic performance of national biopharmaceutical innovation systems. Systemic imperfections are addressed in the investigation and in the policy recommendations.

National system, systems imperfections and the role of public policies: key questions Given the specific characteristics of national biopharmaceutical innovation systems and the role public policies can play in the management of innovation processes in order to correct systems imperfections, two key questions were formulated: • Can one identify important differences and similarities in the structure and dynamics of national biopharmaceutical innovation systems which explain the performances? • What are the main systemic failures in the national biopharmaceutical innovation systems and how can they be addressed in policy recommendations? Systemic failures can be seen as symptoms of sub-optimal innovation systems and are judged as being a rationale for innovation policy actions, next to other rationales. Systemic failures can be defined as mismatches between elements in an innovation system; they hinder the functioning of an innovation system and the flow of knowledge and therefore reduce the system’s overall efficiency (OECD, 1999). Examples of systemic failures are overly stringent or loose appropriability regimes, lock-in effects, inefficient learning processes, malfunctioning interfaces, etc. In general, the causes of systemic failures can be classified in four broad categories: • Absent/inappropriate innovation functions (e.g. production, diffusion and application of knowledge). • Absent/inappropriate actors. • Absent/inappropriate institutions. • Too much/too little interaction. However, an in-depth investigation of these systemic failures and their implications for policy has been lacking for biotechnology. The investigation of these systemic INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

24 – INTRODUCTION characteristics is one of the main goals of the OECD Case Studies in Innovation and therefore a main issue in this study. A specific objective of this case study is to draw policy conclusions with regard to the balance between horizontal innovation policies and more customised measures that take into account the specific characteristics of innovation processes in the biopharmaceutical innovation system. Considering the identification of systemic failures as key to fostering innovation, recommendations will be presented on how innovation policies can be customised to meet the particular needs and features of the biopharmaceutical innovation system. The concept of national innovation systems implies a definition based on a country’s boundaries. However, developments in high-technology sectors, including biotechnology, are to an increasing extent realised by international research and business networks; these are found in international R&D co-operation agreements and the presence of foreign companies such as major pharmaceutical multinationals in a given country. This national/ international dimension of system openness is especially relevant to national policy making when developing and implementing national biotechnology policies and is also addressed in this study. However, in addition to this national/international dimension, openness is also understood in terms of the extent to which new actors (can) enter or must leave the biotechnology innovation system and entry and exit barriers (e.g. lock-in effects). Demand-side factors play a major role in the successful development of new technologies, with biotechnology as the most prominent example. However, in the literature and research on (national) innovation systems, demand-side factors have gone relatively unaddressed. Which specific actors and institutions constitute the demand side of the innovation system (e.g. consumer and patient organisations, national health-care systems, including insurance companies, organisations responsible for regulations on market introduction of [bio]pharmaceutical products), and what is their specific function/role in the innovation process? What is the influence of framework conditions such as market access, regulation and the structure of national health care systems? Demand-side factors and their influence on the performance of national biopharmaceutical innovation systems are also investigated in the study.

Methodology The explorative and comparative nature of this study makes a method based on case studies the most appropriate. The ambition of this study is to compensate for some drawbacks of case studies (OECD, 1999, p. 15) by linking quantitative indicators to the basically qualitative case studies to the greatest possible extent. In order to facilitate comparability across countries, a common methodology was developed for the national case studies that could be used as a framework for the collection and presentation of data: the Guidebook. The Guidebook presented definitions of biotechnology, the biopharmaceutical and pharmaceutical sectors and structure, and dynamics of innovation systems. Moreover, it provided an overview of the methods by which all necessary data had to be gathered in order to answer the key research questions of this project (Enzing et al., 2002).


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The main methods used in the study were: • A descriptive analysis of the national biopharmaceutical innovation system, including the biopharmaceutical innovation chain and the types of actors and organisations involved. Moreover, this serves to describe the main framework conditions that affect the outcomes of the biopharmaceutical innovation process. This step draws on an extensive literature survey and desk research. • Bibliometric and patent analysis for measuring national performance. This also serves to identify the main types of actors and their actual relevance in the biopharmaceutical innovation process. For the bibliometric and patent analysis, data on publications and citations were taken from the Science Citation Index databases in February 2003 and those for patent applications from the European Patent Office. • Industry survey for data collection of R&D co-operation patterns of national firms. The Guidebook contained a template for a questionnaire. The survey included both dedicated biotechnology firms (high-tech companies specialised in biotech and active in R&D and its application in processes/products and services) and diversified firms (established firms that have integrated biotechnologies in their existing R&D and production activities). • Interviews with representatives of companies and publicly funded research organisations on driving forces, the specific character of regional innovation dynamics, collaboration patterns, barriers such as human resources, venture capital, intellectual property rights, etc., role of users in the innovation process and role of national innovation policies. Also, interviews with representatives of organisations that play an important role on the demand side of the innovation process: patient organisations, consumer organisations, the national health system, insurance companies, authorities involved in product regulation, and approval of their role in the innovation process. National reports were prepared for Belgium, Finland, France, Germany, the Netherlands, Norway, Japan and Spain. On the basis of these reports, a cross-country analysis was carried out. The results of the analysis are presented in this report.

Biotechnology in the pharmaceutical sector: products and processes Biotechnology mainly plays two roles in the pharmaceutical innovation process. First, it has emerged as one of the key methods for biopharmaceutical and biomedical research, because biotechnology approaches contribute significantly to the elucidation of the regulatory and physiological mechanisms of disease. An important contribution to this line of research is expected from the results of human genome research. Second, biotechnology is central for research, development and production of new pharmaceutical products, namely diagnostics, biopharmaceuticals and vaccines.

Human genome research In 1990 the Human Genome Project was initiated in the United States under the leadership of the US Department of Energy and the National Institutes of Health. Several other countries joined in, resulting in a worldwide public sequencing project. In 1998, a private sequencing project started to compete with public efforts and greatly accelerated progress. In February 2001 the draft human genome sequence was published in two papers by the public and private consortia (Human Genome Consortium, 2001; Venter INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

26 – INTRODUCTION et al., 2001). The draft sequence covered about 90% of the gene-rich (euchromatic) portion of the genome; each base pair of the 90% was sequenced four times on average. In total, the human genome contains 3.2x109 building blocks. A surprising result of the human genome sequencing exercise was the low number of genes, which is estimated to total 30 000-40 000. This result implies that the complexity of the human body is not solely determined by the number of different genes but rather on more complex processes of downstream gene expression. After the elucidation of the human genome, the next challenge is to identify genes and their function, which is also an important prerequisite for making use of genome information in the biopharmaceutical innovation process. The implications of human genome research for the biopharmaceutical industry concentrate on diagnostics and screening and the identification of new targets for drug development.

Diagnostics There are two main strategies for diagnostics based on biotechnology: immunodiagnostics and DNA diagnostics; • Immunodiagnostics are based on the very specific interaction between antibodies and antigenes. Using radioactive, enzyme, luminescent or fluorescent markers for either component allows very sensitive detection of the immunoreaction. Novel approaches for increasing sensitivity combine immunoreactions with DNA amplification: DNA tags are used as markers and are amplified by specific DNA polymerising reactions. In human diagnostics immunoassays can be used for identifying specific antibodies or antigenes which indicate certain disease conditions, such as viral or bacterial infections or cancer. • DNA diagnostics rely on the specific structural features of the DNA molecule which is made up of two strands which bind to each other. This implies that single strands of DNA which code for specific genes can be detected – for example, in preparations of human cells by using the other, complementary strand of DNA. If one of the strands is labelled with a radioactive, chemical or biological marker, the binding reaction produces a measurable signal. This basic principle of DNA diagnostics is also used in DNA chips. However, in this case the binding reaction does not take place in solution but on a solid state surface. Biochips allow the simultaneous detection of thousands of genes. Genome research has a strong impact on DNA diagnostics because an increasing number of disease-related genes and their modifications is becoming available and can be used for designing specific DNA diagnostic kits. Examples include genes for certain cancers. DNA chips for diagnostic purposes have already been developed for HIV diagnosis, for the detection of cancer-related genes and for the analysis of variations in liver enzymes that are relevant for certain disease conditions.

Therapeutics Using genetic engineering it is possible to produce foreign proteins in microorganisms or cell cultures from higher organisms. This basic principle is used for the production of protein therapeutics. An important example of this approach is the production of human insulin. The genes for this protein have been extracted from the human genome and transferred into either bacteria or yeast cells. Both systems allow the expression of the human insulin product which, after purification and modification, can be used as a pharmaceutical. Other important biopharmaceuticals on the market include


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erythropoietin, growth factors, interferons and tissue plasminogene activators (TPA). New product groups include biopharmaceuticals based on monoclonal antibodies. In 2003 about 370 biopharmaceuticals were in the clinical development and approval process in the United States, and about 280 in Europe (BPI, 2003). Even though the use of biotechnology for producing biopharmaceuticals has been quite successful, the potential of this approach is probably limited. According to expert estimates it is unlikely that biopharmaceuticals will gain more than 10% of the total market for pharmaceuticals. More important than the use of biotechnology as a production method is its application as an R&D tool in drug discovery. Biotechnology as an R&D tool is considered to be one of the main driving forces of innovation in the pharmaceutical industry, leading to a shift in the paradigm of drug discovery and development. An overview of the new, biotechnology-driven mode of drug discovery is given in Figure 1.1. An increasing number of new drug targets will be detected from the human genome sequence information. Of the 30 000 to 40 000 presumed human genes only a minority may turn out to be interesting drug targets. However, this may still account for 3 000 to 10 000 new targets. Compared with the existing number of drug targets this would still correspond to an increase of about one order of magnitude (Reiss, 2001). Figure 1.1. Biotechnology-driven drug discovery Synthetic collections

Natural products

Chemistry Large combinational libraries

Functional disease models

Chemicals

Molecular biology

Biochemistry Screening HTS/UHTS Profiling selection Combinational chemistry

Target

EST Comparative genomics

Automation

Genome sequencing

hit

Biotechnology

Robotics Focused combinational library

Bioinformatics

HTS Pharmacogenetics Medicinal chemistry

lead

Patent

Drug candidate Pharmacology Preclinical/clinical development

New drug

Source: Jungmittag et al. (2000).

The increasing number of potential new drug targets eliminates an important bottleneck in the drug discovery process. At the same time, the assessment of the INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

28 – INTRODUCTION usefulness of new targets introduces a new barrier. The key words are target validation. A validated target is achieved when treatment with the therapeutic compound leads to desirable clinical outcomes. The validation of new targets requires biological information on the physiological role of the putative targets. A number of new approaches, such as analysing the expression of genes, comparing genome information between different organisms and between healthy and disease conditions, or even the use of threedimensional information on the structure of potential drug targets are used in this context. Screening for the usefulness of putative new drug targets is currently performed in a high-throughput manner, an approach that has made impressive progress over the last decade. Today it is possible to perform 100 000 and more screening tests within one week fully automatically. The increased screening capacity requires the availability of a sufficient number of chemicals to be tested for potential pharmaceutical use. For that purpose, combinatorial chemistry approaches, for example, are used in the drug discovery process.

Pharmacogenetics Pharmacogenetics denotes the study of polymorphisms in genes that affect the response of an individual to drugs. More efficient clinical trials could be achieved by using this information to select for clinical trials patient groups for which a good response and low side effects from the new treatment can be expected. The long-term goal of pharmacogenetic approaches is the development of customised and personalised medicines. By identifying the genetic uniqueness of an individual, the therapeutic strategies for treating a particular disease state can be refined. It should be pointed out that such pharmacogenetic approaches rely on the availability and utilisation of individual genetic information. This implies that procedures and structures need to be established which assure confidentiality and responsible handling of such individual information.

Vaccines and antibiotics Vaccines are considered to be among the most powerful health care tools of the 20th century. They contribute both to preventing disease, disability and death and to controlling health care costs. Even though impressive success has been achieved by vaccination, including the global eradication of smallpox, tremendous problems remain with respect to infectious diseases, the leading cause of death world-wide. No effective vaccination is yet available for some traditional diseases such as tuberculosis and malaria, but new and re-emerging diseases pose a continuing threat to health. Moreover, antimicrobial resistance is developing widely. These examples indicate the increasing need for new and improved vaccines. Biotechnology provides new approaches to solve the scientific problems previously associated with vaccine development. This includes a new generation of vaccines based on specific parts of the protein of the infectious agents, which are produced by genetic engineering. Other new strategies include the development of DNA vaccination or the genetic engineering of plants to produce edible vaccines which may facilitate simple and effective vaccination administration. The increased resistance of pathogenic micro-organisms to commonly used antibiotics, the growing frequency of infections, and the emergence of new pathogens poses major challenges to health. The availability of genome sequences for an increasing number of micro-organisms provides opportunities for the development of new


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antibiotics. Sequence information enables the identification of the bacterial gene products that are most appropriate for targeting by antibiotics.

The pharmaceutical product development process1 Once a new biopharmaceutical drug compound has been developed in the laboratory, there is an extensive period of testing before it can be approved and be actually put on the market (Table 1.1). The first step in this process is preclinical testing, in which the pharmaceutical company conducts laboratory and animal studies to show the biological activity of the compound against the targeted disease, and the compound is evaluated for safety. These tests take approximately three and a half years on average (Alliance Pharmaceutical Corp., 2003). Table 1.1. Phases of product development in the pharmaceutical sector

Years Test population

Preclinical testing

Phase I

Phase II

Phase III

Competent authority

3.5

1

2

3

2.5

Laboratory and animal studies File IND at c.a.*

Purpose

Assess safety and biological activity

Success rate

5 000 compounds evaluated

1 000 to 3 000 patient volunteers

20 to 80 healthy 100 to 300 patient volunteers volunteers

Determine safety and dosage

Evaluate effectiveness, look for side effects

Verify effectiveness, monitor adverse reactions from long-term use

5 compounds enter trials

File NDA at Review process/ c.a.* approval

Phase IV

Additional postmarketing testing required by competent authority

1 compound approved

*c.a.: competent authority, e.g. EMEA or FDA. Source: Adapted from Alliance Pharmaceutical Corp. (2003).

After completing preclinical testing, the company files an Investigational New Drug Application (IND) with its respective competent authority to begin to test the drug in people. The IND shows results of previous experiments, how, where and by whom the new studies will be conducted, the chemical structure of the compound, how it is thought to work in the body, any toxic effects found in the animal studies, and how the compound is manufactured. Clinical trials, i.e. tests of the active compound in human subjects, are conducted in three different phases plus a fourth after approval. Phase I tests take about a year and involve about 20 to 80 healthy volunteers. The tests study a drug’s safety profile, including the safe dosage range. The studies also determine pharmacokinetics and pharmacodynamics (i.e. how a drug is absorbed, distributed, metabolised and excreted, the duration of its action), and possible and optimal methods of drug administration. In phase II, controlled studies of approximately 100 to 300 volunteer patients (people with the disease) assess the drug’s effectiveness, which takes on average about two years. More safety data are gained as well as information concerning the effectiveness of the drug at treating the symptoms or conditions it is proposed for. It is focused at determining 1.

This section is based on Fraunhofer ISI (2004).


30 – INTRODUCTION the therapeutic effectiveness in subjects, with further attention to safety. The results of phase II are used to establish the parameters of phase III. This final phase of clinical trials involves several hundred to thousands of individual subjects who suffer from the specific condition or conditions that the drug is intended to treat. This phase is to determine if the benefits of a treatment with the tested compound are significant enough to outweigh the risks. The tests used in this phase must be extremely thorough and meet rigorous standards, as they are the basis for approval of the drug. Following the completion of all three phases of clinical trials, the company analyses all of the data and files a new drug application (NDA) with its competent authority if the data successfully demonstrate safety and effectiveness. The NDA must contain all of the scientific information that the company has gathered. The review times differ from country to country and have been subject to various attempts at regulation. Once the NDA has been approved, the new medicine becomes available for physicians to prescribe. The company must continue to submit periodic reports to the authority, including any cases of adverse reactions and appropriate quality-control records. The product approval process follows the same basic steps in the European Union, the United States and Canada. In general, there are only slight differences concerning some details between regions.

The pharmaceutical industry The pharmaceutical industry is the fifth largest industrial sector in the EU (EFPIA, 2002), accounting for about 3.5% of the total manufacturing production (Gambardella et al., 2000). With an estimated share of 35% of the world pharmaceutical output, Europe is the main manufacturing location, ahead of the United States and Japan (EFPIA, 2002). In 2000, in the EU15, 479 100 persons were employed in the pharmaceutical sector and the average employment growth rate was more than 2% between 1985 and 2000 (Eurostat data; Lienhardt et al., 2003) with 88 200 employees in charge of R&D matters (EFPIA, 2002). Throughout the EU, nearly 80% of the employees work for large enterprises (Lienhardt et al., 2003). Besides the research-based industry, the generics industry is very relevant in the EU. In 1999, the generic market in western Europe, i.e. the EU member states plus Switzerland, Iceland and Norway, was worth around EUR 10 billion (European Generic Medicines Association, 2003). According to the US Bureau of the Census (2001), in the year 1997, 203 337 employees (only those on payroll counted) worked in pharmaceutical medicine manufacturing in 1 761 establishments of 1 428 companies. Nearly 70 000 employees worked in the field of R&D (PhRMA, 2003). Over the past ten years, Europe’s R&D base has gradually eroded (Figure 1.2). Most particularly, some new leading-edge technology research units have been transferred out of Europe, mainly to the United States, but central R&D labs of some European pharmaceutical companies have also been moved there (such as Novartis in 2002). R&D expenditures in Europe doubled over the 1990s to reach EUR 17 billion in 2000. In 1997, the US industry was able to overtake Europe in terms of total amount of R&D expenditure. Between 1990 and 2001, R&D investment in the United States rose fivefold, while in Europe it only grew 2.4 times, reaching EUR 24 billion in 2000. R&D expenditure in Europe represented 1.90% of GDP in 2000, the same figure as in 1990, whereas in 1999, the United States spent 2.64% of its GDP on R&D and Japan spent 3.04% (EFPIA, 2001, 2002). In 1990, major European research-based companies spent 73% of their worldwide R&D expenditures on EU territory. In 1999, they spent only 59% on EU territory. The United States was the main beneficiary of this transfer of R&D location (EFPIA, 2001). INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

INTRODUCTION –

31

Figure 1.2. Pharmaceutical R&D expenditure in Europe, the United States and Japan, 1990-2000 EUR million Europe

United States

Japan

30 000 25 000 20 000 15 000 10 000 5 000

n.a. 0 1990

1995

1999

2000 (e)

(e): estimate Source: EPPA, PhRMA, JPMA; cited in EFPIA (2001).

This report This synthesis report builds on the results of the eight national country studies and addresses the key questions of the case study. Chapter 2 presents the summaries of these national reports. In Chapter 3 a performance analysis of the eight national biopharmaceutical innovation systems based on quantitative indicators is presented. Chapter 4 addresses the openness of the national biopharmaceutical innovation systems. Chapter 5 provides a comparison of the demand-side factors in the eight countries and market attractiveness based on market-related factors in a narrow sense and on social and regulative factors. Chapter 6 presents the structure and dynamics of the eight national biopharmaceutical innovation systems and draws conclusions about which characteristics of these systems might be responsible for their scientific and commercial performance. Chapter 7 draws together the overall results of the analyses concerning systemic imperfections. It also discusses the sectoral or generic character of these imperfections. The report concludes by presenting how the role of governments in innovation policy has evolved and presents the recommendations that can be used by national policy makers in order to overcome the systemic imperfections and reach more consistent and coherent innovation policies. The chapters of this report build on input by the project participants from the eight countries that have collaborated in this case study. A list of authors and national project teams can be found in the foreword.


32 – INTRODUCTION

References Alliance Pharmaceutical Corp. (2003), “Phases of Product Development”, www.allp.com/drug_dev.htm BPI (2003), Pharma Daten 2003, Berlin. EFPIA (2001), “G10 Medicines High Level Group on Innovation and Provision of Medicines Consultation Paper - EFPIA Comments”, www.efpia.org/4_pos/economic/g10.pdf EFPIA (2002), “The Pharmaceutical Industry in Figures”, 2002 edition, Brussels, www.efpia.org/6_publ/Infigures2002.pdf Enzing, C.M., S. Kern and T. Riess (2002), “Case Study on Biotech Innovation Systems: Guidebook”, TNO-STB/Fraunhofer-ISI, Delft/Karlsruhe. European Generic Medicines Association (EGA) (2003), “Introduction” (Web page), www.egagenerics.com/members/ega.htm, accessed 30 July 2003. Fraunhofer ISI (2004), “New Products and Services: Analysis of Regulations Shaping New Markets”, Final Report to the European Commission DG Enterprise, Karlsruhe. Gambardella, A., L. Orsenigo, and F. Pammolli (2000), “Global Competitiveness in Pharmaceuticals”, European Commission, DG Enterprise, Brussels. Human Genome Consortium (2001), “Initial Sequencing and Analysis of the Human Genome”, Nature, 409, pp. 860-921. Lienhardt, J. et al. (2003), “Statistics in Focus: High-tech Industries in the EU”, Eurostat Web site, http://europa.eu.int/comm/eurostat/ OECD (1999), Managing National Innovation Systems, OECD, Paris. OECD (2002), Dynamising National Innovation Systems, OECD, Paris. PhRMA (2003), “PhRMA Industry Profile 2003 – Appendix”, Web document, www.phrma.org/publications/publications/profile02/APPENDIX.pdf Reiss, T. (2001), “Drug Discovery of the Future: The Implications of the Human Genome Project”, Trends in Biotechnology, 19, pp. 496-499. US Census Bureau (2001), “1997 Economic Census - Manufacturing: General Summary”, Web document, www.census.gov/prod/ec97/97m31s-gs.pdf, accessed 12 August 2003. Venter, G. et.al. (2001), “The Sequence of the Human Genome”, Science, 291, pp. 1304-1451.


SUMMARY OF COUNTRY STUDIES –

33

Chapter 2 Summary of Country Studies

This chapter presents summaries of the eight country studies undertaken on the role of biotechnology in the pharmaceutical sector in the context of the countries’ national innovation systems. The countries are: Belgium, Finland, France, Germany, Japan, Norway, the Netherlands and Spain.


34 – SUMMARY OF COUNTRY STUDIES Belgium Belgium is a small open economy with few natural resources. It imports substantial quantities of raw materials and exports a large volume of products. About three-quarters of its trade is with other EU countries. In 2003, Belgium’s GDP was EUR 268.15 billion (EUR 25 784 per capita). Despite a heavy industrial component (24%), services account for 75% of GDP while agriculture accounts for only 1%. In 2001, GERD (gross domestic expenditures on R&D) reached EUR 5.37 billion. Research intensity (GERD as a percentage of GDP) rose from 1.71% in 1993 to 2.11% in 2001. Belgium is a federal state in which the “federated” entities have their own legislative bodies and governments. There are three regions (based on economic concerns and on a territorial concept): Brussels-Capital, Flanders and Wallonia. There are also three communities: the Flemish Community which covers the Flemish Region and the Region of Brussels-Capital, the French Community which covers the main part of the Walloon Region and the Region of Brussels-Capital, and a small German-speaking community which is located in Wallonia. Language and cultural differences are the reasons for this division into communities.

National biotechnology policies Policy competences for science and technology are shared among several authorities, in particular between the Federal Authority, the Flemish government (which covers the Flemish Community and Region), the French Community, the Walloon Region and the Region of Brussels-Capital. The distribution of competencies was established in the special institutional reform act of 8 August 1980 and subsequent amendments, in particular article 6bis. The “primary” jurisdiction for science, research, technological development and innovation policy is conferred to the areas of competence within the regions and communities. As an exception to this general rule, a limited number of competencies involving scientific research are entrusted to the Federal Science Policy Office (FSPO) in the federal government. Each authority has its own bodies at administrative and advisory level to co-ordinate, stimulate, finance and evaluate research activities. Furthermore, consultative bodies involving the federal government, the communities and the regions were set up to co-ordinate the activities of these authorities. Besides the governmental bodies, there are other publicly funded bodies involved in research and technological innovation (IWT-Vlaanderen, FWO-Vlaanderen, the National Scientific Research Fund, Brussels-Technopole). A brief description of the policies of the authorities responsible for S&T can serve to summarise Belgium’s S&T policy directions in 2003. Federal research policy increased its engagement in international S&T co-operation by co-financing R&D activities, through committee co-ordination and the attribution of 35% of the federal S&T budget to space research. To fully integrate Belgium into the European Research Area, public research is to be expanded, e.g. through the Interuniversity Attraction Poles, which account for 16% of the total budget. Finally, the different Belgian authorities agreed to increase overall S&T expenditure to 3% of GDP in 2010. In 1995, the Flemish government started to increase substantially its public investments in R&D activities, infrastructures and assistance programmes. It has substantially invested in micro-electronics, biotechnology and industrial processes. In the early 1980s, Flanders established the Interuniversity Microelectronics R&D Centre (IMEC), an Inter-university Institute for Biotechnology (VIB) and a one-stop shop for INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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multidisciplinary applied industrial research (IWT-Vlaanderen). In addition, the Flemish Institute for Technological Research, VITO, is the largest research centre in Belgium in the fields of energy, environment and advanced materials. Finally, the Prince Leopold Institute of Tropical Medicine in Antwerp (ITMA) deals with research on tropical diseases. These organisations often act as co-ordinators for EU-funded (Framework Programme 6) R&D projects. Moreover, Flanders wants to stimulate industrial R&D cooperation with the private sector and has started to develop specific technology incubators for small and medium-sized enterprises (SMEs) clustered around, but independent from, universities. Recently, knowledge centres were created in the fields of vehicle research (Flanders’ Drive), mechatronics (Flanders’ Mechatronics Technology Centre), logistics (Vlaams Instituut voor de Logistiek) and spatial data (IncGEO). Since 1996, the Walloon government has raised the level of public investment in R&D and currently focuses on exploiting R&D results through the creation of companies. The Direction générale des technologies, de la recherche et de l’énergie is similar to the IWT-Vlaanderen and encourages industrial R&D activities; these account for roughly one-third of the total budget; two-thirds goes to universities and research organisations. Through the establishment and development of poles of excellence, the government aims to establish horizontal and vertical cross-boundary networks with academia and industry. R&D in industry segments such as multimedia and imaging, biotechnology and environment have priority status. A significant effort was made to develop easily accessible assistance programmes for innovation and technological development. The Brussels-Capital Region’s S&T and innovation policies are in line with those of the other regions. The main R&D centres and innovative institutes only started to develop strategic S&T policies in 1998. The region focuses primarily on incentive programmes for universities and industry to stimulate R&D activities as well as R&D capitalisation projects through its industry S&T development organisation Brussels-Technopol/BEA. Areas of specific S&T activities include cell therapy, ICT, biotechnology and health, software for construction and electromechanical applications and virtual imaging, and food processing technologies. GBAORD (government budget appropriations or outlays for R&D) have evolved over a 14-year period. Slightly less than one-third of GBAORD comes from the federal government, while over 40% comes from the Flemish Community. The Flemish Community and the Walloon Region increased their share of GBAORD in 2002, with increases of 11.0% and 3.4%, respectively, on the previous year. GBAORD in Belgium is below the European average as a percentage of GDP (0.60% compared to 0.77% in 2001).

Recent biotechnology innovation policies The Flemish government’s total investment in the life sciences over 1991-2000 was about EUR 50 million. Expenditures were markedly higher in the second half of the period, with 68% used to stimulate high-quality basic research and to train researchers. The remaining 32% targeted economic valorisation, which was mainly provided by IWTVlaanderen, BFF and VIB. The most important initiatives of the Flemish government to support R&D in the biotechnology sector in the last decade were: • Networked research centres and interuniversity poles were created to provide a strategic orientation for research. The Flemish government has invested heavily in INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

36 – SUMMARY OF COUNTRY STUDIES two “thematic” interuniversity research centres. One is the VIB (Flanders Interuniversity Institute for Biotechnology), created in 1995, which is an instrument for strengthening scientific research, its commercialisation and spill-over effects on the regional economy. Funds from the Flemish government represent about 40% of its total R&D expenditures. In 2003, Flemish government support to VIB amounted to about EUR 28 million; 70% of this budget was used for strategic research. In 2003, VIB launched its “VIB new project programme” to attract top scientists in emerging biotechnology fields with strategic importance. The same year saw the establishment of “BioFlanders”, a new biotechnology network involving 30 companies. • The Institute for the Promotion of Innovation by Science and Technological Research in Flanders (IWT-Vlaanderen) supports and stimulates industrial research and technology transfer on a project-by-project basis. In 2001, IWT-Vlaanderen had a budget of EUR 157.2 million, of which 70% was dedicated to industry and 30% to universities and scholarships. Roughly a fifth of this amount is used in the field of life sciences. • The Flemish Fund for Scientific Research (FWO-Vlaanderen) is a public-utility private body that grants research fellowships and provides financial support for university research. In the 1990s, the annual budget invested in the biotechnology area almost doubled, from approximately EUR 7.5 million to about EUR 15 million. • The Investment Company of Flanders (GIMV) was founded at the beginning of the 1980s and has since become one of the most important venture capitalists in Belgium. In 2001, the GIMV invested about EUR 150 million of venture capital in hightechnology biotechnology companies through new participation and renewal investments (EUR 20 million in 1998, EUR 23 million in 1999, and EUR 44 million in 2000). GIMV Life Sciences invests in biotechnology companies combining new technologies and experienced management. In 2000, it invested EUR 44 million (17% of total investments of EUR 243 million) in biotechnology companies in Europe and the United States covering a wide range of technologies (genomics, gene therapy, medical technology, biomaterials, cell therapy, agro-biotechnology, etc.). • Biotech Fund Flanders (BFF), set up in 1994 in parallel with the VIB, provides venture capital for companies located in Flanders that are active in the field of biotechnology. Managed by GIMV, it offers seed capital to start-ups and young companies and provides finance for dynamic SMEs. It received start-up capital of EUR 30 million. • The Vlaams Waarborgfonds (Flemish Venture Capital Guarantee Fund) provides a guarantee to venture capitalists participating in start-ups or growth companies. The fund covers up to 50% of losses if the venture fails. • A wide range of incentives are available for setting up operations in Flanders: regional incentives of 2%, and possibly up to 10% depending on the strategic importance of the project; support of up to 12% for environmentally friendly investments; and subsidies for hiring and employee training. • The Flanders Foreign Investment Office (FFIO) and Provincial Development Agencies (PDAs) assist foreign investors, among others, by providing information on the benefits of locating in Flanders.



37

Structure and dynamics of the national biotechnology system R&D system In 2001 R&D expenditure was divided by sector as follows: 73.7% in the business enterprise sector, 19.2% in higher education, 6.0% in federal and regional institutions and 1.1% in private non-profit organisations. As regards sources of funding, 64.3% was provided by the business enterprise sector, 2.1% by higher education institutions, 21.4% by the federal and regional governments, 0.4% by private non-profit organisations and 11.8% by foreign entities. The nation’s R&D activities are strongly specialised in pharmaceuticals (share of total business enterprise R&D performance in 2001: 20.9%), TV, radio and communication equipment (16.0%) and, finally, chemicals and chemical products excluding pharmaceuticals (15.9%). The pharmaceutical industry remains one of the driving forces of the Belgian economy. From 1996 to 2001, employment in the pharmaceutical sector increased by 23%, compared to 11% in the private sector as a whole. Total R&D expenditures of the pharmaceutical industry represent 26.4% of the value added of the pharmaceutical sector. The pharmaceutical industry accounts for 31.3% of R&D expenditure of all manufacturing industries. Employment in R&D represents 21% of total employment.

Biotechnology business system Biotechnology includes many different industries and there are considerable potential applications covering a wide range of sectors. The 2002 annual report of the BBA (Belgian Bioindustries Association) looked at the following sectors: health care, agrofood, technology and service providers and environment. According to BBA’s 2002 Annual Report, Belgium counts 97 dedicated biotechnology companies. Most have been created as university spin-offs and many have not yet reached the commercialisation stage for their products. The biotechnology industry is dotting the map around the big universities: the Flemish Biotech Valley clustered near Ghent, Leuven and the Mechelen area; the BrusselsNamur-Charleroi triangle; the Brussels Biotechnopole and the Biotechnology Valley of Liege. The health-care sector accounts for 78% of Belgium’s biotechnology activity. The biopharmaceutical sector comprises large global companies such as Baxter Healthcare, Eli Lilly, GlaxoSmithKline Biologicals, Johnson and Johnson, Pfizer and Phibro. Their success benefits the whole scientific community, from the smaller entrepreneurial companies to the recent biotechnology ventures whose long-term aim is to bring new drugs to the market, i.e. BruCells, Euroscreen, Henogen, Innogenetics, Thromb-X, TibotecVirco, XCELLentis and Zentec. Cypro, Euroscreen, HistoGeneX, Innogenetics, ReMYND, Tibotec-Virco and UCB-Bioproducts provide services, testing and screening of drugs and compounds or offer manufacture services and research activities. Ablynx, AAT, Analis, Beldico, Biocode, Bio-line, Biosource Europe, Biotech Tools, Bipharco/Socolab, Coris Bioconcept, DiaMed Eurogen, D-Tek, Eurogenetics, Gamma, Innogenetics, Lambdatech, ProBiox, RED Laboratories, Tibotec-Virco, Unisensor and Zentec are active in diagnostics. Between pure service and drug development, there is a role for providers of high-quality biologicals in research. The Belgian companies involved in such activity are the Eurogentic Group, KitoZyme and UCB-Bioproducts.


38 – SUMMARY OF COUNTRY STUDIES Revenues derived from biotechnology activities are growing every year. The leading sectors clearly remain health care and technology and services (Table 2.1). The top 20 companies represent about 80% of total revenues. A 31% growth in turnover in 2000 (in comparison with 1999) and a 10% increase in the number of companies are clear signs of the strength of the biotechnology sector in Belgium. The relatively smaller growth of 15% in number of employees can be explained by greater efficiency in production and R&D. Table 2.1. Breakdown of biotechnology activity by sector, 2000 Companies

Revenues

Employees

Number of

EUR million

% of total

Number of

% of total

Health care

48

1 250

78

5 589

78

Agro-bio

17

284

18

1 026

14

Environment

9

9

1

132

2

Services

23

55

3

413

6

Total

97

1 598

100

7 160

100

For most biotechnology companies, collaborations and strategic alliances are essential. The growing costs of R&D, product development and presence on global markets have prompted many companies to consider sharing costs and risks. This provides excellent opportunities for biotechnology newcomers to grow and benefit from contract research funding from large pharmaceutical and life science groups, e.g. GSK Biologicals and Baxter Healthcare.

Flemish Region The high-tech biotechnology industry in Flanders is relatively young and counts some 30 to 35 companies (Table 2.2). Most of the Flemish medical biotechnology companies were founded after 1995. Innogenetics, founded in 1985, is the only mature medical biotechnology company in Flanders from the first European biotechnology wave. Genzyme Belgium and Tibotec-Virco are two other important players with a decade in business. Table 2.2. Characteristics of the Belgian biotechnology sector Companies Number of

Revenues EUR million

Employees % of total

Number of

% of total

Brussels

17

61

3.8

336

4.9

Flanders

32

294

18.3

1 522

22.4

Wallonia

51

1 247

77.8

4 915

72.6

Total

100

1 602

100

6 773

100

A VIB study identified 26 biotechnology companies in Flanders at the beginning of 2002. This is an increase of 44% from 2000. Together, these companies generated an operational income of EUR 160 million and employed 1 632 people (+44% in two years) and devoted EUR 105 million to R&D. In the period 1995-2000, 20 companies were founded; in 2001 and early 2002 six more companies were founded. Those founded in the INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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first half of the 1980s still represent 50% of the workforce and 65% of operational income. Their activities are largely in the medico-pharmaceutical field; 12 companies are engaged in developing new drugs, covering various areas of activity. In Flanders, cluster dynamics (growth of clusters) was mainly oriented towards setting up new companies rather than attracting leading foreign companies. Recent biotechnology start-ups are either university spin-offs (commercialising knowledge) or founded by existing companies (concentrating specific knowledge in a separate business entity). The latter category developed a comprehensive network for research and production within a short period. The amount of interaction between different companies in the industry depends on the total number of employees, the type of activities and the company’s history. Typically, university spin-offs operate a mainly academic network while start-ups founded by private companies focus on industrial partners.

Walloon Region Wallonia’s 51 biotechnology companies have experienced continued revenue growth. Turnover in 2000 amounted to EUR 1.25 billion, an increase of more than 20% since 1997. Thus, the Walloon Region accounts for over 75% of Belgium’s biotechnology activity, partially owing to the large share of multinationals (MNEs) (see Table 2.2). EUR 167 million in biotechnology revenues are generated by 47 entrepreneurial life sciences companies. The top 20 companies represent 80% of total revenues. The leading sectors are health care (biopharmaceuticals, diagnostics and medical technologies, biological research) and the closely linked technology and services sector, which represents two-thirds of the companies and more than 80% of turnover. The rapid development of biotechnology in Wallonia is mainly due to the presence of seven university centres, five science parks active in the field of biotechnology and the support of large life sciences groups based in the region. Powerhouses such as GlaxoSmithKline Biologicals, Baxter Healthcare, UCB Group and Phibro invest in research programmes both in-house and in co-operation with local universities and smaller biotechnology ventures. The presence of universities and large health-care companies has contributed to the creation of centres of excellence in biotechnology, the five “biotechnopoles”. Most of the biotechnology companies in Wallonia are located in one of the science parks.

Scientific performance According to the European Patent Office (EPO), Belgium, with about 21 applications per million inhabitants, ranked third over the 1996-2000 period for the number of patent applications in the biotechnology sector. According to the Steunpunt O&O Statistieken study “Biotechnology – An Analysis Based on Publications and Patents”, the total number of Belgian patents identified by the Fraunhofer classification represented 672 EPO applications. Using the more comprehensive biotechnology classification, 860 EPO Belgian patent applications were identified. Similarly, 365 Belgian biotechnology USPTO patents were identified by the Fraunhofer classification and 490 Belgian patents under the wider biotechnology definition. The broadest possible definition for a Belgian patent was used (one with at least one inventor with a Belgian address or, alternatively, assigned to a company based in Belgium). In 1998, Belgium contributed 1% of global scientific production (i.e. 2.8% of EU publications). The average citation rate is 4.4 per publication, which places Belgium INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

40 – SUMMARY OF COUNTRY STUDIES among the leading countries both in Europe and worldwide. The Flanders Interuniversity Institute for Biotechnology (VIB) combines research forces from four different Flemish universities. In 2002, VIB scientists published 147 articles in high-ranking journals (impact factor IF > 5) with 51 publications in top journals (IF > 10), compared to 63 publications with IF > 5 and 14 with IF > 10 in 1996, pointing to a spectacular increase in the scientific output of Flemish biotechnology researchers. Belgium’s reputation for excellence in education is key to the growth and success of the biotechnology industry. To capitalise on the research efforts of university laboratories, Belgian universities have set up special departments, so-called “interfaces” that help their scientists to protect and exploit their innovations by providing legal advice and financial support. This often leads to the creation of start-up companies that take charge of the further development of the project and bring new inventions to the market (spin-offs). Since 1998, 25 university spin-offs were created. In 1999-2000, 30 055 students in Flanders were enrolled in science, applied sciences, health sciences and medical sciences (accounting for about 19% of the total student population of the Flemish Community). In 2001, 28 326 students in the French Community were registered in applied sciences, agricultural sciences, plant engineering, medicine, dental and veterinary science, pharmacy and physical training sciences.

Key drivers in the Belgium biotechnological innovation system • With its strong tradition in science, coupled with its location in the heart of Europe and a highly skilled work force, Belgium has developed regional clusters dedicated to biotechnology. Continuous close co-operation between academic research teams, biotechnology firms, university hospitals and venture capitalists is a well-established feature of the Belgian biotechnology industry. • With sixteen universities and research centres active in the life sciences in Belgium and a dozen science parks, basic and applied research for the health-care sector is abundant and varied. In developing the biotechnology sector in Belgium, co-operative efforts among universities such as the University of Liège, the French-language Free University of Brussels (ULB) and the VIB continue to play a crucial role. The biotechnology industry is mainly concentrated around these large universities: the Flemish Biotech Valley, the Brussels-Namur-Charleroi triangle, the Brussels Biotechnopole and Biotechnology Valley of Liège. • About 32% of the population has a higher education degree, thereby helping to create a highly skilled work force. As noted, in 1999-2000 about 19% of students in Flanders were enrolled in science, applied sciences, health sciences and medical sciences. • Belgium has benefited from early investments in biotechnology, owing to the strong local presence of major pharmaceutical companies which were initially the main source of industrial funding. • For many years, the regional and federal authorities have made biotechnology a priority in their policy planning and have facilitated the transition from research to development and finally to the market. • Financial incentives include tax exemptions for additional personnel employed for scientific research and the development of technological potential. Regional



41

investment aid is available up to 24% of the eligible investment. Tax reductions exist for investment in R&D projects. • By the end of the 1990s, growing interest in venture capital and the success of biotechnology companies on public equity markets spurred the rapid development of the Belgian biotechnology sector. More than 100 venture capital companies, including many of the major European ones, were ready to invest in the biotechnology sector. Several venture capital companies still invest in private biotechnology and life sciences enterprises. Since 2002, the venture capital market in Belgium has decreased as a result of the economic situation. • Key markets are in close proximity, with 60% of EU purchasing power and markets within a 300-mile radius. • Real estate costs in Belgium are among the lowest in Europe. In the science parks, incubation and innovation centres have been created to offer low-cost and highquality locations for high-technology and research-oriented start-ups.

Key barriers in the Belgium biotechnological innovation system • Excessive employment costs and the complexity of innovation support mechanisms reduce investment and entrepreneurship in Belgium. This results in the relocation of businesses to centres of excellence and manufacturing facilities in other countries. • Entrepreneurial biotechnology companies are concerned that, owing to a lack of continuous support to research-based enterprises and to an inadequate tax regime for innovative companies together with excessive social charges for researchers, young innovative companies cannot compete with their counterparts in other parts of the world. • The Flemish government has developed an effective research policy but not a sufficiently effective industrial policy, i.e. there is no systematic follow-up of research results, no support for their commercialisation and no assistance in the regulatory and production process. • Industrial policy for medical biotechnology can have many aspects, but it is essential for any region with the ambition to develop a medical biotechnology cluster to have an excellent reputation for quality clinical trials at low cost and transparent and efficient registration procedures. • The major pharmaceutical companies, particularly those located in Flanders, do not focus on medical biotechnology. Therefore, there are limited positive cluster effects for small biotechnology companies.

Finland Country characteristics and the Finnish biotechnology industry Finland has a population of approximately 5.2 million with roughly two-thirds living in cities and urban areas. The population is expected to peak in the early 2020s at 5.3 million, but the labour force began to decline in 2004 by 0.5% annually. Population ageing is among the most significant in OECD countries and will have a major impact on INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

42 – SUMMARY OF COUNTRY STUDIES public finances. The old-age dependency ratio will rise from the current 23% to approximately 37% by 2020 and to 45% around 2030 and will plateau just below 50% in 2040-50. Finland is a small open economy that is highly susceptible to the cyclical swings that affect all industry, including innovative biotechnology. Business expenditures on R&D (BERD) represented 2.68% of GDP in 2001, the second highest in the OECD area after Sweden. Public R&D expenditure, i.e. gross domestic expenditure on R&D (GERD) minus BERD, was 0.98% of GDP in 2001, again the second highest in the world. However, the share of government funding of business R&D is low (Table 2.3). Table 2.3. R&D expenditures by sector of performance, 1995-2000 EUR millions and as a percentage of GDP Business enterprises

Public sector

University sector

Total R&D expenditures

Year 1995

EUR millions

% total

EUR millions

% total

EUR millions

% total

EUR millions

As a % of GDP

1 373.4

63.2

374.4

17.2

424.6

19.6

2 172.4

2.30

1997

1 916.7

66.0

408.6

14.1

579.5

20.0

2 904.9

2.72

1998

2 252.8

67.2

443.9

13.2

657.9

19.6

3 354.5

2.89

1999

2 643.9

68.2

470.1

12.1

764.8

19.7

3 878.8

3.22

2000

3 135.9

70.9

497.4

11.2

789.3

17.8

4 422.6

3.37

Finland ranks consistently high in the European Innovation Scoreboard; it is among the three leading countries in eight out of 14 indicators, and above or close to the EU average for the others. Finnish strengths are in innovation, technology and society. Weaknesses are related to the size and financing of the public sector and the inflexibility of the labour market. Turnover from new or renewed products and services is 22%. Finland has three important industries: ICT; wood, paper and pulp; and metal. The leader was wood, paper and pulp until 1999 when electronics and telecommunications replaced it. Exports of goods and services correspond to 40.1% of GDP while imports account for 31.7%. Electronics and telecommunications account for 27.5% of exports, and the forestry industry for 26.5%. Finnish industry is dependent on imports of raw materials, machinery and components for manufacturing products. Consumer products account for nearly 25% of total imports.

Public R&D, business and demand system During the years 1991-93 Finland suffered from one of the most severe economic crises of all OECD countries. Real GDP dropped by approximately 14% from 1990 to 1993 and unemployment rose from 3% in 1990 to almost 20% in 1994. This crisis is important for understanding the rapid adoption of a new policy framework. Nevertheless, a decision to raise the share of R&D inputs in GDP to the level of those of other industrial countries had already been taken in the late 1970s, and increases were maintained during the recession. In 1983, the National Technology Agency (TEKES) was founded to promote the competitiveness of Finnish industry and the service sector through technological means. Technology programmes were started that included collaboration between university and government research institutions and industry, as well as



43

development projects proposed by companies. TEKES rapidly became the most important funding organisation for applied R&D. The Science and Technology Policy Council (STPC) was established in 1987. Finnish science policy is based on the government’s five-year development plans for education and research, and the triennial reviews of the STPC. Major reforms were carried out in the 1990s: • A regional innovation policy was created by an act that entered into force at the beginning of 1994 and led to the creation of regional centres of expertise. • A cluster programme was launched in 1997 to reinforce the utilisation and commercialisation of technology by established technology centres, incubators and university licensing offices. Eight cluster programmes were formed under six ministries and a national cluster – The Finnish Pharma Cluster – was formed. • Venture capital activity began with Sitra as a major operator. • Increased funding was made available at the end of the 1990s. Additional centres of excellence were established (the first dated from the late 1980s) and research programmes were strengthened. A change in the structure of research funding took place between 1990 and 1998 with a rise in the proportion of competitive funding from 26% to 41%, with funding for technological research through TEKES almost doubling, and with funding at TEKES’ university increasing from 11% to 23%. The Academy of Finland is the central financing and planning body for basic research in all scientific disciplines. Most Academy funding is channelled to basic research conducted in universities. Academy funding comes from the state budget and amounted to EUR 187.1 million in 2001, 84% of which went to universities (including university hospitals). Sitra is an independent public foundation supervised by the Finnish Parliament. The fund was set up in conjunction with the Bank of Finland in 1967 and transferred to the Parliament in 1991. Sitra co-operates with both private investors and public-sector bodies such as TEKES, Finnish Industry Investment Ltd, Finnvera, Finpro, the Academy of Finland, the Employment and Economic Development Centres (TE Centres) and the Foundation for Finnish Inventions (Keksintösäätiö). Sitra finances through: i) direct equity financing in domestic companies; ii) investment in Finnish venture capital funds; and iii) investments in international venture capital funds. In addition to its funding activities, Sitra closely monitors venture capital investment both in Finland and on international markets and invests in international venture capital funds focused on high technology. Out of 20 universities, ten conduct biotechnology research. The system of graduate schools was established in 1995 to improve the quality and effectiveness of graduate training and education. The Finnish Graduate Network in Life Sciences, FinBioNet, is a national network of graduate schools in health and biosciences which promotes research training co-operation and co-ordinates research courses. There are now 24 graduate schools in eight universities, which offer a four-year research training programme: University of Helsinki with seven schools, Helsinki University of Technology (1 school), University of Joensuu (1), University of Kuopio (6), University of Oulu (1), University of Tampere (1), University of Turku (4) and Åbo Akademi University (1). Bio-centres are important


44 – SUMMARY OF COUNTRY STUDIES elements of the biotechnology innovation system. There are currently six in operation, with two in Helsinki and one in Kuopio, Oulu, Tampere and Turku. Currently there are 120 active biotechnology firms in Finland. The Finnish biotechnology business is still very new, with 60% of companies started after 1997. The companies are very small: 60% employ fewer than ten persons. Half of the companies are located close to the bio-centres of science parks. Almost 70% of the companies founded before 1997 have a turnover of under EUR 1 million, which means that they have very limited ability to grow. A person with a PhD manages 60% of the companies and 60% of the managers have under five years of managerial experience. All biotechnology firms have a high share of academically qualified personnel. Additionally, 60% of all firms had personnel with some university position or task. Collaboration most frequently takes place with domestic universities and research institutions. Only 10% collaborate with foreign research institutions. Collaboration between universities and companies is reflected in the number of research contracts and collaborations. The universities performed contract research in biotechnology for EUR 100 million in 1995 and EUR 136.8 million in 1999. In the same year, research in companies funded by business amounted to only EUR 36 million.

National biopharmaceutical policies and national funding Many biopharmaceutical policies and national funding instruments are connected to and overlap with the R&D system. This means that several different programmes may have some of the same actors as those in the R&D system. The main funding parties – Sitra, TEKES and the Academy of Finland – have already been described, so that only those not mentioned above are described here. Finland has separate policies for support for knowledge and for commercialisation. The former category includes technology programmes, research programmes and centres of excellence. Technology programmes promote development in specific sectors of technology or industry. Research programmes are targeted to a specific field and run for a fixed time period. Policies to support commercialisation include: i) the Centre of Expertise Programme; ii) the Entrepreneurship Programme in operation between 2000 and 2003; iii) the Innosuomi Prize; and iv) technology incubators. The Centre of Expertise Programme aims to increase co-operation between research centres and local companies. The Innosuomi Prize is awarded annually in recognition of exceptional innovation and entrepreneurship. Five technology incubators aim to promote business activities by offering premises, facilities and business services to new start-up companies. In summary, Finland has established numerous policies to support and facilitate the creation of a national innovation system, with biotechnology as one of the areas included. These policies are constantly changing based on ongoing reviews of their effectiveness and efficiency. New instruments are introduced and older ones are restructured or terminated. This apparent flexibility is possible because of close co-operation and partial overlap between actors and systems. For a nascent industry, this may prove to be a national strength in the long run.

Key drivers and barriers Entry barriers in biotechnology are often related to financing, proprietary technology, access to distribution channels and access to skilled personnel. Intellectual property rights (IPR) regimes and procedures play an important role in a firm’s survival and growth as INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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intellectual property may represent all or a large part of its assets. Access to qualified personnel is another important obstacle to growth. Generally, the special features and particular requirements of the biotechnology sector that relate to entrance barriers are: i) a high-technology industry with inherently high risks, especially for the development of disruptive technologies; ii) long product development times; iii) capital intensity and the need for international capital; iv) access to global markets; v) need for highly skilled personnel; vi) a regulated environment with high compliance costs; vii) shortening product life cycles; and viii) regulatory issues and the demand for cost efficiency and cost containment in the health-care sector. Different types of knowledge are required to transform an invention into an innovation. Knowledge needs therefore vary between firms in different sectors and at different stages of their life cycle. The extensive discussion on this issue, however, has centred on knowledge creation and transfer, often with a closer focus on technological or scientific aspects than on business or organisational knowledge. Most Finnish biotechnology companies are spin-offs from academia and the founders are often the source of the idea that originally led to the company’s creation. Therefore, one can assume that these companies have good scientific and technological knowledge. On the other hand, knowledge about commercialisation, such as product development, business development, marketing, sales, financing and regulatory requirements is underdeveloped. However, the problem has been recognised as policies aimed at supporting commercialisation indicate. In a rapidly evolving industry, all the pieces are unlikely to be in place at once, and this is very much a learning process for all involved parties.

Skilled personnel While there is no current shortage of personnel in the Finnish biotechnology sector, this may be more a consequence of an extremely difficult financing situation that compromises growth in many companies than a reflection of an abundance of qualified personnel. Human resources may well become the next barrier to growth in the event of a recovery in financial markets. Many biotechnology companies are small and possibilities for supporting the start-up of larger, fast-growing companies have been limited, possibly owing to the fact that most capital comes from national sources. Finland is a small country whose possibilities for educating and training certain specialists are therefore limited. To support high growth in this sector, Finland would need to attract people from abroad. Possibilities for attracting foreign staff are limited owing to relatively low salary levels, which are due in part to high income tax and heavily taxed stock options. In the academic sector, the quality of the research environment and good career prospects are essential for attracting highly qualified scientists. The graduate school system has improved academic education in biotechnology. Between 1996 and 2001 around 1 000 graduates completed a PhD in biotechnology. Highly qualified people are not only needed in companies, but also in the financial and public sectors as well as in technology transfer, business consultancy and financial services. The availability of a sufficient number of specialists with the necessary (practical) expertise in evaluating, funding and assisting high-technology firms has also been considered a barrier. The human capital pipeline needs improvement on various levels. There are disparities among the positions available for young promising scientists that make it difficult to retain scientists with strong potential at universities. In many research


46 – SUMMARY OF COUNTRY STUDIES laboratories, there are few post-doctoral fellows, especially compared to numbers of PhD students, which may be due to the lack of a tenure system.

Capital and venture capital While only 5% of all small and medium-sized enterprises (SMEs) in Finland regard availability of capital as their most significant obstacle, 50% of growth-oriented SMEs indicate that availability of finance is a problem. In the Global Entrepreneurship Monitor (GEM), Finland ranks 16th out of 29 on how well venture capital (VC) markets, business angel financing and initial public offerings (IPOs) work. Availability of finance has been seen as the most important driver and/or barrier. Nearly 60% of the Finnish VC firms currently in operation were established between 1996 and 2001. Insurance companies and pension funds serve as the main sources of funding. VC firms have, on average, 21 investee companies in their portfolios, but in 33, the portfolio consists of ten or fewer companies. The average amount of investment has been EUR 4.5 million; however, in about 40% of VC firms the average investment was under EUR 1 million. Among the VC companies, 63% had no biotechnology company in their portfolio, and 30% had a share of up to 25%. On average, from 1991 to 1998, there were fewer than 50 exits a year. The most common exit routes were trade sale (37%), management buy-out (27%) and IPO (16%). The average duration of investment has been 2.6 years. Until now, only one biopharmaceutical company has made an IPO in Finland, BioTie Therapies, which went on the market in June 2000 with a transaction volume of EUR 21.1 million. In 1991, universities accounted for 22.1% of total R&D expenditure in Finland, in line with the international average. By 1997, this figure had dropped to 17.7% and core funding dropped from 67% in 1991 to 54% in 1998. Core funding at universities is tied to performance: universities are expected to produce a certain number of degrees and qualifications. Whereas universities’ core budgets increased during this period, there was no significant net increase in research funding because part of the money was earmarked for real estate expenses, which universities did not have to cover previously.

Taxation Personal income tax and capital gains tax (CGT) have an impact on innovation both on the demand side (high-growth SMEs seeking finance) and the supply side (institutional and individual investors). The stability and predictability of the overall tax environment are also important. The taxation of risk capital and equity investments has a direct effect on their attractiveness. Capital gains tax affects investors on two levels. It applies to the disposal of assets and hence affects the rate of return on investments. It influences decisions by individual investors, financial institutions and venture capitalists to invest in early start-up companies. In Finland, taxation of capital income (including taxes paid on interest income of private persons, investment fund gains, dividend income, rent income and capital gains) has been 29%. Recently, the corporate income tax rate was lowered to 26%. Finland abandoned R&D tax credits in 1987 as part of a wider tax reform. They were not considered an efficient tool owing to problems in defining R&D activities precisely enough to avoid relabelling and the high administrative costs this would involve. Direct subsidies in the form of R&D grants and loans with favourable conditions are therefore the main form of support for R&D activities. The advantages of indirect measures are their less distortive effects on the market, since the firm can decide how to make the most INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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of the incentives. Like most EU countries and the United States, Finland allows the accelerated depreciation of capital expenditure on R&D infrastructure and equipment, providing companies with an incentive to invest in modern equipment and thereby stimulating advances in products. Both free and accelerated depreciation offer deferment of tax payments rather than an actual tax reduction. Finland is among the top three GEM 2001 countries in terms both of perception of opportunity and of entrepreneurial capacity. However, in terms of entrepreneurial motivation, Finland only ranks 20th out of the 29 GEM countries. The lack of motivation can partly be explained by the lack of a financial structure providing efficient incentives, and also by cultural values, which are usually slow to change. The Finnish GEM team concludes in its report: “The technological infrastructure is in excellent condition, but there are weaknesses in the innovative ability of small and medium-sized entrepreneurial firms. The problem with innovative SMEs is not necessarily one of insufficient capability for R&D. On the contrary, Finnish SMEs are among the world leaders in terms of the use of sophisticated technologies. The bottleneck, as some Finnish key informants see it, is more in the area of technology commercialisation. Whereas large Finnish companies have excellent strengths in this area, creating viable technology-based new ventures is problematic.”

Commercialisation of science and technology Universities are an important source of scientific and technological inventions in biotechnology and the “third mission” targeting the commercialisation of research results will be included in the amended University Act. This is reflected in increasing collaboration with industry and in the rapidly increased share of external contract research as a source of funding. However, it is not clear if and what structural changes are needed within the Finnish university system to accomplish this “third mission”. Commercialisation of research results can be achieved by technology transfer to established companies, in the form of licensing, research collaboration and contract research, or through generation of academic spin-off companies. The Finnish government has responded to earlier uncertainty about IPR in universities and an amendment of the relevant legislation is being prepared. Technology transfer and IPR have been handled very differently by the various universities; support, financial resources and policies vary considerably. One direct consequence is the limited availability of data on IPR by number of disclosures, patents, licences or spin-offs. Often, patenting issues are handled by innovation and research units at the universities and some collaborate closely with the Finnish foundation for inventions. Some universities, but not all, offer financial support for patenting activities. Some universities and bio-centres prefer to recommend collaboration between scientists and technology transfer companies that are active in the area of biotechnology. At the moment it is not possible to foresee the consequences of the new legislation on patenting and licensing activities or the creation of university spin-offs. So far, earlier practice has not led to satisfactory commercialisation of academic research results. While collaborative and contract research activities are extensive in terms of international comparisons, the number of biotechnology patents is below the OECD average and far below Finland’s rate of patenting in other high-technology areas such as ICT.


48 – SUMMARY OF COUNTRY STUDIES The creation of university spin-offs poses a different set of challenges. These are the most frequent type of biotechnology start-ups (67%). Many of the founder teams have a purely academic background. The key question is whether partnerships should be developed between academia and business, rather than trying to turn academics into entrepreneurs. Generating ideas, developing them into a product and bringing the product to market do not necessarily have to be done by the same person. Many support schemes target the transformation of the academic into an entrepreneur through education, business support services and consultancy. In Europe, there are currently 300 spin-off support programmes. In Finland, technology centres located near universities are the main form of support. Assuming that this model is successful, the major drawback might still be the time required by the founding team to gain the necessary experience, which may slow down product development to such a degree that it is unprofitable. The transformation of academics – often qualified professors – into entrepreneurs might also lead to a loss of scientific competence and talent at universities. Moreover, the most inventive scientists may not become the most gifted entrepreneurs. There is also the danger that scientists that become the CEO of their companies will compromise their research competence while acquiring the necessary business competence, or will focus unduly on research, thereby compromising the company’s successful product development. Positive trends in entrepreneurship that have been perceived in Finland are: i) an improving entrepreneurial culture; ii) emergence of role models for rapid growth and internationalisation; iii) increasingly professional technology ventures; iv) development by Finnish VCs of internationalisation strategies, international syndication relationships and internationalisation support capabilities.

Systemic failures and policy implications The biotechnology innovation system in Finland is shaped by distinct interactive forces acting on different levels, both nationally and internationally. It is not possible, or even desirable, to describe it in a national innovation system (NIS) framework. It is clear that the building of a viable biotechnology sector cannot be adequately addressed with local or even national resources. The requirements will pose major challenges to the biotechnology innovation system in the coming years, since an internationalising sector makes very high demands in terms of competitiveness, focus, cultural change and collaboration in an environment that is currently felt to be unstable and insecure. Moreover, the task of pointing out precise systemic failures is made more difficult by the fact that the industry largely emerged after 1997 and many policies were introduced later. Above all, the late 1990s was a period in which investors made extremely unwise investment decisions. Hence, on a global as well as a national level, many companies were created that would not have been under less unusual conditions. This had nothing to do with national innovation systems or biotechnology as such, but everything to do with unsound developments in the financial market. Given that R&D processes are lengthy, even a single a full cycle has not been completed, and it would be desirable to observe at least a few cycles before drawing definite conclusions about such failures. In addition, while they have experienced financial difficulties, Finnish biotechnology companies have not been extremely hard hit and most still exist. While it is important to be realistic about possible (economic) outcomes and the timeframes necessary to reach both scientific and economic targets, it is also important to maintain confidence in the



49

sector and in the progress that new scientific breakthroughs can bring. The Finnish biotechnology innovation system is very dynamic and it is constantly evolving. A report on biotechnology in Finland, commissioned by the Academy of Finland and published in 2002, presented recommendations aimed at improving the education system, mainly the universities. The report stated that the long-term, comprehensive development of biotechnology research should continue and that core funding of the five biotechnology centres should be maintained at least at the current level. An additional EUR 7 million was to be allocated as special funding for research, new equipment and new development projects over the period 2004-06. The Academy of Finland and TEKES should explore ways to contribute to the financing of universities’ and research institutes’ equipment procurement. Joint use of large, expensive research equipment should be increased. Co-operation in researcher training between sectoral research institutes, universities and graduate schools must be intensified and the resources of the graduate schools increased. Graduate schools should include more education and research on technology transfer, IPR and business know-how in their programmes. The Finnish study proposed the creation of a committee on biotechnology research, education, product development, technology transfer and business that would review in 2005 the implementation of the recommendations of an international impact analysis of public biotechnology funding. It also encouraged stronger co-operation between the respective ministries and subordinate organisations and institutions in order to promote further development of biotechnology research, product development and training. With respect to framework conditions, changes in the tax regime are necessary. While Finland’s economic growth and competitiveness will continue to be based primarily on knowledge and utilisation of new technology according to the new government programme, some important changes affecting corporate and capital gains taxes were announced at the end of 2003. Foreign venture capital will be taxed on a consistent basis. In addition, measures are planned to increase the amount of investments into Finnish VC funds. Planning for new measures has not yet begun, but future focus areas of the government programme are largely in place. TEKES’ R&D funding will be increasingly shifted from R&D loans to research funding at public organisations and R&D grants for companies. Funding will also be allocated to areas such as branding, commercialisation and R&D in the service sector and new technology sectors, and to know-how and innovation that support sustainable consumption and production. Quality assessment and performance monitoring of projects seeking public R&D funding will be more rigorous in order to ensure that the financing is used as effectively as possible. Closer co-operation will be sought between the various organisations that support innovation on a regional level. There will be a focus on entrepreneurship to encourage company start-ups, growth and internationalisation. The government will investigate possible incentives for entrepreneurship and ways of promoting SMEs in the start-up and growth phase. Legislation will be adapted to the needs of both small and large companies, and entrepreneurs will receive incentives in the form of improved social security. Finland’s remote location itself poses a challenge. When investing abroad, venture capitalists have to seek opportunities that justify the costs of operating in foreign markets. As an exit market, Finland is too small. Other European economies are also unable to support market liquidity in volatile, high-risk industries such as biotechnology. Without a sufficient flow of international exits, however, it will be difficult for the Finnish VC INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

50 – SUMMARY OF COUNTRY STUDIES market to grow. The most frequent exit form has been trade sale, since the IPO market has been almost completely closed. For Finland this means that most companies financed by venture capital will become foreign-owned, which poses many challenges. Entrepreneurs need to consider the costs and benefits of foreign ownership, especially in the case of exit. Foreign venture capitalists and foreign investors may help to lower the barrier for going public abroad. This is especially important if the entrepreneur wants to retain control of the company. Foreign investors might influence decisions such as location of headquarters, composition of personnel, etc. In Finland – as in most other EU countries – market failure in biotechnology seems less related to the supply of knowledge (especially technological knowledge) and more to knowledge required for commercialisation. This has been described as the “European paradox”.

France Current research and development effort Domestic expenditure on research and development (GERD) measures the research effort conducted on national territory (Table 2.4). It amounted to EUR 32.9 billion in 2001 and was estimated at EUR 33.4 billion in 2002 (Table 2.5). National expenditure on research and development measures research funding by French actors regardless of the location of the research. It amounted to EUR 33.6 billion in 2001 and was estimated at EUR 34.2 billion in 2002, i.e. approximately 2.2% of GDP (0.83% by the state and 1.37% by firms). Table 2.4. Indicators of R&D and innovation in all areas United States

EU15

Japan

France

9.3 (1999)

5.8

9.7

7.1

Government-funded GERD, 2002 as a % of GDP

0.80

0.65

0.56

0.87

Industry-funded GERD, 2002 as a % of GDP

1.71

1.07

2.31

1.18

Share in triadic patent families, 2001 as a % of total

34.9

34.8

24.9

5.2

28 173

Unavailable

8 181

1 955

Number of researchers, 2002 per 1 000 total employed

Technology balance of payments, 2003 (income from royalties, licences, etc.) USD millions Source: OECD MSTI, 2005:1.

The leading industries for R&D expenditure are, in decreasing order, the car industry, telecommunications, pharmaceuticals, aeronautics, measuring instruments and chemicals. They account for 50% of research expenditure. The top 13 French business groups account for half of R&D expenditure by firms. The pharmaceuticals and aerospace sectors were those for which foreign R&D expenditure was highest and growing. The same sectors also enjoyed the highest levels of R&D expenditure by firms outside France. INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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Table 2.5. GERD: compound annual growth rate (constant prices), 1995-2003 Year

United States

EU15

France

1995

6.4

1.4

0.3

1996

5.4

1.7

0.5

1997

5.8

2.7

1998

3.5

1.1 3.7

1999

6.1

6.0

2000

6.4

5.3

2001

1.2

3.8

4.4

2002

-0.8

2.5

2.7

2003

0.9

1.0

-2.7

Source: OECD Main Science and Technology Indicators (MSTI), 2005/1.

Public R&D policy In 2001, domestic expenditure on R&D by civil administrations amounted to EUR 11.2 billion and accounted for 93% of total domestic expenditure on R&D by civil administrations and the military. A distinction is made between three institutional sectors: government, higher education and non-profit organisations (NPOs). The main actors are public establishments of a scientific and technological nature (EPST), public establishments of an industrial and commercial nature (EPIC), universities and grandes écoles, and NPOs, which respectively account for 29%, 27%, 36% and 4% of research funded by civil administrations. Some 70% of the civil R&D budget for the life sciences is allocated to research conducted by research agencies: CNRS (28%), INRA (19.7%) and INSERM (18.7%) (Table 2.6). Approximately 25% of that budget is designated for biotechnology and health, i.e. some EUR 350 million in 2002. This figure should be compared with the EUR 3.3 billion designated by the pharmaceutical industry for research activities and the approximately EUR 100 million in assistance provided by the ministry in the form of incentives and other measures. Table 2.6. Annual national budget for R&D in the life sciences by funding source, 2000-2002 EUR millions

Civil R&D budget Other Pharmaceutical industry Associations Total

2000

2001

2002

1 708

1 839

1 994

717

732

793

2 903

2 897

3 299

119

119

119

5 446

5 586

6 205

Source: Ministry of Finance.


52 – SUMMARY OF COUNTRY STUDIES Main public policy actors France does not have a government agency which provides centralised co-ordination of measures promoting innovation. Innovation programmes are drawn up by individual ministries within their sphere of action. Innovation and R&D activities are supported by individual ministries, research organisations and agencies that translate R&D findings into applications. In spite of this apparent complexity, application of the rules is quite simple and was further simplified by the Act on Innovation and the new Innovation Plan for 2003. In the pharmaceutical sector, as in all high-technology sectors, roles are assigned as follows: • The Ministry of Research is responsible for conducting scoping research programmes and, where appropriate, laying down strategic directions in collaboration with representatives of industry, academic research and universities. • The Ministry of Industry’s responsibility lies further downstream in the area of technological innovation. The focus is on pre-competitive programmes designed to lead to the development or improvement of products to be launched on the market. • The Ministry of Health is responsible for regulating and managing health expenditure in partnership with social welfare agencies. • Finally, for green biotechnology, the Ministry of Agriculture can be called upon to set up research programmes in collaboration with the Ministry of Research. In organisational terms, government actions target either the supply of or demand for health products. On the demand side, priorities are assigned according to the time needed to develop or bring to market a product resulting from research in progress; on the supply side, actions are assigned according to the degree of maturity of innovations. The organisation of actions reflects the separation of health policy (supply of health care) from industrial policy. The main public policy actors for innovation in the pharmaceutical biotechnology sector are: the Ministries of Research, Industry and Health; research agencies (Institute of Health and Medical Research – INSERM), the life sciences division of the CNRS (National Centre for Scientific Research), the life sciences division of the CEA (French Atomic Energy Commission), the French Institute for Agricultural and Food Research (INRA), the Institut Pasteur, the Institut Curie, the National Agency for Innovation (ANVAR), the Caisse des Dépôts et Consignations (CDC), universities, local and regional government, the European Union and the agencies for technology transfer in research bodies (CNRS, INSERM, INRA).

Innovation policies The 1999 Innovation Act The Innovation Act was inspired by a situation of moderate but steady growth in world markets, an international economic context characterised by strong growth in the new financial markets dedicated to new technologies (NASDAQ, New Market), a background of growth in the value of high-technology companies, a stable geopolitical context, awareness of innovation theories among politicians and decision makers and the development of an international approach to R&D management among industrial groups.



53

The principal and complementary measures of this law are: • A new legal framework to allow research personnel to develop applications from research findings. As a result of this legislation, over four years approximately 120 researchers became involved in the biotechnology sector. • Incentives for the creation of innovative firms through a national competition for assistance in creating firms specialised in innovative technologies. Also, 31 incubators for public research findings have been set up and are currently operational at the regional level under regional and local authorities. The incubators cover several sectors, but focus on sectors such as biotechnology or equipment. Two incubators are exclusively dedicated to biotechnology: Paris Biotech (Île-de-France) and Eurasanté (Nord-Pas-de-Calais). • The creation of specific national venture capital funds for biotechnology, information and communication technologies and seven general venture capital funds for investment in firms using public research findings. These private funds provide venture capital for innovative firms and participate in their initial financing. Out of an initial budget of EUR 44 million, public venture and seed capital funds (primarily the BIOAM, the national seed capital fund for biotechnology) have invested EUR 15 million in seven biotechnology firms for an expected return on private investment by the first financing rounds of approximately EUR 60 million. The CDC, alongside research agencies and other major investors, promotes 15 venture and seed capital funds whose portfolios in 2002 included 40 firms specialised in the life sciences, of which 16 received renewed funding in 2002. In 88% of cases, these firms were set up to develop spin-offs from public research, and 78% also benefited initially from public incubator facilities. Aid is subsequently provided by seven non-sectoral regional funds. Investment in the field of the life sciences amounted to EUR 4 million in 2002 compared with EUR 3.6 million in 2001; there is virtually no refinancing in this sector. Average leverage amounts to 2.2 on venture capital provided by other investments, primarily by companies specialised in such funding and, to a lesser extent, research agencies, financial establishments, industry and foreign investors. Investment funds retain their equity holdings in SMEs for three to five years on average. • Incentives for the development of partnerships. Research and technological innovation networks, which now have a legal basis, provide value added through the pooling of resources and collaboration between the public and private research sectors. Networks receive incentive funding, and several systems are designed to establish bridges between public research and industry: 18 national technological research centres set up between 2000 and 2002; 41 technological research teams created since 1999; 14 commercial and industrial activity services (SAIC); and 200 regional centres for innovation and technology transfer (CRITT) for a total of 265 structures designed to foster partnerships, under various headings. In this specifically French approach, any new idea or proposed improvement complements the systems already in place, so that the actors addressed are unlikely to lose sight of all the measures and services available. • A tax incentive is the research tax credit that has been in place since 1983. This measure is designed to encourage firms to undertake more research. It benefits major industrial groups and above all small and medium-sized enterprises and industries (SMEs/SMIs) which receive a credit equal to 50% of the increase in the firm’s R&D


54 – SUMMARY OF COUNTRY STUDIES spending. The research tax credit (EUR 527 million in 2002) provided assistance worth EUR 15 million a year to pharmaceutical companies and biotechnology firms that had declared an increase in their R&D spending. The amounts involved should double with the introduction of new arrangements. The Innovation Act was designed to provide support that would encourage projects to emerge, and not to resolve structural and economic problems (Table 2.7). However, the environment in which the act was to take effect suddenly suffered a number of blows: a stock-market crisis; a decline in the attractiveness of new technologies to financial markets; an international geopolitical crisis. In this context, major industrial groups undertook a review of their R&D policy, restructured, regrouped sites, searched for new know-how and skills in emerging countries such as India, Brazil and China (e.g. IBM, Cap Gemini, etc.), and adopted a policy aimed at internationalising their R&D effort. Table 2.7. Impact of policies aimed at the pharmaceutical biotechnology sector (1999 Innovation Act) Competition and incubators

Networks

ANVAR

Total

0

331

395

726

Number of biotechnology firms created or planned of which Number of pharmaceutical biotech firms created

148

3

27

178

32

3

n.a.

35

Jobs created

654

440

430

1 524

Total cost to state (EUR millions)

32.5

78

88

198.5

Average unit cost to state (EUR)

219 000

234 000

208 000

219 000

28 in the life sciences

n.a.

n.a.

n.a.

12

219

198

429

Number of projects supported

Young firms assisted by funds in 2002 Patents/products expected in the medium term Source: Ministry of Research, ANVAR.

Owing to the changes in the international climate, the new assistance measures failed to attract support rapidly from venture capital funds, seed capital funds or business angels. In biotechnology-related areas, 148 firms appear to have been created as a result of aid measures (competitions and incubators), of which 28 attracted seed and venture capital in return for a net outlay of EUR 22 million of public money over a four-year period, i.e. an average EUR 790 000 per firm. Between 25 and 31 patents should be applied for. These firms represent between 6% and 8% of start-ups in the biotechnology sector over the four-year period. Twice the amount of secondary funding would have made it possible to increase the number of firms and sharply reduce new start-up costs. In spite of the creation of venture capital funds and bio-incubators, the government’s intervention was out of step with the economic environment; this shortcoming was addressed by the Innovation Plan.

The 2003 Innovation Plan The 2003 Innovation Plan adjusted policy to strengthen the provisions of the 1999 Innovation Act through: efforts to achieve greater synergy with European poles of excellence, continued pursuit of a policy of creating innovative firms, financial aid of EUR 30 million for young firms by the CDC-PME (a subsidiary of the Caisse des Dépôts



55

et Consignations), actions to raise researchers’ awareness of patent policy and give them a financial interest in patents. The Innovation Plan follows directly from the 1999 Innovation Act by establishing a new legal status for “business angels” and introducing new tax provisions: total exemption from employer contributions for R&D projects conducted by “young innovative firms”; reduced tax rates linked to the R&D expenditure of all firms seeking to innovate, regardless of size, age or sector; tax reform in favour of patronage and foundations; simplification of aid for innovation; new funding for seed capital (EUR 30 million) through the CDC. It also introduced practical measures to better capitalise on R&D in firms and laboratories.

Another source of public financing: ANVAR For 1999-2002, ANVAR’s budget for biotechnology firms amounted to EUR 88 million and primarily aimed at firms less than three years old and with fewer than ten employees. It gave assistance to 395 projects involving new start-ups, technology transfer or innovative projects; approximately 27 biotechnology firms and 430 jobs were created as a result.

The pharmaceutical industry Main characteristics Production in the sector is relatively undiversified. Subcontracting is widespread (94% of firms in 2000) and almost exclusively concerns specialist activities within the same group. Concentration has increased the use of subcontracting. The major laboratories have devoted ever-increasing funds to R&D and been forced to restructure their industrial plants and make greater use of highly skilled subcontractors for production activities. The French pharmaceutical industry accounts for 6.5% of world production, but France only accounts for 5% of the world market. In 2002, the French pharmaceutical sector generated an annual turnover of EUR 34.4 billion and value added of EUR 10 billion (2001). Turnover grew at around 7% in between 2002 and 2003, primarily driven by exports, which rose by 10%. Three-quarters of turnover came from sales to wholesale distributors. The capitalisation of the French pharmaceutical industry sharply increased over the past 20 years, with a threefold rise before dropping by half when the dotcom bubble burst. At the global level, the financial situation of these companies has improved and they now have financial autonomy of 40%. The top 20 groups in world ranking include two French groups, Aventis and Sanofi, with a 4% and 1.5% share, respectively, of the world market in 1999. Production is led by exports and the trade surplus is primarily attributable to trade with western Europe. The growth in exports reflects growth in intra-group trade. In France, pharmaceuticals rank fifth in terms of sales behind the automotive, aeronautics and space, electrical goods and perfume sectors. Over the past ten years the share of exports in the sector’s turnover (medication, serums and vaccines for human and veterinary use) doubled to 33%, with exports mainly going to European countries (66%). The trade balance in the sector was EUR 6.3 billion in 2002 compared with EUR 3.6 billion in 2000. This surplus was attributable to the activities of French companies only; foreign groups’ imports equalled their exports. Two-thirds of foreign trade consisted of intra-group trade. INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

56 – SUMMARY OF COUNTRY STUDIES In 2001, the pharmaceutical industry employed some 98 000 people, two-thirds of whom are located in the Île de France, Rhône-Alpes and Centre regions. Employment in the sector breaks down as follows: R&D (14%), production (32%), distribution (35%) and administration (19%). R&D has grown fastest, with 15 200 employees in 1999.

Main actors in the pharmaceutical industry The number of pharmaceutical companies in France varies according to data source, although all sources concur in reporting a steady decline in numbers due to mergers and acquisitions over the past ten years, closures, the expiration of patent rights, and the gradual process of restructuring that has been under way since the 1950s. In October 2003, databases listed 309 companies in the pharmaceutical sector (excluding the 148 biotechnology firms specialised in health care), compared with 1 000 in 1950, 422 in 1970, 365 in 1980 and 349 in 1990.

French groups The sector is less concentrated than in other countries owing to the variety of products, markets and technologies. While the leading group operating in France has a market share of around 14%, the top 50 firms in France account for 83.3% (61.5% in 1980) and the top 50 groups for 90.5% of the total. In 1999, out of the top 20 companies, ten were French-owned and for the most part were part of Aventis and Sanofi, the two leading French groups. Aventis is the eighth largest group worldwide and Sanofi ranks 17th. These two leading groups account for 28.5% of French production.

Independent French laboratories There are a great number of SMIs, but their weight is decreasing. The decline of independent French laboratories is chiefly attributable to disposal operations since the mid-1990s. They have outdated product portfolios and focus on a limited number of specialities and pharmaceutical classes. These laboratories also have limited R&D resources. They have no significant diversification and rely on sales of reimbursable products; their market share has fallen from 54% to 18% over the past 30 years.

Foreign groups Foreign groups supply two-thirds of the drugs and medication market in France. Investments by foreign pharmaceutical companies in France have two objectives: to set up research structures and to gain access to the world’s fourth largest market where prospects do not seem to have dimmed and which offers access to the European market. Furthermore, robust prescribing practices offer opportunities for innovative products, including those of biotechnology firms, which are the favoured choice of prescribers. In 1999, 80 foreign groups had registered offices in France. Their presence in France was facilitated by the changeover in 1994 from administrative price controls to negotiated prices.

R&D in the pharmaceutical industry Each group strikes a balance in its R&D strategy between in-house research, joint research projects conducted in partnership, and acquisition of licences. As a general rule, the work of start-ups is likely to consist of finding a “candidate drug” molecule, while that of groups is to take care of the development and marketing stages. To defend their



57

strategic positions, groups tend to acquire licences to produce drugs from biotechnology firms or external sources. This strategy applies on average to 35% of drugs in the R&D phase in pharmaceutical companies. Faced with growing competition, the pharmaceutical industry has developed two strategies: to move into the generics market and/or to seek to exploit the new markets offered by biotechnology. With regard to the former, since the 1990s many French laboratories have pursued a strategy of developing generics which, while cheaper to develop, require a larger sales and marketing budget. This strategy has had an impact on the registration of brands. The French pharmaceutical industry ranks first in terms of applications for brand protection. Pharmaceutical groups are major consumers of research and development, and R&D expenditure accounts on average for 14% to 38% of their turnover. The R&D conducted by the leading pharmaceutical companies must now meet a number of new challenges: to increase the number of molecules in the initial stages of development; to meet the increased costs of R&D through greater investment (the number of patients needed for trials has risen to 50 000 compared with 1 300 a decade or so ago and the cost of researching a new product has risen to over USD 500 million); to seek new technology to reduce the length of R&D cycles; to develop networks in order to globalise R&D; to outsource more activities; and to focus research on molecules offering major sales potential, i.e. blockbusters. Out of 40 blockbusters at the international level in 2000, only one was owned by a French group although half of the companies in the sector innovate and in 2002 invested a total of EUR 3.3 billion in R&D. SMEs subcontract 40% of their R&D and pharmaceutical companies subcontract 69%. Patents protect 43.6% of their turnover.

The pharmaceutical biotechnology industry For their R&D, two-thirds of the biotechnology firms specialised in health care receive or have received public aid in the form of assistance with transfer of skills, patents and licences (41%); assistance with the recruitment of research staff (22%); grants for plants and equipment (48%) or incentive/fiscal measures. There are between 80 and 125 biotechnology firms specialised in health care according to different surveys. Furthermore, a large share of research activities is conducted in public laboratories which carry out a large number of clinical studies (296 listed to date, primarily dealing with molecules designed to treat orphan diseases). In 2001, a national overview of the biotechnology industry was drawn up on the basis of a survey (DEP) of a selection of 1 400 firms from the sector. This overview produced a list, for 2001, of 625 firms whose activity related to biotechnology and the supply of products, processes, services and instrumentation (Table 2.8). Of these 625 firms, 72% produce products or use new processes; 28% sell equipment and services to other firms; 92% conduct biotechnology R&D in-house, 47% outsource R&D, 329 have a related biotechnology activity; and 296 develop products or use new processes. The main attributes of these 296 firms are as follows (Table 2.9): they have fewer than 500 employees (50% have fewer than ten, the average is 34); 50% were set up less than six years ago; they employed a total of 9 954 people in 2001; 95% have an in-house R&D activity; 45% outsource R&D work; and 42% subcontract R&D work to another firm.


58 – SUMMARY OF COUNTRY STUDIES Table 2.8. Main activities of biotechnology firms specialised in health care As a percentage of total firms Therapy

Diagnosis

Oncology

15

17

Infectious diseases

13

7

Immune system

10

9

Genetic diseases

7

12

Source: Deloitte, 2001.

Table 2.9. Number of firms and employees in the biotechnology and pharmaceuticals sectors, 2001 Total

Biotechnology firms

Biotechnology firms specialised in health care

Pharmaceutical industry

625

296

80-125

329

Employees

98 000

9 954

≈ 1 400/3 000

88 046

R&D workers

17 940 (18%)

3 338 (34%)

> 2 000

14 602 (16%)

Number of firms

Source: DEP.

Trend in start-ups and failures Half of all biotechnology firms in France were founded before 1999 and the new wave of start-ups since 1998 can be attributed to the subcontracting and outsourcing strategy pursued by the pharmaceutical industry; a satisfactory economic and financial environment in which the expansion of financial markets was accompanied by a wave of new start-ups in 1999 and 2000; and the adoption of the 1999 Innovation Plan to promote innovation (Figure 2.1). Figure 2.1. Start-ups of biotechnology firms, 1980-2001 80 70 69 60 50

52

40 39

38

30 26

20

27

27

26 20

10 0

4 1980

9

7

81

82

5 83

8 84

12

85

15

15

18

21

20 15

9 86

87

88

89

90

91

92

93

94

95

96

97

98

99

2000

01

Source: MJENR, DEPB3.



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According to a 2001 Deloitte study, a third of all biotechnology firms have no partners, while 30% have between three and five. These partners, when they exist, are domestic firms in 60% of cases, European firms in 25% of cases and US firms in 11% of cases, and 84% of the most mature firms have entered into at least one partnership agreement. According to the Xerfi 2000 study (Table 2.10), an analysis of partnership agreements entered into by French biotechnology firms over the period 1995-99 reveals the weakness of alliances in the sector. In addition, in 90% of cases, these partnership agreements were entered into with foreign operators, thereby indicating the weakness of the alliances with French pharmaceutical groups. In France, the activity of the biotechnology firms remains marginal compared with that of the pharmaceutical industry. The number of molecules in the latter’s pipeline in 2003 was apparently between 140 and 160, primarily in the pre-clinical phase. This figure excludes pharmaceutical groups and agro-food groups. Table 2.10. Performance of biotechnology firms 34% of biotechnology SMEs file patents to protect their inventions (1995-2000) 60% of pharmaceutical groups submit patent applications 2000

2001

2002

158

150

1711

Annual turnover of biotechnology firms (EUR billion)

-

0.3

-

% share in the annual turnover of the pharmaceutical industry

-

1%

-

% share in the R&D budget of the pharmaceutical industry

-

10%

-

Number of biotechnology patents filed by French firms

1. Ten firms account for over 80% of patents filed (Deloitte, 2002). Source: INPI, DEP (Ministry of Education).

Key drivers and barriers Human resources In terms of the use it makes of human resources, the pharmaceutical sector is clearly a high value-added sector with approximately 18% of research-related jobs. Analysis of recruitment statistics for 2001 reveals both the policy thrust of firms in the sector and the pressures on the job market. The level of competition in the sector prompts firms to adopt a more aggressive sales policy. This is reflected in the high percentage of new sales and marketing staff recruited, the areas given overwhelming priority. The market situation also reflects the continuing interest of groups and firms in research jobs. The job market for employers, on the other hand, appears to be extremely tight. The number of PhDs and graduates produced by the higher education system in 2003 appears to be just enough to meet industry requirements. However, there are probably upward pressures on firms’ wage costs because a number of young researchers and graduates find employment in the public research sector and teaching. The market is therefore supplyled. This situation is also reflected in a higher rate of turnover than in other sectors since it encourages mobility among managers in the pharmaceutical industry.


60 – SUMMARY OF COUNTRY STUDIES Financing A large number of biotechnology firms make use of the financial and logistical assistance provided by venture capital funds and companies, or take advantage of the provisions of the 1999 Innovation Act. Stock markets are tight in France after the bursting of the dotcom bubble. In addition, IPOs are received coolly by investors and there are virtually no business angels in France for fiscal and cultural reasons. Venture capital investment in France amounted to EUR 758 million in 2002 compared to EUR 1.9 billion in the United Kingdom, EUR 969 million in Germany and USD 9.5 billion in the United States. In 2002, biotechnology investment funds provided EUR 169 million in France, of which 6% was invested in young firms compared with 23% in 2000-01 and EUR 31 million during the first half of 2003. There are 60 companies operating in the venture capital market in France, and during the first half of 2003 they invested a total of approximately EUR 213 million in all sectors of the economy to 159 companies which received average funding of EUR 1.3 million, down 21% compared with 2002. Investors are focusing on refinancing their portfolios and are giving priority to development capital until the market turns. A total of six biotechnology firms were quoted on the new market in 2000: Appligene Oncor (now Qbiotech), Cerep, Chemunex, Flamel Technologie, Genset, and Transgene. There were four companies quoted on the new market in 2003: Transgene, Nicox, Cerep, and Oxis INTL.

Laws and regulations All activities in the pharmaceutical sector in France are subject to the stringent rules of the Public Health Code, which sets out the rules for market access (clinical studies, pharmacovigilance). Growth in sales is strictly controlled by the authorities. The French prescribing system favours the development of the market for innovative products in that prescribers give priority to new products. Furthermore, for any drug considered to be ineffective or insufficiently effective its rate of reimbursement may be lowered or it may be reclassified as non-reimbursable. The French market is administered by retail sales and production permits, set prices, a policy of setting reimbursement rates, as well as regulated distribution with mapping of pharmacy locations and set margin rates for wholesalers and retailers. The determinants of demand for drugs in France are as follows: high standard of living; ageing population; consumer habits of the younger generations; and the long-standing tradition of health protection that has created a well-established health-care culture. Individual income levels have little effect on demand and the French market appears to be growing. Indeed, the French are the largest consumers of medication in the world.

Starting up a firm All categories of actors in the French economy are subject to high taxes. SMEs must devote much time and effort to administrative and fiscal formalities (up to 10% of human resources depending on firm size), and the burden increases if a firm applies for state assistance, even simply for a grant for innovation. While there is a strong desire to simplify administrative procedures, the number of procedures is still increasing. Indeed, it is worth asking whether it would not be more in the strategic interest of an innovating firm to spend time and energy on administrative procedures with a view to securing grants rather than on developing a commercial strategy or attempting to find private financiers, given that the system makes private sources of financing unattractive. INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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Moreover, measures in favour of innovation are often tax measures that do not ease the burden imposed by previous systems, but instead make them more complex and opaque. The result is that taxation and subsidies are now dealt with by specialists and tax officials remain unaware of the wide spectrum of specific conditions or general aid measures available. Moreover, French social contributions are the highest in Europe; however, the new status of “young innovative enterprise” should reduce the 60% rate to approximately 5-10% for over 90% of the jobs concerned.

Systemic failures and policy implications The pharmaceutical industry faces numerous challenges at the international level: adapting the industry to cost-cutting policies; expiration of patent protection for certain molecules; rising R&D costs; growing importance of marketing and related expenditures; pressure from private health insurance systems; restructuring of the sector through mergers and acquisitions; search for new outlets; wider portfolios and concentration of research efforts. Weaknesses in the biotechnology sector still remain owing to: the weakness of the pharmaceutical sector; the trend towards concentration which reduces the potential number of partners; uncertainty in financial markets; the distinctive nature of French R&D culture which gives too little attention to the commercial and industrial dimensions. The build-up of momentum over the past few years is not always sufficient to compensate for the lag in R&D activity and the following brakes on growth remain: non-existent activist venture capital; mismatch with financial markets; a constraining regulatory and fiscal environment; lack of a culture of entrepreneurship and industrial protection; a clear divide between basic research and the world of industry. In terms of scientific output, indicators for publications and patent applications in the areas of pharmacology and biology have declined over the past ten years, reflecting a decline in the productivity of research activity in these fields in France. Furthermore, R&D is largely undertaken by industrial groups; biotechnology firms and small independent laboratories play a minor role. Resident French firms file 6 900 patent applications a year, but the pharmaceutical sector accounts for only a small share of the total and groups in the sector are more active in registering brand names. Moreover, sources of financing for the biotechnology industry are generally starting to dry up. The industry is a major risk for investors who favour downstream sectors, with the result that there is often no relaying of funding sources between the start-up phase and development phases. Pharmaceutical groups reduce their risk exposure in the same way, and at the same time take an international view of research which prompts them not to adopt a strategy that takes account of local considerations. Given the weight of partnerships between biotechnology firms and all firms in the pharmaceutical sector, the system needs to be revitalised. Although in policy terms the state has introduced incentives for firms to pool their research efforts, growth in strategic alliances is at a standstill owing to the smaller number of firms in the pharmaceutical sector and the fact that many of these firms have adopted a model based on brand development and aggressive marketing of generic products, a market that seems to offer the potential for very high growth. Lastly, the measures put in place to develop partnerships seem to fall far short of achieving their objective given the limited number of pharmaceutical biotechnology firms’ strategic alliances (fewer than 40), excluding the incentive policies pursued by national technological innovation networks. The world market favours firms that have adopted an international strategy to the detriment of the INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

62 – SUMMARY OF COUNTRY STUDIES many pharmaceutical laboratories which fail to keep track of patent expiration dates or continue to shelter behind French regulations. Paradoxically, the strategic alliances that do exist are between pharmaceutical biotechnology firms and foreign firms. However, firms are now starting to become aware of these issues. There would appear to be a will to develop the downstream financing potential that the previous system lacked. Input from the CDC should make it possible to rapidly consolidate the viability of a dozen or so high-technology biotechnology firms. All that remains is to consider the effect of this policy on investors. The merger of ANVAR with the BDPME bank should be of help in the respect. It is not yet possible to assess the overall impact of the policy in place since 1999, although the state’s contribution of EUR 86 million a year has brought about the creation of 175 biotechnology firms over the past four years, 41 of which are now fully mature, the creation of over 870 R&D jobs in the sector in the short term and over 400 patents or patent extensions.

Germany Introduction With a population of 82.3 million in 2000 (7.3% of the total population of OECD countries), Germany is the largest member of the European Union. In 2000, German GDP was EUR 2.03 billion. The economic environment in Germany in the 1990s was largely influenced by German reunification in 1989, but despite the post-reunification economic problems, Germany gradually increased its investment in R&D in the second half of the 1990s. Total R&D intensity rose from 2.26% in 1994 to 2.44% in 2000. The increasing R&D intensity is largely due to R&D investments from industry, which raised its contribution during the 1990s and was responsible for 65.7% of total R&D investment in 2000 compared to 61.4% in 1994. Germany’s overall technological performance is considered good. However, during 2001 and 2002 in particular, its high-technology industries started to lag behind the most dynamic international developments. This was mainly due to a slump in the information technology (IT) sector which was responsible for a 10% cut in the volume of production of high-technology firms between 2001 and 2002. On the other hand, the mediumtechnology sector, driven mainly by the automotive industry, remained strong and secured a very favourable position in international trade. However, other indicators of investment activities that are important for future structural change (such as expenditures on education, R&D and investment in information technology) present a less positive picture. The main industries in the German economy are motor vehicles (turnover of EUR 238.25 billion in 2000), followed by electronics and electrical engineering (EUR 257.91 billion), machinery and equipment (EUR 151.76 billion), the chemical industry including pharmaceuticals (EUR 133.99 billion), the food industry (EUR 120.35 billion) and construction (EUR 108.73 billion). As in other major economies the services sector is gaining in significance. Between 1991 and 2000, the share of total manufacturing in total gross value added decreased from 36% to 30% at the expense of the services sector which grew from 62% to about 69% in the same period.



63

The pharmaceutical industry has a long tradition in Germany. About 20 years ago companies like Hoechst and Bayer led the list of the world’s top ten pharmaceutical companies. Germany was called once the “pharmacy of the world”. However, in the 1990s the German pharmaceutical industry’s position weakened, in particular compared to the United States and the United Kingdom. Nevertheless, since the middle of the 1990s, the turnover of the German pharmaceutical sector increased continuously and reached EUR 23.2 billion in 2000. During the same period, employment first decreased from 123 000 employees in 1995 to 113 000 in 1999. After 1999, the trend reversed and employment grew at an annual rate of 0.3% to 0.8%; employment reached almost 115 000 in 2002. From 1995 production grew continuously in the German pharmaceutical industry, most strongly between 2000 and 2001, to EUR 20.2 billion in 2001. At first glance trade performance also seems to indicate a positive trend. Export-import ratios and export specialisation remained at about the same level in 1999 and 2000. However, an apparent downward trend in export performance towards the end of this period may be an early warning signal. Traditionally the pharmaceutical industry is among the most R&D-intensive industries. In 1997 approximately 16% of its personnel was employed in R&D. For member firms of the German association of research-based pharmaceutical companies, R&D intensity even reaches approximately 19%. However, in international comparisons, the industry’s R&D efforts appear less favourable. Between 1991 and 1995 the share of the German pharmaceutical industry’s business expenditures on R&D (BERD) in the OECD total for the industry decreased continuously, while those of France and the United Kingdom were maintained or rose. Since 1995, however, the industry seems to place greater emphasis on R&D.

National biopharmaceutical policies and funding Owing to the division of political responsibility between the federal government and the states, German biopharmaceutical innovation policies are complex and involve a large number of actors and ministries at the state and federal level. At the national level five federal ministries (education and research; health; environment; food, agriculture, forestry and consumers; and economics and technology) together with the German Research Council (DFG) are directly or indirectly involved in supporting the development and commercialisation of the biopharmaceutical sector. In addition, various ministries are involved at the state level. In addition to these political institutions, certain foundations and societies support the development of the sector. Between the funding organisations and the organisations carrying out research a variety of intermediate organisations exist, leading to quite differentiated decision-making procedures and a complex system of distribution of R&D funds. Typical organisations in this system are the so-called project co-ordination or management organisations (PMO, “Projektträger”) which are responsible for the detailed management of R&D programmes. Horizontal innovation policy instruments play the key role in support of the biotechnology knowledge base. Health- and biotechnology-related basic research is mainly funded through mechanisms that do not explicitly target biotechnology. These include institutional support for public research organisations (e.g. universities, Helmholtz Research Centres and institutes of the Max Planck and Fraunhofer Societies) and the competitive open call system of the German Research Council (DFG) for financing public sector research. In the period 1994-98, 75% of the biotechnology R&D INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

64 – SUMMARY OF COUNTRY STUDIES expenditures of the Federal Ministry of Education and Research (BMBF) were channelled through institutional funding, direct funding to National Research Centres and the project funding of the DFG. These institutional instruments support the independence of the most important actors of the German R&D landscape. For vertical funding activities, support for the biopharmaceutical knowledge base has mainly come from the “Biotechnology 2000” programme (issued in 1990), its follow-up “Biotechnology Framework Programme” (published in 2001) and the “Health 2000” programme. These programmes define the framework for direct promotion of R&D activities related to biopharmaceuticals. Other important public funding initiatives include the “German Human Genome Project” (launched in 1995) and the “National Genome Research Network” (launched in 2001). Specific support for commercialisation in the biopharmaceutical sector takes two main approaches. First, mechanisms were established to promote biotechnology research by industry actors. On the one hand, the involvement of industry actors in biotechnology research activities conducted in collaboration with public research organisations was stimulated. On the other hand, the programme BioChance (and its successor BioChanceplus) further supported the commercialisation of biotechnology by providing funding for high-risk projects in biotechnology firms. Second, instruments to support commercialisation included initiatives for forming clusters of research units and industry actors. The BioRegio contest (1995-2001) and the recent BioProfile programme (19992006) are important policy instruments for that purpose. Owing to the lack of official statistics it is difficult to provide a complete inventory of current public funding for this sector. Total federal funding for the biopharmaceutical sector over the period 1994-98 was estimated at about EUR 1.7 billion (or EUR 340 million a year). According to the Boston Consulting Group (BCG), a total of EUR 3.43 billion of public money was spent for biomedical basic research in 1999. Unfortunately, no details on the sources for this figure are provided. The difference between this large amount and the annual funding and alternative estimates are difficult to understand but may be due to the fact that all types of basic medical research were likely included in the BCG figure. The BCG study also contained an international comparison of public R&D expenditures for biomedical research. It gave per capita expenditures for biomedical research in 1999. These were EUR 42.6 in Germany, EUR 43.0 in the United Kingdom, EUR 54.5 in the United States and over EUR 65 in Sweden and Denmark.

Public R&D, business and demand Germany has a very differentiated system of public R&D organisations performing research related to the biopharmaceutical sector. The main actors are the 92 universities, many with science or medical faculties which conduct research relevant to the biopharmaceutical sector. In addition, various public-sector research organisations have individual institutions active in the biopharmaceutical sector. The most important is the Max Planck Society where 21 of its 80 institutions work in biopharmaceuticals. In the other large umbrella research organisation, the Fraunhofer Society, only a few institutions (four out of 57) work on biopharmaceuticals. A third important organisation is the Helmholtz Society (HGF), the umbrella organisation for Germany’s large federal research centres. Of the society’s 15 institutions five, including the National Biotechnology Research Centre (GBF) in Braunschweig, the German Cancer Research Centre in Heidelberg (DKFZ) or the Max Delbrück Centre in Berlin, are active in INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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biopharmaceuticals. Finally, the Leibniz Society (WGL), an association of state-based research centres, harbours six (out of 78) institutions doing biopharmaceutical research. Another important actor is the European Laboratory for Molecular Biology (EMBL) in Heidelberg which is not only committed to basic biomolecular research, but also to the transfer of research results to industrial applications. In addition, the EMBL hosts international training courses in molecular biology. The key actors in the biopharmaceutical industry are pharmaceutical companies with activities in biotechnology, specialised biotechnology companies, intermediate supply companies and clinical trial organisations. Only a small number of pharmaceutical companies are large research-based companies that have the development and exploitation of biopharmaceutical or biomedical products as a core activity. Using as criteria more than 500 employees and active in production and/or R&D activities in Germany, about 30 biopharmaceutical companies were identified. About 350 specialised biotechnology firms supply technology and pre-products to the pharmaceutical industry. In addition, a number of companies that focus on speciality chemicals also produce intermediates for the pharmaceutical industry. About seven large firms of this type were identified. Finally, there are several hundred clinical research organisations; however, most are very small and are mainly engaged in monitoring. Some 20 larger clinical research organisations are also active in research. Considering the dynamics of the biopharmaceutical industry Germany seems to have reached a steady state in 2002, with the rate of (biotechnology) company entries balanced by exits via insolvency or mergers and acquisitions. This indicates that the consolidation process in the German biotechnology industry is gaining momentum. In addition, despite the sharp decline in new firms and problems of public financing, the sector still seems to be quite stable and not (yet?) in a crisis situation. Almost all of the biotechnology firms in the sector co-operate intensively with universities and public-sector research organisations (PSRO) which represent 52% of all co-operation partners. About 30% are other biotechnology firms, and large pharmaceutical firms account for 16%. Co-operation with universities and PSRO mainly involve national partners, while co-operation with large pharmaceutical firms is predominantly international. The United States, the United Kingdom and Switzerland, the main locations of global pharmaceutical enterprises, are the most important locations for these partners. In summary, co-operation behaviour indicates that biotechnology firms mainly use a national knowledge base for innovative activities; this points to the presence of a well-developed national landscape for commercialisation in biopharmaceuticals. The last ten years saw important structural changes in the USD 424 billion world pharmaceutical market. In the early 1990s the United States and Europe both represented about one-third of the world market, but the US market grew rapidly between 1991 and 2001, resulting in a market share of 45% in 2001 and close to 50% in 2002 according to IMS Health Data. Over the same period, the European market share dropped to about one-quarter and the German share from about 8% in the early 1990s to about 4% in 2002. These data indicate that the North American market considerably increased its attractiveness over the past decade, in particular for new medicines. According to IMS Health Data, 62% of the sales of new medicine marketed since 1997 was generated on the US market compared to 21% on the European market. On the German pharmaceutical market, too, interesting structural changes occurred over the last few years. In 1998, firms of German origin held 45.5% of the German pharmacy market, which accounts for about 86% of the total pharmaceutical market in INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

66 – SUMMARY OF COUNTRY STUDIES Germany, measured in ex-factory prices. By 2001 the German industry’s share dropped to 40%, and the US, UK and French pharmaceutical industries improved their position on the German market. Prescription drugs, which include all innovative medication for the treatment of important medical problems, represent about 80% of the German market. This market segment grew by 66% between 1996 and 2002, an indication that the German market is an interesting market for innovative drugs, which is supported by the development of the market for biopharmaceuticals in Germany. Since 1996 this market segment grew at an annual rate of about 26% and reached sales of EUR 1.53 billion (ex-factory prices) in 2002, for a market share of 8.3%. The market data first indicate a strong shift towards the US market and the improved position of US firms on the German market. Second, pharmaceutical firms of German origin are increasingly under competitive pressure, not only internationally but also at home. Third, even though the German pharmaceutical market has grown much more slowly than the US and some other markets, Germany still seems to be an interesting market for innovative drugs in general and biopharmaceuticals in particular. The German health-care system is a so-called “Bismarck system” financed by subscription fees. Health-care insurance is part of social insurance and a basic right. To finance it, employees and employers each contribute 50% of the total. Compulsory health insurance (CHI) covers about 60% of the total health expenditures in Germany. Some other social insurance also contributes to health-care expenditure. In addition, private health insurance companies cover about 8% of health-care expenditure. Private and compulsory health insurers finance about three-quarters of the cost of pharmaceuticals in Germany. In 1999, 88.5% of the German population were covered by compulsory health insurance, 9% had private health insurance. In 2002 there were 355 compulsory health insurance companies and about 50 private insurance companies. The health-care system comprises all organisations and persons that contribute to the maintenance, improvement or restoration of public health. A wide variety of actors and institutions contribute to this general goal. They provide health services and are responsible for financing, for governance, consulting and controlling. Health-service providers in the German system include physicians, dentists, physiotherapists, hospitals, pharmacies, the pharmaceutical industry, out-patient nursing services, rescue services and midwives. These groups are divided into the out-patient and the in-patient sectors. All in all, in 2000 more than 4 million people were employed in these different institutions. Key actors in the out-patient sector are physicians, dentists, various nursing services and pharmacies. Physicians provide the major share of health services. About 90% are CHI physicians who take care of those covered by compulsory health insurance. The interests of CHI physicians are represented by over 20 regional associations (Kassenärztliche Vereinigungen), which are the main organisations of selfgovernment in the health-care sector. In addition, there is a federal association of CHI physicians. All these associations are governed by the Federal Ministry of Health and Social Security. Key actors in the in-patient sector are hospitals, nursing homes and other related organisations. An interest group of hospitals, similar to the physician’s associations, negotiates contracts with the associations of health insurance companies on the reimbursement of hospital services. In addition to the interest groups at state level, there is a federal association of hospitals.



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More than 500 patient groups in Germany are concerned with many different disease areas. Their attitude to biopharmaceutical innovations is at least as diverse as the variety of their diseases of interest. Some groups, including interest groups of disabled persons, oppose innovative solutions based on genetic engineering. Interest groups concerned with Parkinson’s disease or multiple sclerosis take a more positive view of innovative medical solutions based on biotechnology. So far such groups do not have much influence on the innovation process in biopharmaceuticals. Some exceptions are rare diseases for which patient groups have succeeded in initiating the development of medical treatment by interested smaller firms. From the perception of patient organisations, however, there seems to be some improvement, in the sense that the pharmaceutical industry appears to be giving patient interests more attention. Intermediate organisations also play an important role. In particular, through their recommendations and decisions on reimbursement, the self-governing boards of compulsory health insurance companies and CHI physicians control access to a large share of the German market. These bodies seem, however, to have limited interest in innovative solutions. This implies weak incentives for innovation on the demand side.

Key drivers and barriers Key factors influencing innovation in the biopharmaceutical system are: sources of the required knowledge, human resources, regulations and financing. The main sources of scientific knowledge are the PSROs and universities. Knowledge for product development still originates mainly in the pharmaceutical industry. In addition, biotechnology firms are emerging as important contributors to this type of knowledge. In general, there is an increase in the internationalisation and distribution of knowledge sources. The analysis of human resources for the biopharmaceutical industry indicates that interdisciplinary skills are crucial for biopharmaceuticals. Interdisciplinarity in this context means that scientists who are specialised in one of the disciplines required for biopharmaceuticals also need to be able to interact with other disciplines. Presently there is no shortage of skilled personnel for the biopharmaceutical sector except in specific areas such as patient-oriented medical research, natural scientists with management and economic know-how, and in general scientists with well-developed communication and teamwork skills. However, scenarios of the future development of the supply of academics in Germany indicate that a shortage is expected in most of the natural sciences and engineering disciplines that are important for the sector. For private financing, venture capital has played a key role in the development of Germany’s biopharmaceutical sector in recent years. Consequently, the slump in the venture capital market changed the business environment considerably. In addition, structural changes in venture capital investments had important implications for hightechnology firms. In particular, a strong shift in the stages of investment – away from early-stage and towards late-stage investment – was observed between 2000 and 2002. These trends in the venture capital market mean that less money is available for venture capital financing in general and, in particular, for early-stage financing. For biotechnology there was a very strong increase of venture capital financing during the 1990s which peaked in 2000 and 2001 with total investments of about EUR 500 million a year. In 2002 the amount of venture capital invested in biotechnology dropped by more than half to EUR 216 million. This decrease is reflected in the decreasing share of biotechnology investments in all investments between 2001 and 2002. INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

68 – SUMMARY OF COUNTRY STUDIES However, the share of biotechnology investments in 2002 was still above the share in 1999. In addition, the relative drop was considerably lower than the absolute decline. This seems to indicate that the years 2000 and 2001 were exceptionally good years for venture capital investment in biotechnology, while 2002 seems to return to a more normal situation. Further, the biotechnology sector seems to fare better than other sectors as indicated by the rather low relative decrease of investments in the sector. The number of biotechnology companies which received venture capital investment even reached a high point of 199 companies in 2002. This indicates that venture capital firms maintain their portfolio of biotechnology firms. However, it also implies that smaller investments are available for each firm, leading to more competition for venture capital and thus to difficulties for new firms to acquire venture capital. A large number of regulations govern the biopharmaceutical sector. Presently there seem to be no major problems with the regulations that are relevant for research activities in biopharmaceuticals. Problems can occur, however, in their implementation by the responsible institutions. Bureaucratic procedures may hinder research activities, and the involvement of different institutions in managing the different regulations without sufficient co-ordination considerably slows the overall process and hampers licensing and approval procedures. In terms of the specific regulatory framework for genetic engineering, the situation in Germany improved during the 1990s. Industry stakeholders strongly supported faster implementation of the biopatent directive. In general, differences in the regulatory framework of European countries are perceived as getting smaller. Against this background, harmonisation is seen less as a European issue than as an issue between Europe and other parts of the world. The key regulatory concerns, in particular from the perspective of the biopharmaceutical industry, are regulations affecting market access and market attractiveness. These include approval, registration and reimbursement of drugs. For example, regulations on the reimbursement of pharmaceuticals in Germany do not seem guided by an overall goal. In particular, they do not aim at fostering innovation. Rules such as the negative list, the fixed-price rule or the aut-idem regulation tend to support the development of innovative solutions since they do not (so far) apply to patented (innovative) drugs. Others, such as the discount for patented drugs and in particular the perceived arbitrariness in setting discount rates (change from 6% to 16% within one year), do not contribute to creating planning security for innovation projects in the pharmaceutical industry. In summary, at present the (fluctuating) financial situation of the CHIs seems to be the main driving force behind the development of reimbursement regulations.

Systemic failures and policy implications The efficiency of the science system with respect to biopharmaceuticals ranks just below the European average. Important lines of biopharmaceutical research, such as patient-oriented biomedical research, are not well established. In addition, pharmaceutical research is largely promoted mainly by the (large) pharmaceutical industry. In general, public funding for biopharmaceutical research (on a per capita basis) is lower than compared to important competitors. Patient- and product-oriented R&D networks in the German biopharmaceutical system are not well established and there is a lack of interaction. The performance of the biopharmaceutical research system should be monitored closely. Funding programmes aimed at improving patient-oriented clinical research, such INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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as the programme supporting co-ordination centres for clinical research, should be monitored and their outcomes evaluated with respect to the needs of patients and the biopharmaceutical industry. More generally, the amount of public funding for biopharmaceutical research should be reassessed from an international perspective. Policy instruments to support patient- and product-oriented R&D networks should be developed. The gap in early-stage financing of biopharmaceutical firms in Germany is widening, leading to a decrease in start-up activities. In consequence, knowledge transfer from academia to industry may suffer. Incentives for private financiers to redirect their attention to early-stage investments should be developed. There is a shortage of specific academic qualifications for the biopharmaceutical sector. These include managerial, communication, and economic skills. There is also likely to be a shortage of qualified natural scientist and engineers, who are also important for the biopharmaceutical sector, in the medium term. Curricula of the respective study courses should be amended to include the required courses. In addition a systemic policy approach is recommended so that education policy elements become an integral component of innovation policy. Innovation as a means to improve the efficiency of the German health-care system is not very popular. Rather, innovation and cost containment are frequently considered to conflict. Reimbursement regulations, which are key factors in market access, do not provide planning security for innovative activities. Thus, the biopharmaceutical system faces conflicting policy signals: contribute to cost containment and contribute to innovation and competitiveness. It seems essential to develop a systemic policy approach which combines different objectives, such as improving international competitiveness and enabling a high-quality and affordable health-care system. Since the health-care system has many actors and many conflicting interests, such a policy approach must look at the medium term and involve key stakeholders from the beginning. The conduct of multi-centre clinical trials in Germany is hindered by complex assessments which require a balance between several ethical viewpoints. Ethical assessment procedures for clinical trials should be evaluated and adjusted to achieve a better balance among different interests. A guideline for such an exercise could be the question of risks and benefits from the patient’s perspective. European harmonisation of institutions guiding the registration of new biopharmaceuticals can facilitate market access for industry actors. However, for small and medium-sized firms, the European procedures are (too) costly and work against the concept of a common market. Cost-benefit evaluation of the European registration procedures could provide a sound basis for potential modifications. The demand side (patients) has very limited influence on the biopharmaceutical innovation process. The demand side’s knowledge and experience of medical needs is not used efficiently, and the facilitating role of patient groups during clinical trials and market access is rarely called upon. Health-care initiatives to support patient organisations should be expanded to take into account their role as actors in the innovation process. Coordination of health and innovation policy would facilitate such efforts.


70 – SUMMARY OF COUNTRY STUDIES Japan Introduction In 2001, Japan’s gross domestic product (GDP) was JPY 504.4 trillion and its GERD was JPY 16.5 trillion, with a ratio of R&D expenditures to GDP of 3.29%. In terms of value added, the shares of primary, secondary and tertiary industries were 1.5%, 21.0% and 77.5%, respectively, indicating that Japan’s manufacturing share is relatively high among OECD countries. Within the manufacturing sector, the electrical machinery industry accounted for the largest share of value added, followed by food, pulp/paper/publishing and transport machinery, in that order. The pharmaceutical industry accounted for 0.5% of value added, 0.3% of number of employees (210 000 out of a total workforce of 64.5 million), and 4.8% in terms of R&D expenditures. About 720 out of a total of 1 400 pharmaceutical firms in Japan produce ethical drugs. Industrial concentration has tended to increase recently.

National policies A key to expanding basic knowledge in biotechnology is an increase in the relevant R&D budget. The biotechnology-related budget in fiscal 2003 was about JPY 500 billion. The lion’s share of the budget goes to four ministries: the Ministry of Economy, Trade and Industry (METI), the Ministry of Agriculture, Forestry and Fisheries, the Ministry of Health, Labour and Welfare, and the Ministry of Education, Science and Technology (MEXT). Besides the budget for major government-sponsored projects, there is a budget for competitive research funding, open to application by researchers in universities or public research organisations. This type of funding represented a total of JPY 266 billion in fiscal year (FY) 2002, and 47% of that amount (about JPY 124 billion) was for research projects in the life sciences. Competitive project funding increased to around JPY 300 billion in FY 2003, and the amount for research projects in the life sciences, at an unchanged ratio of 47%, would be JPY 140 billion. In addition, a biotechnology-related budget of about JPY 10 billion is estimated for the independent administrative agencies under the jurisdiction of METI or the Ministry of Agriculture, Forestry and Fisheries. The total biotechnology budget in 2003 was about JPY 500 billion, which included biotechnology-related R&D for various purposes, such as agricultural products, industrial products and environmental measures. Budget data for biopharmaceutical R&D are not available. The biotechnology-related budget of the Ministry of Health, Labour and Welfare, nearly all of which is supposed to be for medical and heath-care projects, is about JPY 160 billion. Substantial portions of the budgets of MEXT and METI are earmarked for basic research, such as gene and protein analysis, so that biopharmaceutical R&D funding is likely to be substantially higher. In addition to fiscal appropriation, tax incentives for R&D are also important for pharmaceutical innovation. The system for R&D tax credits was revised recently to provide stronger incentives. Formerly, tax credits were applied only to R&D spending in excess of a threshold amount. Under the new system, the tax credit is a certain percentage (8% to 12% of an R&D-to-sales ratio) of total R&D expenditures. The incentive provided by this system is expected to correspond to about JPY 600 billion and should have a substantial impact on the R&D of large pharmaceutical companies with large investments in R&D.



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Commercialisation of research results from public research institutes (PRIs), including universities, has been strongly promoted by various kinds of policy initiatives under the guidelines of the Science and Technology Basic Plans. Commercialisation can take various forms. It may be through the licensing of PRI patents or the “spinning out” of researchers to set up new companies. In addition, research collaboration between PRIs and industry is encouraged in order to increase the potential for commercialisation of research results. Such collaboration will also induce knowledge spillovers from PRIs to industry which eventually enhances industrial innovation. At the institutional level, the Law for Promotion of University-Industry Technology Transfer plays an important role. This law was enacted in 1998 to support technology licensing offices (TLOs) at PRIs. Under this law, registered TLOs can receive financial support for their activities, and other special treatment, such as reduced patent application fees. The number of patent applications made through registered TLOs between the end of 1998 and the end of 2000 exceeded 700 (there were 26 TLOs as of January 2002). In addition, since FY 1987 joint research centres have been established at universities as footholds for the promotion of industry-academia co-operation. These centres provide space for conducting collaborative research projects between the universities and private firms, as well as an in-house university focal point of interaction with industry representatives. There were 61 centres as of the end of March 2002. At national universities during the last decade, the number of joint research projects has increased 4.4-fold, and the number of researchers for those projects has increased 2.7-fold. As for national research institutes, most of which are now operating as independent administrative institutes (IAIs), commercialisation of research and collaboration with industry are at the top of the agenda for their mid-term plans. Each institute’s evaluation committee assesses the overall activities of IAIs, and the national guidelines on research evaluation state that the evaluations should be based on quantitative criteria as far as possible. For PRIs, therefore, the quantitative indicators for research output, such as the quantity of patents and papers, are important. In addition, IAIs are encouraged to attract external research funding, including not only project-based grants from the government, but also research funds from private firms for contract research and joint research projects. These policy initiatives for commercialisation of the research findings of PRIs and collaboration with industry have started to work. According to a survey conducted by MEXT in 2000, 21.8% of firms reported an increase in their joint research with universities during the five years preceding the survey, while 9.2% reported a decrease. As for national research institutes, 13.7% had increases in joint research, while 11.5% had decreases. Other signs of the success of the policy initiatives include increases in the number of joint papers published by PRIs and industry and in the number of patent applications and the amount of licensing revenues of universities.

Structure and dynamics of the national system As Table 2.11 shows, of the JPY 945 billion spent by the private sector on lifescience R&D, JPY 698 billion (more than 70%) was spent by the pharmaceutical industry. In addition, more than 80% of life science R&D by universities (JPY 700 billion) was spent for projects related to health care. Although data on the breakdown of biotechnology-related R&D budgets at public research organisations are not available, a considerable portion is estimated to be spent for pharmaceuticals and health-care projects.


72 – SUMMARY OF COUNTRY STUDIES Table 2.11. R&D for life science, 2001 JPY billion

Share (%)1

945

57.4

Pharmaceuticals

698

73.8

Chemicals

84

8.9

Food manufacturing

64

6.8

Electronics

15

1.5

Universities

700

42.5

Public research institutes

329

20.0

1 645

100

Industry

Total 1. Share in total industry for manufacturing sub-sectors.

There is no large-scale public biotechnology research institution like the US National Institutes of Health (NIH) in Japan, but there are a few PRIs in certain fields of applied research. The most important in the biopharmaceutical field is the National Cancer Research Centre under the supervision of the Ministry of Health, Labour and Welfare. Important roles in biotechnology research are also played by METI’s AIST (Agency for Industrial Science and Technology) and MEXT’s RIKEN (Institute of Physical and Chemical Research), as well as university hospitals such as the University of Tokyo Hospital. According to the Japan Bio-industry Association, the number of biotechnology companies in Japan was 334 as of February 2003, and grew rapidly in that year. However, the number is still small when compared with some 2 000 firms in the United States and roughly 2 500 in Europe. Also, Japanese biotechnology firms are small. According to the Japan Bio-industry Association survey, the number of employees averages 20, and average sales volume is about JPY 400 million. Consequently, few biotechnology companies have made initial public offerings (IPOs). AnGes MG, founded by Professor Morishita at Osaka University, was listed on the Mothers section of Tokyo Stock Exchange in September 2002, the first university spin-off to make an IPO in Japan. In the following December, Trans Genic Inc., which utilises innovative technologies developed by Kumamoto University, was also listed. Some biotechnology companies involved in the development of new medicines, DNA chip techniques, and other such technologies were prepared to be listed in the near future. According to the Survey of Research and Development (Ministry of Public Management, Home Affairs, Posts and Telecommunications), the pharmaceutical industry’s ratio of R&D expenditures to gross sales in 2001 was 8.6%, significantly higher than the overall average of 3.0% for all industries. Development of new drugs is said to take more than ten years and R&D outlays of several to tens of billions of JPY. Thus, the pharmaceutical industry is an R&D-intensive industry with a high ratio of R&D expenses to production and sales expenses. Collaboration with external organisations is crucial for efficient R&D on new drugs.



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Key drivers and barriers in biotechnology innovations in industry Many factors encourage Japanese pharmaceutical companies to engage in R&D partnerships with external organisations. A questionnaire survey of 21 major pharmaceutical companies and an interview survey of ten companies were conducted to analyse these factors in detail. As noted above, external collaborations differ, depending on whether the partner organisation is a company or a research organisation, such as a university, and depending on the stage of R&D at which the collaboration occurs. Accordingly, it is important to have a detailed understanding of the actual status and recent trends in these partnerships. In addition, a survey of factors essential for entering such partnerships was undertaken (including aspects such as technology, demand, regulation and political measures promoting innovation). With respect to the type of collaboration, joint research projects are now both more numerous and increasing more rapidly, with licensing arrangements and consigned research (outsourcing) just behind. Joint ventures, externally funded research and exchange of researchers are less common. With respect to collaboration partners, joint research with domestic universities and public research organisations now leads and is growing more rapidly. In addition, the number of mutual licensing agreements with major drug makers, particularly foreign companies, is increasing. For venture companies, licensing agreements with foreign companies are increasing in number and growing at a more rapid rate. The following are the results of in-depth interviews regarding the nature of these partnerships: • Pharmaceutical companies have worked closely with universities, primarily with university medical schools, and the number of such collaborations is growing. • Previously implemented in a way that left ownership of research results ambiguous, these issues are now much more often delineated in research contracts, presumably owing to the establishment of guidelines for joint research and of TLOs in universities. • However, pharmaceutical companies rarely accept patent licences directly from universities, preferring instead to take research concepts generated in universities and further develop them in joint research. • According to evaluations of Japanese universities, despite the establishment of TLOs and recent measures for promoting university-industry partnerships which will undoubtedly lead to collaboration of university members with private companies, the business sense of university personnel is unlikely to be mature soon. • Japanese pharmaceutical companies collaborate with foreign venture companies in restricted, focused areas. In many cases, partnerships are conducted under a set of licence agreements for a patent granted to the venture company and a co-R&D contract for patent development. • Partnerships with large companies primarily focus on downstream processes in pharmaceutical R&D. Examples of such partnerships include clinical trials with foreign pharmaceutical companies and clinical research organisations (CROs). In addition, the survey asked about the purposes of external partnerships and changes in their importance. The reasons for external partnerships marked as “very relevant” in the responses include “acquisition of leading-edge technology and information” and “introduction of a state-of-the-art technology” in partnerships with universities and public INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

74 – SUMMARY OF COUNTRY STUDIES research organisations; “acquisition of new drug candidate compounds” in partnerships with major drug makers; and “reduced research costs” in partnerships with large companies (in other business sectors). The reasons currently gaining importance include, in addition to those given above, “faster, more efficient research” and “overcoming the company’s disadvantages”. Given the advances in biotechnology, Japanese pharmaceutical companies are apparently pursuing partnerships in order to acquire stateof-the-art biotechnologies and, at the same time, improve R&D efficiency to retain their place in an increasingly competitive market. However, the results of interviews with companies revealed that most regard some recent biotechnological methods, e.g. high throughput screening, to be rather restrictive with respect to improvements in the speed and efficiency of R&D (manual procedures by trial and error are more effective). Furthermore, despite the broadening of the repertoire of methods for finding new candidate drug compounds brought about by genomic drug development, this is not generally acknowledged to have led directly to improvements in the speed and efficiency of R&D. While companies are keenly aware of, and are in fact currently tackling, issues related to improved R&D efficiency, they do not believe that the new genomic methods have improved efficiency so far. Many companies cite the increasing importance of reduced research costs promised by partnerships with venture companies. According to some, this applies to partnerships involving R&D that cannot be tackled internally, but not R&D that can be performed in-house, and particularly high-risk projects for which internal resources are insufficient. This reflects the same trends that led companies to rate “overcoming the company’s disadvantages” over “strengthening the company’s advantages”. Licensing is also an important instrument for enhancing knowledge spillovers among firms. According to a survey by the Japan Patent Office in 2001, firms’ income from licensing was about JPY 100 billion while their expenditure on licensing was about JPY 40 billion. The biggest licensing counterparts are firms and research organisations in the United States, and their share far exceeded that of domestic counterparts. The ratios of licensing income and expenditure to in-house R&D were 13.8% and 5.3%, respectively. In terms of the regulatory environment, guidelines for regulation of biopharmaceuticals were enacted in 1999 under the good manufacturing practice (GMP) rules of the Pharmaceutical Affairs Law. The Pharmaceutical Affairs Law was then drastically reformed in 2002. Under the new legislation, biopharmaceuticals are treated as a category separate from medicines based on chemical synthesis. Special regulations for bio-medical drugs are applied at the beginning and middle stages of production, including donor selection, securing of safe materials and prevention of contamination. In addition, once a bio-drug is marketed, proper indications, accessibility of information, donor tracing and regular reports on infections are required. Moreover, strict rules on the handling of biopharmaceuticals in clinical testing, production and sales were established. These regulations will help to ensure the reliability of biopharmaceuticals and better public acceptance. Keen competition brought about by revision of the Pharmaceutical Affairs Law and the Health Insurance Law gives pharmaceutical firms incentives for developing biotechnology for innovative drugs. Finally entrepreneurship is not well developed in Japan, although the number of biotechnology firms has increased in recent years. Newly established firms (entries minus exits) are estimated at around 50 in the past two or three years.



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Systemic failures and policy implications The Japanese innovation system appears characterised by an “in-house development principle”, mainly in larger companies, and differs markedly from the network-type innovation system found in the United States which tends to involve venture companies and universities as well. This is due to various, partly interconnected, aspects of Japanese companies, including low mobility of researchers in companies and universities, the short supply of venture capital for start-up companies, the tendency of universities to focus on basic research and to be unenthusiastic about industry-university co-operation, and a corporate climate in which in-house development is highly valued and alliance strategies are disregarded. In the case of the pharmaceutical industry, it is also important to note that drug prices under the current national health-care insurance scheme are determined not by competition but by the drug price standard (DPS) which impedes fair market competition, and to note that the historical absence of incentives for clinical organisations – users of ethical pharmaceuticals – to make daring applications of innovative drugs weakens drugmakers’ motivation to seek innovative drugs in the first place. As R&D processes for new drugs changed and there was progress in biotechnology, various innovations took place in the development of new pharmaceuticals, mainly in biotechnology companies in the United States. Japan was left behind, presumably because its innovation system had been dominated by large companies. This was due to the generally low level of basic research in fields such as molecular biology in Japanese universities. However, even though Japanese drug makers trail slightly, they are progressively entering into external R&D partnerships and producing results in the biopharmaceutical field. It is also interesting to note that new entrants from other business sectors, such as Japan Tobacco Inc. and Kirin Brewery Co, Ltd., are taking active roles. Entries of companies from other sectors into the pharmaceutical industry may offer an effective model for maintaining a company’s competitiveness, by generating innovation that is not incremental and maintaining healthy competition in Japan, where an innovation model based on start-ups is not feasible. However, it is also natural to consider that a dynamic and flexible system, in which university-industry partnerships and venture companies are established, would be more effective for a field in which innovations are not incremental. Additionally, it is important to link universities closely to public research organisations in fields such as biopharmaceuticals, where scientific knowledge has a very important role. From this viewpoint, Japan must continue to seek to make the Japanese innovation system more open and more flexible. At the same time, changes are required in a number of areas, including finance, human resources, the environment of competition among companies, and incentives for researchers in universities. Injecting venture capital does not necessarily lead by itself to a massive flow of researchers to biotechnology companies. Nor does a reform of the incentive system in universities always lead to increased cooperation between universities and industry, owing to problems on the company side. All these factors are complementary: it is the overall system that needs to be revised.

The Netherlands The Netherlands is a medium-sized European country with a population exceeding 16 million in 2002. It is an open economy that depends heavily on foreign trade. In 2001, Dutch gross domestic product (GDP) was EUR 429 billion, 71% of which derived from INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

76 – SUMMARY OF COUNTRY STUDIES service activities. In 2001, the Netherlands showed a positive trade balance with exports of EUR 280 billion and imports of EUR 257 billion. The predominant industrial sectors are food processing, chemicals, petroleum refining and electrical machinery. In 2000 the Dutch labour force was 7.2 million. In 2000, gross domestic expenditure on R&D (GERD) was EUR 7.6 billion, an increase of 35% compared to 1994. In 2000, R&D intensity (GERD as percentage of GDP) was 1.9%, which is below the OECD average (2.23%) but almost identical with the EU15 average (1.89%). The private sector contributes most to R&D intensity: in 2000 business sector expenditure for R&D (BERD) accounted for 1.11% of GDP. This was considerably less than the EU15 and OECD averages (1.22% and 1.56%, respectively). The public sector, i.e. universities and research institutes, accounted for almost 0.77% of GDP. Although the R&D intensity of the public sector has significantly decreased since 1993, it was still far above the EU15 and OECD figures (0.65% and 0.61%).

National biotechnology policies National biotechnology innovation policies, 1979-2004 In the 1980s creating a strong biotechnology R&D structure had high priority in the Netherlands. Two biotechnology R&D programmes were set up (the Innovation Oriented Research Programme Biotechnology – IOPb, and the Programmatic Industry-related Technology Stimulation on Biotech – PBTS) and industry research received considerable support. In the early 1990s, Dutch technology and innovation policies shifted from dedicated support towards more generic support. New programmes were of a generic character and the existing dedicated programmes (IOPb and PBTS) became generic programmes open to all technology fields. Commercialisation of biotechnology was mentioned as a priority in national innovation policies. This was mostly implemented through the support of national networking activities between academia and industry. It was only in 1998 that the Dutch government focused its innovation policies on biotechnology again. The Dutch government, in particular the Ministry of Economic Affairs, felt it had become urgent to stimulate the biotechnology sector in light of the results of a government-sponsored benchmarking study. The main conclusion of this study, which compared the Dutch entrepreneurial bioscience industry with that of six other regions in the world, was that many conditions for growth, such as financing and incubator facilities, were lacking. In 1999, the Ministry of Economic Affairs presented the Life Sciences Action Plan 2000-2004 and announced the BioPartner programme. The main goal of this programme was to establish at least 75 new life science start-ups in the period 2000-04. The total budget was EUR 45.3 million. In 2000, the Dutch industry and public sector research organisations presented the Strategic Action Plan Genomics for building a strong research infrastructure in the field of genomics. An advisory committee was assigned to investigate the need for such investments and the urgency of public financial support. This Temporary Advisory Committee for the Genomics Knowledge Infrastructure advised the Dutch government to invest heavily in genomics research and infrastructure, taking an integrated approach that included commercialisation and the social and ethical aspects of genomics. Based on this advice, the Dutch government presented in 2001 its view in a policy report, Genomics Knowledge Infrastructure. This led to the Netherlands Genomics Initiative (NGI), which is responsible for the execution and management of a national genomics strategy, with a budget of EUR 189 million for the period 2002-07.



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In the period 1981-93, the Dutch government invested more than EUR 178 million in biotechnology research, mainly through the IOPb and PBTS programmes. Between 1994 and 1998, more than EUR 150 million was allocated to biotechnology research via several public instruments and programmes. Additionally, in the same period, charity funds provided EUR 75 million to EUR 100 million for biotechnology-related research.

Policy instruments and financial support for the knowledge base The main programmes dedicated to biotechnology research in the period 1994-2004 are the Association of Biotechnology Centres in the Netherlands (ABON), a number of research programmes of the NWO, the Dutch research council, and the programmes supervised by the NGI. Although Dutch innovation policy was mainly generic in character in the 1990s, a number of Dutch biotechnology companies and public research organisations succeeded in attracting extra public funds for ABON in 1991. The goal of ABON was to strengthen the science base established by the IOPb. ABON lasted until 1999 and had a budget of EUR 15.2 million, including funding by government. During the mid-1990s, the NWO ran two programmes in the biotechnology field: the Structural/Functional Relation Biomolecules programme (1995-2003) and the Computational Chemistry of Biosystems programme (1996-2002). They had budgets of EUR 2 million and EUR 1.3 million, respectively. Like most NWO programmes, they involved high-quality research. In 1999 NWO initiated the BioMolecular Informatics programme and the Genomics programme. In 2000, the Ministry of Economic Affairs started the Innovation Oriented Research Programme (IOP) Genomics to run for eight years; the budget for the first phase (2000-04) was EUR 20.4 million. The programme targets strategic and pre-competitive industry-oriented basic research at universities and public research institutes. The Netherlands Genomics Initiative started its activities in 2002. NGI is formally responsible for the co-ordination of all national genomics instruments, including the IOP Genomics and the Bioinformatics and Genomics programmes of NWO. One of its tasks is to establish genomics centres of excellence that perform high-level research in specific fields and have an advanced genomics research infrastructure. The centres also offer education and training and perform research on social aspects. In 2002, four genomics centres of excellence were selected. In January 2003 NGI started the HORIZON programme to stimulate excellent and visionary basic research in genomics and biomolecular informatics. In 2004, two technology centres (BioInformatics and Proteomics) and four innovative clusters were set up and financed by additional funds (EUR 99 million) from the so-called Bsik programme. Besides these dedicated programmes, biotechnology research groups may also apply for horizontal science and technology schemes, especially those targeting themes in the area of human health or food, where biotechnology research is important. Most of these schemes were oriented to basic research and presented by the NWO. Moreover, several R&D support schemes aim to stimulate industrial R&D and R&D co-operation, e.g. by providing subsidies for R&D projects and tax reductions for employing scientific personnel. Two other horizontal initiatives started in the late 1990s aim at improving the general conditions of pharmaceutical research: the Netherlands Federation for Innovative Pharmaceutical Research (FIGON) and the Steering Group Orphan Drugs.


78 – SUMMARY OF COUNTRY STUDIES Policy instruments and funding for commercialisation support For the period 1994-2004 three instruments dealt with the commercialisation of biotechnology: BioPartner, Mibiton and the Support Programme for Innovative Medicine Research and Entrepreneurship in the Netherlands (STIGON). BioPartner made available to life science start-ups networking instruments, subsidies for formulating business plans, incubators, research facilities support and risk capital. The programme ran until end 2004. Some of the BioPartner instruments were integrated into a new public organisation that stimulates entrepreneurship and technology-based start-ups, TechnoPartner. Mibiton started in 1994 with a subsidy of EUR 10.8 million from the Ministry of Economic Affairs. It provides financial support for the purchase of high-technology research equipment at universities and public research institutes on the basis of facility sharing with private companies. The Mibiton programme proved especially useful for starting up firms. STIGON is a scheme that supports (bio)pharmaceutical start-ups based on innovative concepts in medicine research. Its main target group is scientists at universities and public research institutes. The total STIGON budget amounts to EUR 8.8 million, including matching funds. Generic instruments aimed at stimulating commercialisation of technology in general were rather limited in the period 1994-2004. Dreamstart is a public initiative initiated by the Ministry of Economic Affairs which provides high-technology start-ups support for networking activities and facilitates access to information and consulting services. Additionally, the Subsidy Infrastructure TechnoStarters facilitates high-technology startups’ access to research facilities at universities and research institutions.

Instruments with a socio-economic and/or ethical dimension Since 1993, five national public debates have been organised to discuss specific biotechnology issues. The debates focused on topics like genetic modification, genetic research, cloning, xeno-transplantation and the application of biotechnology in food. Furthermore, NGI has set up the Centre for Society and Genomics with a four-year research and education programme, and has a specific research scheme, Social Component of Genomics Research (set up by NWO). The genomics centres of excellence also are obliged to include socio-economic and ethical aspects in their research programme.

Structure and dynamics of the national biotechnology innovation system Public biopharmaceutical R&D system Public biopharmaceutical R&D in the Netherlands is mainly performed in graduate research schools of universities and in research institutes. In 2003, 18 graduate research schools were (somewhat) active in biopharmaceutical research, a number that has been stable over the last years. Public biopharmaceutical research is also performed by ten public research institutes, of which seven target basic research and three target applied research. Academic research is mainly funded by the Ministry of Education, Culture and Sciences; a considerable part goes through the NWO, the NGI and the Royal Netherlands Academy of Sciences (KNAW). Applied research and commercialisation are mainly funded by the Ministry of Economic Affairs, mainly through programmes managed by the Senter agency and the BioPartner instruments. Other ministries co-fund these programmes and funding organisations.



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Figure 2.2. Public funding system of biopharmaceutical research in the Netherlands

Dutch Cancer Society

KNAW

NKI

NIOB

M inistry of Education, Culture and Sciences

M inistry of Agriculture, Nature and Food Quality

NW O

NIH

M inistry of Spatial Planning, Housing and the Environm ent

Senter

NGI

CBG

CM SB

U niversities

CBS

CGC

Funding organisation

Research organisation

Block grant or basic funding

M inistry of Econom ic Affairs

M inistry of Health, W elfare and Sport

BioPartnerM ibiton

TNO

RIVM

Sanquin

Interm ediary organisation

Project and program funding

Biopharmaceutical business system During the period 1994-2001, the number of pharmaceutical firms fluctuated at around 100. The most significant Dutch pharmaceutical firms are Organon and the Pharmaceutical Products Group of the Dutch multinational DSM. The Dutch subsidiary of Solvay Pharmaceuticals is another important player. Most pharmaceutical firms in the Netherlands are subsidiaries of major foreign pharmaceutical companies with production, logistics and/or research facilities in the Netherlands. Total employment in the Dutch pharmaceutical industry was estimated in 2001 at 15 100 and had increased by 3.5% from 1994. Since 1994 annual investments in pharmaceutical R&D in the Netherlands have increased significantly from EUR 198 million in 1994 to EUR 401 million in 2001. The number of employees in pharmaceutical R&D in the Netherlands also increased considerably from 2 082 in 1994 to 3 077 in 2001. A considerable number of dedicated biopharmaceutical firms have been created in the Netherlands. In 1994, there were only 18 pharmaceutical and fine-chemical firms dedicated to biotechnology. In 2001 there were almost 80, representing roughly twothirds of the total population of dedicated biotechnology firms in the Netherlands. Most of the dedicated biopharmaceutical firms specialise in niche markets, niche technologies or specific activities in the pharmaceutical R&D process, such as drug discovery, lead optimisation and drug delivery. Very often, they are suppliers of specific technologies or research partners to the traditional pharmaceutical firms and larger (foreign) biopharmaceutical companies. Most dedicated biopharmaceutical firms have seen very limited growth in terms of employees (Figure 2.3). Total employment for these firms was estimated at 1 764 in 2001, an average of fewer than 23 employees per firm. The R&D intensity of these firms is higher than that of pharmaceutical firms. In 2001, all dedicated biotechnology firms in the Netherlands, of which the biotechnology firms in human health form the lion’s share, invested almost EUR 73 million in R&D (and realised total INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

80 – SUMMARY OF COUNTRY STUDIES turnover of EUR 123 million). Moreover, 60% of the labour force employed by dedicated biotechnology firms are in research and development. Figure 2.3. Dedicated biopharmaceutical firms in the Netherlands by firm size, 1994 and 2001 1994

2001

70 64

60

50

40

30

20

10

13 7

0

3 Over 100 employees

2

6

50-100 employees

Fewer than 50 employees

Source: TNO-STB.

Some 30 clinical trial organisations, mostly private companies, are active in the Netherlands. They support public research organisations and pharmaceutical companies by developing and monitoring new clinical trials, performing (parts of) the clinical study, managing clinical data and providing statistical support or (co)writing the final clinical study reports. The number of (pre)clinical trials conducted in the Netherlands has been significant; there were 640 in 2002. Nevertheless, a decrease in (pre)clinical trials has occurred since 2000, most notably in phase II. Mergers and acquisitions have had limited effect on industry dynamics in the Netherlands. In 1998, DSM acquired Gist-Brocades, another Dutch multinational and the world’s largest supplier of antibiotics and a specialist in enzyme and fermentation technologies. In 2000, DSM acquired Catalytica Pharmaceuticals, a US-based company specialised in pharmaceutical intermediates. Akzo Nobel’s Organon acquired the Japanese pharmaceutical company Kanebo in 1999 and Covance Biotechnology Services in 2001; it sold its subsidiary Organon Teknika, specialised in in-vitro diagnostics, to the French BioMerieux in 2001. Among the dedicated biopharmaceutical firms, only two mergers occurred before 2001. Only after 2001 have mergers and acquisitions intensified in the Dutch biopharmaceutical industry: two mergers and three acquisitions occurred up to the first half of 2003. R&D collaboration is widespread in the pharmaceutical and biopharmaceutical industries. About 35% of the R&D partners of Dutch firms in biopharmaceuticals are located in the Netherlands (most are public research organisations), the rest mostly in Europe (31%, mostly firms) and the United States (21%, mostly firms).



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Biopharmaceutical demand Expenditures on pharmaceutical products have increased continuously over the last decades. In addition, the growth of Dutch pharmaceutical expenditures has been stronger than the growth of the total expenditures on health (Table 2.12). Table 2.12. Dutch expenditures on health and pharmaceuticals, 1994-2000 USD million (PPPs)

Total expenditures on health Total expenditures on pharmaceuticals Public expenditures Private expenditures Share of pharmaceuticals in total expenditures on health (%)

1994

1996

25 166

28 233

32 036

35 766

2 738

3 108

3 643

4 205

2 475

1 966

2 336

2 680

263

1 142

1 307

1 525

10.9

11.0

1998

11.4

2000

11.8

Source: OECD Health Data 2002.

In 2002, the Dutch market for pharmaceuticals consisted of the following segments: 72.2% for branded (or in-patent) pharmaceuticals, 18.5% for generic (or out-of-patent) pharmaceuticals, and 9.4% for parallel imports. Although branded pharmaceuticals still dominate the market, generic pharmaceuticals are gaining an increasingly large market share. This development began in the 1990s, owing to the large number of pharmaceutical patents that expired and the government’s policy of stimulating the prescription of generic pharmaceuticals. The market for pharmaceuticals based on biotechnology is still limited. In 2001 approximately 60 biopharmaceutical products were on the Dutch market, with insulin accounting for the largest share. Expenditure on biopharmaceuticals is growing annually and represents an increasing share of total expenditures on pharmaceuticals, rising from EUR 295 million in 2001 (8.6% of total pharmaceutical expenditures) to EUR 345 million in 2002 (9.2%).

Public health policies For several years, public health policies in the Netherlands have strongly emphasised cost containment. In particular, pharmaceuticals have been subject to measures such as maximum price levels, encouraging the prescription of generic pharmaceuticals and tolerating the parallel importation of brand-name pharmaceuticals. Rising expenditures on health care and decreasing quality forced the Dutch government to deregulate and place more responsibilities with individual actors in the health-care system. The government acknowledged that targeting cost containment was not the whole solution but must be combined with measures that increase the effectiveness and efficiency of health care. Therefore, in 2000 the Dutch government decided to give health-care insurance companies the central role in the national health-care system, forcing them to take a more active role in the system’s reorganisation. In addition, the method for determining tariffs for intramural treatment was replaced in 2003 by the Diagnosis Treatment Combination. This entails a specified price for the patient’s complete treatment, covering the entire process from diagnosis and hospitalisation to discharge from hospital. INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

82 – SUMMARY OF COUNTRY STUDIES The new system still shows many growing pains. The fall of the Dutch government in 2003 led to considerable delay in the development and implementation of the new system. Moreover, it remains unclear how pharmaceutical products will fit into the concept and what the consequences will be for new and expensive pharmaceuticals, e.g. biotherapeutics.

Market access Market access for new pharmaceutical products is mainly covered by international regulations that have been included in the Dutch Medicines Act. The Medicines Evaluation Board, the Dutch authority responsible for evaluating pharmaceutical products and issuing market authorisations, determines whether or not pharmaceuticals should be made available on prescription. In general, two alternative routes exist for the authorisation of new pharmaceutical products: a centralised route at the European level through the European Agency for the Evaluation of Medicinal Products (EMEA) and the decentralised route at the national level. For pharmaceuticals based on biotechnology only the centralised route is available. Promotion of the prescription of generic drugs has been an important element in Dutch health policies. However, the concept of generic drugs may prove problematic in the case of biopharmaceuticals. In contrast to pharmaceuticals based on chemical synthesis, no generic copies have so far been developed and introduced for biopharmaceuticals. First of all, most biopharmaceuticals are still protected by a patent, so that the development of a generic copy is impossible. Second, it is not yet clear what the authorities will demand in terms of specific requirements for dossiers on generic copies of biopharmaceuticals. A complicating factor is the extreme difficulty of proving that a biogeneric drug has the same properties and effects as the original biopharmaceutical drug. As a consequence, extensive clinical evidence will be necessary, in addition to a study of bio-equivalence, before the registration authorities will declare the generic biopharmaceutical a bio-equivalent of the original biopharmaceutical. This means a very lengthy and expensive development process that compares with that for a totally new drug. This is relatively new issue for the development of generic drugs and makes the development of biogenerics less attractive.

Patient organisations A specific feature of the Dutch biopharmaceutical innovation system is the presence of a large number of patient organisations. At least 400 associations and organisations exist for patients with a specific disease or disorder. A number of them are united in umbrella organisations like the Dutch Genetic Alliance (VSOP) and the associations for people suffering from chronic diseases and for handicapped people. Generally speaking, patient organisations represent patients’ interests by improving awareness and understanding of diseases and disorders. The main activities of patient organisations are to spread information among their members and to communicate with government, public health authorities and welfare services in the political arena. Patient organisations try to influence decision-making processes, for example in the case of listing a new but more expensive drug under the public insurance schemes or stimulating specific health research areas. Patient organisations also communicate with pharmaceutical companies, especially with the more integrated (bio)pharmaceutical firms.



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Key drivers and barriers in biopharmaceutical innovations Public intellectual property rights and technology transfer Since the late 1970s, Dutch universities have technology transfer offices to support university-industry interaction and provide assistance to researchers on IPR issues. However, these are often considered insufficiently effective in commercialising biotechnology. Technology transfer between the Dutch public R&D system and industry is limited, particularly in terms of patenting and licensing. A prominent reason is the lack of a combination of expertise in commercial, legal and specific biotechnological issues. This is aggravated by the limited size and small budgets of most technology transfer offices. A complicating factor is the heterogeneity of the academic IPR system in the Netherlands: each university is relatively autonomous in developing its IPR policies.

Small and large firms Pharmaceutical companies have extensive experience in the downstream stages of the innovation process, such as manufacturing, distribution, marketing and regulatory affairs and can assist small firms in these areas. Pharmaceutical companies are also important clients of small high-technology biopharmaceutical firms from which they buy highly specialised scientific and technological knowledge and tools that are too costly to develop internally. From this perspective, the very limited number of large integrated pharmaceutical companies in the Netherlands can be considered a barrier to growth of the biotechnology sector. Proximity is an issue and as most small firms work in business-tobusiness markets with larger pharmaceutical firms as their main clients, the transaction costs for building up relations with clients abroad are higher. Especially for small firms, this can have a negative effect on their survival and – at a later stage – on their successful exit strategies.

Human resources Knowledge is also acquired by attracting high-quality human resources. Over the period 2000-02, the availability of and access to qualified human resources increasingly became a bottleneck for the Dutch biopharmaceutical sector owing not only to the limited number of students graduating in the life sciences but also to the rapid increase of biotechnology firms worldwide and thus higher demand for skilled labour. Small and medium-sized firms and public research organisations in particular encounter difficulties, as they are often unable to offer the same employment conditions and career opportunities as larger firms. The areas in which most significant shortages emerge are laboratory support and the disciplines of bio-informatics, genetics, genomics and proteomics. The industry finds it especially difficult to attract staff with both scientific and managerial expertise.

Private financing The Dutch market for private equity is considered mature, increasingly competitive and characterised by a large variety and number of private equity firms. Although the overall level of private equity investment has risen over the years, an important share is invested outside the Netherlands. The total amount of venture capital investments in biotechnology in the Netherlands in the years 1999-2000 was EUR 56.8 million. Compared to 1994-95, when EUR 19.8 million was invested, this is an increase of more than 186%. In the last few years, providers of private capital have become more reluctant


84 – SUMMARY OF COUNTRY STUDIES to make high-risk investments in biotechnology. Biotechnology companies, including biopharmaceutical companies, with a business model mainly based on investing in R&D, encounter difficulties in raising external financing owing to investors’ demand for income. The first years of the new century are likely to be critical for Dutch biotechnology firms as a substantial gap emerges between public funding in the seed and start-up stages and private venture capital for follow-up stages.

Laws and regulations Generally speaking, both industry and public-sector research organisations welcome a sound and strict regulatory framework because it contributes to a higher level of quality and innovativeness in the biotechnology sector. However, the Netherlands’ present regulatory framework has a number of serious disadvantages in comparison with those of other countries. Most of these concern the length of application and decision-making procedures and their lack of transparency and predictability and the overlapping tasks and evaluation frameworks of the authorities. Regulatory and legislative issues cause problems in particular in the areas of biotechnology involving animals and the protection of biotechnology inventions. Dutch law forbids the application of genetic modification techniques to animals and a licence is only issued if there are no ethical objections and no unacceptable consequences for the health or well-being of animals. Moreover, the Dutch government has always resisted the EC directive 98/44/EC on the granting of intellectual property rights on biotechnology. The directive had not been implemented at the beginning of 2004, although it should have been implemented on the 30 July 2000 at the latest. This negative attitude isolates the Dutch biotechnology sector in Europe and affects the overall climate for biotechnology in the Netherlands.

Entrepreneurship In general, the Netherlands is viewed as a country that lacks the entrepreneurial spirit. This hinders considerably the commercialisation of new scientific knowledge, including biotechnology. Scientists are not very willing to leave their academic position and be fully engaged in business activities.

Systemic imperfections and policy implications The case study reveals various factors that affect the effectiveness of the Dutch biopharmaceutical innovation system. This section presents the main systemic imperfections and outlines implications for public policies. As the Dutch government presented in early 2004 the outlines of its policies for stimulating the life sciences in the Netherlands (Action Plan Life Sciences 2004-2007) several of the imperfections identified here will be addressed by public policies in the period 2004-07. Additional recommendations are formulated. Although the Dutch biopharmaceutical science base and education system is of high quality, there is an imbalance in knowledge production as there has been strong growth in applied research and in development of technology and very little in basic research. This could ultimately lead to a depletion of the science-driven biopharmaceutical knowledge base and to increasing difficulties for the Dutch research sector and industry to keep up with international scientific developments. Moreover, present policies focus on genomics. But the life sciences and biotechnology entail more than genomics and a post-genomics era will eventually develop. Finally, the availability of qualified technical staff and



85

researchers is increasingly becoming a bottleneck for both public sector research and industry in general. Policy measures are necessary to sustain a high-quality fundamental knowledge base in biotechnology. The Netherlands Genomics Initiative includes strong basic research components and is therefore an important action. It is also necessary to sustain the basic knowledge base in other areas relevant to biotechnology. Moreover, future developments need to be explored. In terms of the availability of skilled labour, measures are needed to increase the attractiveness of technical and natural sciences, in particular related to biotechnology. Finally, restrictions on attracting talented and experienced foreign human resources need to be removed or simplified. These problems have been acknowledged by policy makers in education and S&T policies and actions are being prepared. There are several systemic failures related to the exploitation and commercialisation of biotechnology. First, there is insufficient exploitation of public sector research, in particular university research. Exploitation of research is not a high priority in most universities and specific infrastructural instruments like technology transfer offices often lack the critical mass and the necessary expertise. There are also differences in universities’ exploitation policies. Second, most scientists who start their own biopharmaceutical firm lack managerial skills. This has a negative impact on the speed of development of many young biopharmaceutical firms. Third, the limited number of major Dutch pharmaceutical firms diminishes the opportunities for small biopharmaceutical firms to depend on a significant home market with regard to turnover and R&D collaborations. Governmental action is required to increase the priority given to exploitation of research by universities and public sector research organisations. The Action Plan Life Sciences and the latest Science Budget of the Ministry of Education explicitly address the problem of insufficient exploitation of public-sector research. Consequently, new actions aim to improve the quality of business plans and to investigate best practice concerning organisational and juridical models for valorisation. Moreover, a new measure is being prepared to subsidise the valorisation and exploitation activities at universities (i.e. Subsidieregeling Kennisexploitatie). However, additional governmental action is necessary. Improved co-ordination of university exploitation policies could increase the sense of urgency felt by university boards and contribute to inter-university learning processes. Second, the inclusion of indicators for valorisation and exploitation in university review procedures could contribute to prioritisation. Third, apart from the financial means Subsidieregeling Kennisexploitatie will offer, biotechnology transfer offices need a combination of biotechnological, legal and commercial expertise. Activities of national and local government should not only deal with attracting foreign companies to the Netherlands but also with keeping the Dutch pharmaceutical firms inside the country. Systemic failures on the demand side of the pharmaceutical innovation process include the large number and heterogeneity of patient organisations. Critical mass could be achieved through more co-ordination and interaction. As a result, patients’ organisations could have a more active role in the industrial innovation process and in facilitating clinical trails. In general there is a lack of appropriate dialogue between the main stakeholders in biopharmaceutical innovation. Open and constructive channels of communication are needed to improve acceptance of biotechnology.


86 – SUMMARY OF COUNTRY STUDIES The government should investigate the possibility of supporting patients’ organisations to achieve interaction and co-ordination and to explore how to stimulate interaction between patients’ organisations and industry through patient-industry networks. Additionally, incentives need to be introduced to encourage researchers from academia and biotechnology firms to communicate fairly about their activities, by addressing the benefits but also the risks. One very important framework condition that is currently hindering the development of biotechnology is the limited availability and accessibility of risk capital. The lack of risk capital is especially prominent after the first stages of firm development, as there is a considerable gap between the mainly public sources of funding for the seed and start-up stages and the sources for follow-up financing provided by venture capitalists. A second inappropriate framework condition is the set of regulations applied to biotechnology. A third framework condition that negatively affects biopharmaceutical innovation is the set of public health-care policies and related measures. The policies targeting cost containment send a negative signal to innovative (bio)pharmaceutical companies. Also the policy incentives for developing innovative pharmaceuticals in the Netherlands are limited. The last imperfect framework condition is the lack of interaction and coordination among government departments. Governmental policies in the area of health care and environmental protection and safety, for example, have been inconsistent with the aims of innovation and industrial policies in the field of biotechnology on several occasions. The Action Plan Life Sciences 2004-2007 announced measures to remove the barriers raised by the lack of risk capital, restrictive regulations and lack of policy co-ordination. In addition, the Dutch government should provide more clarity about the position of innovative but more expensive pharmaceuticals in the health-care and reimbursement system. In this respect, it also needs to take into account the benefits that innovative pharmaceuticals provide and how they can contribute to cost containment in the long term by increasing the effectiveness and decreasing the length of medical treatment. A more systemic policy approach is needed that combines the objectives of a competitive pharmaceutical industry and of an affordable public health care system.

Norway Introduction Norway has a population of slightly over 4.5 million. Civilian employment in 2001 was 2.3 million, with about 3.8% employed in agriculture, forestry and fishing, 21.5% in industry and construction and the remainder in services. GDP for 2001 was estimated at EUR 194 billion based on 1995 USD and exchange rates, or about EUR 43 000 per capita. Gross fixed capital formation was about 19% of GDP, and general government current revenue was over 57%, the highest among OECD member countries. There was also a general government surplus of 14% of GDP because of oil revenues. Natural resources, including oil, gas, hydropower and fisheries, play an important role in the Norwegian economy. Oil and gas exports topped EUR 86.6 billion and government oil revenues from these exports exceeded 15% of GDP in 2001, creating surpluses in both the government budget and trade balances. An important consequence of these oil revenues is that the business cycle often moves differently than in the rest of Europe.



87

The discovery of oil and gas in 1969 has made Norway one of the world’s wealthiest societies. Industries directly connected to petroleum and gas have developed a competitive advantage, while others have been adversely affected by rising labour costs and unfavourable exchange rates. The OECD (2002) observed that competitiveness had deteriorated by 24% between 1995 and 2001 in terms of unit labour costs and by 7% in terms of wages per hour in manufacturing. The relative trade-weighted unit labour costs also increased by 32% during this period, but the OECD found that all but 2% of this rise was offset by a decline in profit margins. The information and communications technology (ICT) and biotechnology-related industries remain small relative to the country’s Nordic neighbours. The development of the Norwegian economy and the competitive advantage of some industries helps to explain the evolution of R&D activity during the past decade. It also helps to explain why R&D activity as a percentage of GDP is significantly lower – under 2% – than the OECD average, despite a policy target to reach the average by 2005 (OECD, 2002). Even more alarming is that the trend appears to be diverging from the average. One reason for the relatively low R&D activity is the relatively low share of R&D-intensive industries such as defence, electronics and pharmaceuticals in Norway’s industrial structure. If defence-related industries are excluded from gross expenditures on R&D (GERD), Norway compares more favourably and is close to the EU average. Moreover, Norway has relatively higher R&D intensity in industries related to the petroleum and natural resource industries, most of which are not classified as hightechnology industries by the OECD. Government funding is a much more important source of finance for R&D activities than is typically the case in the OECD or the other Nordic countries. Business enterprises also perform a lower percentage of R&D than the OECD average, while institutes of higher education perform more than the OECD average.

Public R&D, business and demand In 1999, total expenditure on R&D was EUR 2.4 billion, of which public-sector allocations accounted for roughly EUR 1.02 billion. Approximately one-third of Norway’s public-sector research investment is channelled through the Research Council of Norway (RCN). The remainder is transferred directly from the ministries to the relevant universities and research institutions. The RCN is thus the most important actor in shaping research policy. Reporting to the Ministry of Education and Research, the RCN acts as a research policy advisor and allocates research grants on the basis of guidelines drawn up by the Norwegian government. It also initiates and co-ordinates networks and encourages the participation of R&D institutes, ministries, business and industry. In 2002 the Research Council of Norway had a budget of EUR 0.47 billion. Most RCN funds are distributed on a competitive basis, using peer review. Funding is allocated to research programmes, independent projects, infrastructure, grants and fellowships. User-driven research is the cornerstone of collaboration in Norwegian business and industry, whereby enterprises set their priorities and provide an average of 35-40% of the funding required for research in these fields. Innovation Norway (IN) was created in 2004 by merging several public organisations. The main aim is the promotion of innovation and internationalisation, particularly of small and medium-sized enterprises, and regional development. IN offers expertise and funding to companies in their early stages of development and promotes new and innovative business development by finding, refining, funding and following up on projects and enterprises. INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

88 – SUMMARY OF COUNTRY STUDIES Public R&D is carried out at universities or research institutes. There are four national universities in Norway. Each specialises in a particular field of biotechnology. All have courses in disciplines related to biopharmaceuticals and are involved in research programmes in this area. The Norwegian University for Agricultural Studies and Norwegian College for Veterinary Studies have relevant courses. Several government or semi-public research institutes specialise in specific research areas, such as SINTEF (a large-scale research foundation), Matforsk (a food-related research institute), Akvaforsk and Havforskningsinstituttet (marine-related research institutes). Finally, there are several relevant institutes in regional hospitals. The pharmaceutical industry accounts for less than 1% of total manufacturing output and employment. The total number of firms in the pharmaceutical industry is very small according to official data (about 15 during 1996-2000). However, many of the small, dedicated biopharmaceutical firms do not appear in statistics owing to their small size and various classification problems. An important feature of the biopharmaceutical innovation system in Norway is the limited presence of large foreign-owned pharmaceutical firms, and the presence of a number of locally developed dedicated biotechnology firms. Since 1997 several dedicated biopharmaceutical firms have been established. They have contributed to diversity in the system as they specialise in specific technologies and product platforms and cover different types of activities in the pharmaceutical innovation process. Most firms were created as spin-offs from universities, and some were created in collaboration with employees made redundant by a large-scale merger in 1997 between a foreign-based (Amersham) and a domestic (Nycomed) firm. As a result, there currently exists a small cluster of dedicated firms focusing on diagnostics and medical equipment/devices (Table 2.13). These new entrants have influenced the performance of the Norwegian innovation system as a whole, since they have been a main contributor to the growth in patent applications in the period 1995-99. The product market for pharmaceuticals as such is obviously limited in Norway owing to its population size. Expenditures on health as a percentage of GDP are similar to those in Belgium, the Netherlands, Japan, Spain and the United Kingdom, but far below thos in the United States, France and Germany. Norway with its 9.2% share (in 2000) of spending on pharmaceuticals within health expenditures ranks lowest among all the case study countries. This may partly be explained by policy measures focusing on disease prevention. Consumption of biopharmaceuticals largely concerns anti-neoplastics and immuno-modulating agents (cytostatics) and the musculo-skeletal system. Among drugs in last two of these therapeutic groups, two biopharmaceuticals meant for rheumathoid arthritis were as of 2003 among the national top-selling drugs. Prescription drug costs are reimbursed up to a certain limit. In an attempt to reduce escalating health-care costs, the Norwegian Medicines Agency determines the prices of prescription medicines on the basis of average prices in several countries. Most nonprescription drugs were deregulated in 2003, making it possible to obtain many basic drugs in any shop which had obtained sales permission.



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Table 2.13. Types of firms in Norwegian biopharmaceutical system, indicative Biotechnology category

Type A firms

Type B firms

7

13

Enzymes

4

4

Antisense

0

2

Therapeutic biopharmaceuticals

Monoclonal antibodies

1

1

Vaccines & antigens

2

4

Cell therapy

0

2

5

3

5

3

27

0

Equipment

13

0

Services

14

0

39

16

Diagnostics Diagnostics Equipment and services

Total

Note: For an explanation of the difference between Type A and Type B firms, see Mangamatin et al. (2003) and below. Source: Own assessment based on fieldwork.

There is a relatively high presence of organisations representing patients’ interests and liaising with policy-making bodies, pharmaceutical firms and research organisations. Patient organisations potentially play an important role in communication between the pharmaceutical industry and patients. In practice, however, patient organisations provide limited input to industry. The situation in Norway is unique, however, in that certain patient organisation umbrella organisations (e.g. cancer and cardiovascular disease organisations) are financially strong and provide funding to basic research conducted, for example, at university hospitals. Public acceptance of biotechnology can be an important factor influencing demand. Norwegians in general are very sceptical of biotechnology applications such as genetically modified food but take a positive view of medical applications. Although the average Norwegian knows more about biotechnology than the average European, he or she tends to expect less from the technology than before. This may be due to a lack of trust in the pharmaceutical industry as a source of information. Norwegians prefer to obtain their information from patient organisations, the medical profession and universities. Seen from a business perspective, our survey indicated that the dedicated biopharmaceutical firms ranked this obstacle to commercialisation as low and confirmed that it has diminished over time.

National biopharmaceutical policies and national funding The Norwegian government has long recognised the need to support certain “strategic” technologies such as biotechnology. In the period 1978-91, Norway implemented a technology policy that targeted five technologies: ICT, biotechnology, materials technology, aquaculture and off-shore technology. The White Paper on Research 1999 contains policy information relating to biotechnology. i.e. prioritising research on health and environment, increasing funds for basic research in biotechnology, strengthening links between research and the environment, and ethical aspects connected INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

90 – SUMMARY OF COUNTRY STUDIES to risk assessment. The white paper follows up on several earlier recommendations and identifies four areas for special attention: marine research, information and communication technologies, medicine and health, the crossroads between environment and energy. Medicine- and health-related research was to be strengthened on a broad basis and concrete measures included: • Making research positions more attractive in order to secure recruitment. • Creation of excellent research centres in order to achieve internationally strong research groups. • Research on preventive and health-improving aspects. • Ensuring that the emphasis on medicine and health contributes to higher levels of innovation in the business system through linkages between university and business and incentives for commercialisation, including changes in legislation related to university-produced intellectual results. Some of the plans mentioned above have been implemented, including a programme for creating centres of excellence and changes in the legislation relating to commercialisation of university-produced intellectual results. There are various programmes in place to improve the knowledge base. These include, first, FUGE (National Plan on Functional Genomics, 2002-), a long-term plan for reorganising and restructuring Norwegian biotechnology research, which aspires to enhance basic biological research, medical research and research in the marine sector. One objective is to promote closer ties between the research community and trade and industry. Second, PROSBIO is a new research programme based on the strong tradition in process industries technologies in Norway, which seeks to take advantage of this tradition to further develop a chemical and biotechnological industry focusing on biopharmaceuticals and fine chemicals as well as new materials. Third, a Centre of Excellence (CoE) in molecular biology and neurology was named in 2001 and located at the University of Oslo and the National Hospital. The CoE is to take a leading role in elucidating the role of DNA repair and genome maintenance mechanisms in preventing neurological disease and brain ageing. In addition, networking initiatives such as MedCoast (the OsloGothenburg area) and Scanbalt (the Scandinavia, Baltic countries and northern Germany network) have recently been initiated. A reform consisting of tax reductions to SMEs based on their level of R&D expenditures has also been implemented. There are semipublic stimulation programmes that emphasise start-up funding. However, while there are many specialised programmes, there is limited integration of biotechnology-related concerns in horizontal policies. The various public bodies with advisory or surveillance roles are, first, the Norwegian Biotechnology Advisory Board, whose main task to evaluate the social and ethical consequences of modern biotechnology and to discuss use that promotes sustainable development. Second, the Technology Board has the more general aim of addressing technological issues in all areas of society. There are also national committees on research ethics, with advisory roles, including a committee on medical research ethics. The RCN has also initiated a research programme entitled Ethics, Society and Biotechnology, which aims to contribute to building competence in ethical, judicial and social aspects of modern biotechnology



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The total 2001 public expenditure on biotechnology R&D was estimated at EUR 85 million. Public expenditure represents about 40% of total R&D expenditure. Biotechnology expenditures were split about equally among higher education, industrial and institute sectors. The Norwegian Cancer Society (NCS), a national voluntary organisation, funds a significant amount (EUR 17 million in 2002) of basic research in Norway.

Key drivers and barriers Innovative activities of firms and research organisations are largely determined by framework conditions. Those of particular relevance to a newly emerging biopharmaceutical industry are the availability and cost of knowledge, of well-trained human resources and of finance and also the general regulatory framework. Like many other countries, Norway has struggled with the problem of decreasing student cohorts in the life sciences. However, the merger between Nycomed and Amersham in 1997 resulted in the creation of a surplus of well-educated researchers, a labour surplus which played a part in the formation of dedicated biotechnology firms in the late 1990s. The long-term viability of biotechnology depends to a great extent on the availability of venture capital until dedicated biotechnology firms become commercially viable. The European Biotechnology Innovation Scoreboard 2002 shows that Norway raises about half as much venture capital as the EU average (0.0054% of GDP was invested in biotechnology in 2001) and much less than other Scandinavian countries. The inability to raise venture capital is one of the most important weaknesses of the Norwegian biotechnology innovation system, especially as many of the dedicated biotechnology firms are not yet commercially viable. In interviews respondents were concerned about the ability of biotechnology start-ups to obtain public grants in the early phase of their innovation activities, but in most cases research in the following phases must be financed from private sources. During the last two years it has been difficult to raise venture capital, and this creates further uncertainty for firms’ development. The regulation of biotechnology is characterised by special legal and moral standards which are basically identical to EU regulations. Amendments instituted in 2003 have, however, made the regulations stricter than elsewhere, for example by prohibiting stemcell research. Interviewees suggest, however, that regulation has actually had little impact on the types of research so far undertaken by biopharmaceutical firms and research institutes in Norway. The survey results show that biopharmaceutical firms face considerable barriers. Access to capital appears as the most important obstacle, followed by human resources and risk. Perhaps the most important trend is the apparent increase in economic obstacles in the period 1999-2003, whereas the public perception of biotechnology has improved.

Systemic failures and policy implications Systemic failures This section first reviews specific issues that may be perceived as systemic failures before turning to a more analytical discussion of policy implications. In spite of the relatively large number of new entrants to the private enterprise system in recent years and their ability to specialise and participate in large international projects, many have not yet become mature, market-oriented firms. The post-1997 generation of firms has launched some products, but has a far greater proportion of product candidates INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

92 – SUMMARY OF COUNTRY STUDIES still in the pipeline. This may be understandable in view of the long development period needed, but an unavoidable issue is whether firms with feasible products-in-process will survive until they are able to launch the products themselves or present their projects as viable potential products to customers. The firms remain small, few are profitable, their R&D projects are limited by their budgets and their patenting intensity is still low. Survey respondents reported that the dedicated biopharmaceutical enterprises lack sufficient managerial skills and do not design proper business plans. Although the dedicated biotechnology firms appear to be innovative and develop new products, the survey also indicated that the lack of well-trained human resources and limited access to capital were two of the most important obstacles to the commercialisation of biotechnology, and that these obstacles became more pronounced after 1999. The percentage of students choosing the life sciences was well below the European average in 2000, which does not augur well for any expansion of the industry. In the second half of the 1990s around 80% of all contributions to the biopharmaceutical research literature came from universities. However, institutional support for technology transfer activities from universities to the private sector, such as establishing spin-offs or mediating licensing agreements, has been very limited. Recent (2003-04) reforms address this problem. Recent research programmes may improve the level of the basic research disciplines underlying functional genomics. Many dedicated biopharmaceutical firms encounter increasing difficulties for raising capital after the start-up phase. Investors seem to be increasingly reluctant to invest in biotechnology firms that are not yet able to generate significant turnover. As a consequence, financial insecurity after the start-up phase will likely put the industry in jeopardy. Inconsistencies in public policies relevant to biotechnology sometimes occur because several Norwegian ministries develop policies without proper co-ordination. The government has not yet provided a joint plan to remove these inconsistencies. At the same time there appears to be a lack of co-ordinated efforts to protect intellectual property rights, with the universities being relatively autonomous in developing their own policies. This has resulted in too many underdeveloped and often ineffective IPR policies. There are also too many policy actors doing similar things, including governmental, nongovernmental and other initiatives.

Policy implications To determine what policy implications may be specific to the biopharmaceutical sector and the extent to which innovation policies should be customised to meet the particular needs and features of the biopharmaceutical innovation system, it seems necessary to do so on the basis of an assessment of the firm population concerned. Various studies have categorised firms in the biopharmaceutical sector in various ways. One is the somewhat rough division, which is used here, between diversified and dedicated firms. A slightly more nuanced way of separating different types of firms is to distinguish between dedicated biotechnology firms, traditional pharmaceutical companies marketing drugs developed by biotechnology firms, and a specialised tier of companies serving both the pharmaceutical and biotechnology industries with platform technologies that can speed up the drug discovery process or improve drug delivery. It can be argued that there are essentially two different business models, each with its own dynamics and development patterns, and, hence, appropriate policy implications.



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“Type A firms” deal with incremental innovations, i.e. smaller projects. The risk level is low to medium. Such firms need to achieve and maintain profitability from an early stage, which forces them to limit the investments in R&D. The subsequent niche strategy avoids direct competition with larger firms. The firms require specific resources (cooperative or commercialisation networks, reputation or scientific visibility) to operate. Policies relating to such firms have to focus mainly on the start-up phase, since SMEs focusing on a market niche and conducting small research programmes will experience steady growth if they are able to reach financial equilibrium fairly quickly. “Type B firms”, which are most of those dealing with therapeutic biopharmaceuticals, aim at radical innovations. They undertake research-intensive larger projects targeting broader markets, which are feasible only when the downstream target market is broad (e.g. Genentech, Chiron, Millennium). The risk level is high, and exit may involve entering into a contract with a partner about rights to results, partnering when moving into the industrial and marketing phase, or achieving IPO independently. This business model requires specific resources (human resources on a continuous basis, access to scientific competencies and techniques developed by academic research, and access to capital markets, in addition to co-operative or commercialisation networks and reputation/scientific visibility) in order to operate. To develop, the firm has to convince specific kinds of financial partners. The policy implication is that policy must focus on follow-up as well as start-up, since SMEs embarking on large research programmes in partnership or competition with major companies can only develop when outside capital exists and venture capital firms participates. It appears useful to assess the Norwegian situation according to this more detailed categorisation. There is in the Norwegian context a significant overall dominance of Type A firms aiming at incremental innovation and a relatively quick market launch of products or services. The equipment and services segment is, not surprisingly, dominated by Type A firms. For therapeutic biopharmaceuticals, however, Type B firms dominate, although they are still in the first stages of development. There are three major Type B firms which may not even altogether fit this scheme, since they have a product portfolio, have grown considerably, and behave more like independent pharmaceutical firms in their own right. On the basis of the above distinctions, the resource needs of Type A firms will mostly be related to co-operative or commercialisation networks and scientific visibility or reputation, and the policy target in terms of timing will mainly be the start-up phase. For Type B firms, the resource needs will generally be broader and mostly related to acquiring and developing human resources on a continuous basis, to access to scientific competencies and techniques developed by academic research, and to access to capital markets. The main policy target in terms of timing will be various stages of the follow-up phase in addition to the start-up phase. As the current public focus is predominantly on the start-up phase, the later phases appear undervalued in the current Norwegian policy context. Nevertheless, it should also be observed that the total number of firms is not large, and within the Type B firm population a large proportion of firms is still in the emerging phase. An overall concern should thus be to foster and maintain a critical mass of firms in order to benefit from cluster benefits. This applies to the needs of the Type B firms and to the emergence and maintenance of Norwegian biopharmaceutical innovation with Type B firms as main actors. It appears possible to summarise the four main factors in current and potentially persistent systemic failures in Norway as follows (see Figure 2.4): INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

94 – SUMMARY OF COUNTRY STUDIES • Absence of linkages between firms. • Lack of relevant human resources. • Lack of management skills. • Lack of commercialisation abilities.

Figure 2.4. Factors relevant for linkages facilitation policy Human Resources

Science base

Commercialisation

Management

Assuming that the scientific basis is adequate, the crucial policy implication is to focus on the need for facilitating linkages between each of the middle two factors, with the aim of enabling commercialisation of innovative products. Linkages between firms may be relevant in terms of R&D or in connection with other collaboration efforts in order to compensate for the lack of large domestic firms, as well as the lack of critical mass. Such potential linkages are relevant in the case of domestic biopharmaceutical firms and foreign pharmaceutical firms with activities in Norway. Linkages of another type may be conceivable, namely linkages between the dedicated biopharmaceutical firms and domestic firms within Norway’s marine biotechnology sector. Although these are quite different in many respects, there might nevertheless be synergy effects from limited and carefully targeted linkages. Also, a considerably different type of linkages might materialise if the conditions are present, namely linkages between domestic, dedicated biopharmaceutical firms and domestic “national champions” in entirely different businesses (e.g. oil drilling, mechanical engineering). The role of policy makers then becomes to evaluate the feasibility of facilitating such types of linkages and subsequently to act as facilitators for developing and maintaining selected linkage patterns. Lack of management skills and human resources are two input factors which correspond, on a more aggregate level, to several of the systemic failures reviewed above. Science-based firms often lack management skills, and there is thus a need for policies that facilitate learning and knowledge transfer between firms. Indeed, programmes to this end have been directed at SMEs. Learning by way of linkages can supplement such programmes. Acquisition of management skills in a wide sense is especially relevant to INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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the firms dealt with here owing to the fact that biopharmaceutical firms are outside the main “locked-in” framework of the Norwegian national system of innovation, which is centred on oil-related and mechanical engineering businesses. Linkages to firms within this network may thus result in important assets for the firms in the form of personal contacts, in addition to the learning outcome. In the case of human resources, there is, for reasons explained above, adequate or even surplus labour, but a shortage will inevitably occur in the medium or long term. Indeed, direct policy measures to facilitate an increase in life science graduates or the immigration of specialist labour may be warranted. However, cross-cluster networking between biopharmaceuticals and the traditional industries, as well as between therapeutic biopharmaceuticals and diagnostics, may be valuable and result in cross-sectoral mobility of labour which has hitherto been virtually non-existent. The main goal of favouring such linkages is obviously the need to increase the probability of commercialisation. There are, in quantitative terms, more products at the planning stage or in the pipeline than already launched. There currently seems to be a vicious current leading from a lack of products on the market to a lack of confidence among investors. This is especially so because investors may tend to think in terms of earlier Norwegian “blockbuster products”, such as X-ray and ultrasound agents and the Ugelstad beads. If increased likelihood of commercialisation is the goal, the main guiding issue for Norwegian policies is to construct and maintain a critical mass (i.e. construct and maintain a biopharmaceutical system). In such a context, it may be useful to think in terms of linkages such as outlined here.

Spain Spain occupies, together with Portugal, the Iberian Peninsula (580 825 square kilometres, of which Spain occupies four-fifths). The Spanish population is 41 million and demographic growth has been very low over the past years. Following Spain’s accession to the European Community, the Spanish labour market was characterised by a high rate of job creation in a period of rapid economic expansion (1986-90). Nearly 2 millions new jobs were created, resulting in an average 400 000 net new jobs a year. The 2001 survey of the working population showed 17.8 million in the labour market, with 16 million employed and 1.8 million unemployed. As regards territorial distribution, there is a strong concentration in four Autonomous Regions: Cataluña, Andalucia, Madrid and Region of Valencia.

National biotechnology policies The Law 13/1986 (Ley de Fomento y Coordinación General de la Investigación Científica y Técnica) established the Plan for Scientific Research and Technological Development to promote and co-ordinate scientific and technical research. The main areas of interest in the National Plan for R&D relevant for this study are: Biomedicine: This area comprises all the research fields based on biology, biochemistry and other related disciplines which seek to solve health problems. Biotechnology: Spain’s opportunities to benefit from this emerging, horizontal technology depend on at least two conditions: it must continue to encourage the scientific


96 – SUMMARY OF COUNTRY STUDIES community to perform high-quality research and to develop a solid entrepreneurial structure able to carry out important efforts in the area of technological innovation. Socio-sanitary area: A concept of health based on a perspective including physical, mental and social aspects implies a great variety of initiatives. The attainment of such broad goals can be achieved through health policies which address prevention, cure and rehabilitation. The relevant instruments are a series of national programmes such as the National Programme for Biotechnology and the National Programme on Health. The programme of general measures of public support for pharmaceutical research is the Plan Profarma, the programme to promote R&D activities in this sector. Funding of further steps in the innovation pipeline remains the responsibility of the CDTI (Centro para el Desarrollo Tecnológico Industrial). This line of public funding of firms allocates credits with zero interest rate and a long pay-off period. The total budget of CDTI, with contributions from 33 financing entities, rose to EUR 220 million by December 2003. Every firm established as a commercial entity can request financing for new investments or for improvements in the firm’s technology. Though the decision is shared, the projects require a previous positive evaluation from CDTI and have to meet certain conditions and limits. Collaboration between industry and the public sector has increased since 2001. In 2001, the pharmaceutical industry signed an Agreement on Collaboration for the Promotion and Development of Scientific and Technical Research in the Field of Public Health with the Ministry of Health. EUR 33.06 million was allocated to foster and develop plans, programmes and activities of scientific research through the Health Institute Carlos III (ISCIII). The most significant event of the collaboration between industry (through the Employers Association, Farmaindustria) and the Ministry of Health was the signature in 2001 of an Agreement for the Elaboration and Performance of an Integral Plan on Control Measures of Pharmaceutical Spending and Rational Use of Drugs for the period 2002-04. This agreement constitutes a pact for stability and innovation to benefit citizens and received funding of EUR 1.35 billion, which should be supplemented by EUR 300 million to fund research projects performed by public institutions on public health topics of general interest. The ISCIII promotes biomedical research through grants. The grants fund both extramural and intramural projects.

Structure and dynamics of the national biotechnology system The R&D system The main public (governmental) authority involved in R&D, innovation and technology policies is the Ministry of Science and Technology (MCYT), although the Ministry of Health and Consumption (MSYC) also plays a role, particularly in the biomedical realm. Some public institutions deeply involved in the development of scientific research and technological development deserve special mention. Among these institutions the CSIC (Consejo Superior de Investigaciones Científicas) of the Ministry of Science and Technology should be mentioned first. It can be considered the main representative of the public research bodies in Spain and a basic element of the public research system. CSIC fosters many linkages with administrations (state, regional and local) and with other research institutions, whether public or private (universities, research centres, businesses) with a view to collaboration on joint projects. An Office for Technology Transfer aims to make a bridge from the knowledge produced in CSIC centres and institutes and the eventual technological assets to all socioINNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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economic sectors at both national and international levels. Its main goal is to transform the capacities and skills of CSIC human resources into economic, social and cultural wealth. The CDTI (Centro para el Desarrollo Tecnológico e Industrial) is another important body in the public science and technology system. It is a public body assigned to the Ministry of Science and Technology whose aim is to help Spanish businesses to carry out R&D and innovation projects. CDTI funds projects proposed by firms irrespective of their sector of activity and dimension. The amount of funding fluctuates between EUR 240 000 and EUR 900 000, and covers capital assets, personnel involved in the project, material and other costs. Another organisation of importance is the already mentioned ISCIII. It is an autonomous public organisation under the Ministry of Health and Consumption. Its mission is to develop and offer scientific and technical services of the best quality to the National Health System (Sistema Nacional de Salud, SNS) and to society in general. The ISCIII is ruled by the Law 13/1986 (popularly referred to as the Law for Science), the Law 14/1986 (Ley General de Sanidad) and its statute approved by the Royal Decree 375/2001. Other public organisations of particular interest are: CIEMAT (Centro de Investigaciones Energéticas, Medioambientales y Tecnológicas), IMIM (Instituto Municipal de Investigaciones Médicas), CNIO (Centro Nacional de Investigaciones Oncológicas), INIA (Instituto Nacional de Investigación y Tecnología Agraria y Alimentaria) and IRTA (Instituto de Investigación y Tecnología Agroalimentaria). In the Basque Country there are also relevant semi-public institutions. One is IKERLAN (Centro de Investigaciones Tecnológicas) which specialises in mechatronics. Law 13/1986 (Ley de Fomento y Coordinación General de la Investigación Científica y Técnica) established the National Plan for Scientific Research and Technological Development as the instrument to promote and co-ordination scientific and technical research and created CICYT (Comisión Interministerial de Ciencia y Tecnología), the Interministerial Commission for Science and Technology as the body for planning, coordination and monitoring of the National Plan.

The business system One of the first studies on the biotechnological business sector was carried out in 1999. It found that the business subsystem of biotechnology in Spain did not fit the model based on spin-off and start-up companies alone. Three subgroups of companies were identified: companies clearly dedicated to biotechnology, companies partly dedicated to biotechnology and companies that use biotechnology. An empirical analysis was carried out using a sample of 20 firms, of which 25% were micro firms (with fewer than ten employees), another 25% were small companies (10-50 employees), and 20% can be considered medium-sized companies (50-250 employees) while the remaining 30% were big companies (over 250 workers) (Table 2.14). The first two groups, micro and small businesses, fit the profile of the newly created biotechnological firms (NBF) that have arisen in the last years as a result of the evolution of biotechnological activity. The other two groups are examples of traditional pharmaceutical companies’ diversification into biotechnology.


98 – SUMMARY OF COUNTRY STUDIES Table 2.14. Characteristics of the Spanish biopharmaceutical sector by firm size Micro firms

Small firms

Medium-sized firms

Large firms

Fewer than 10 employees

10 to 50 employees

50-250 employees

More than 250 employees

Patents, 1991-2001

1.50

2.25

7.0

33.4

Biotechnology production

1.0

19.5

0.75

2.20

Total sales 2001 (EUR millions

212.6

6.0

39.0

261.0

Sales in biotechnology activities, 2001 (EUR thousands)

162.0

5.0

9.6

8.4

R&D expenditures (% of total sales

58.5%

78.0%

48.0%

7.0%

Total salary cost EUR thousands

136.2

653.0

7.3

42.1

Human health products In market In development

0.50 3.50

18 20.67

44.5 24.25

18.2 13.6

Animal health products In market In development

0 0

0 0

0 0

5 4

Total other products

12.0

16.5

0

0

Total strategic alliances in biopharmaceutical sector

4.0

8.0

4.0

30.83

Age of firm (years)

4.20

7.8

42.5

70

Source: Own survey data.

NBFs invest a higher share of their sales in R&D activities and have a larger number of biotechnological products on the markets. The medium-sized and large companies are beginning to apply biotechnology as a tool for the discovery and development of new drugs. It is worth emphasising that large companies allocate a small share of their sales to research activities. The main reason is that most are subsidiaries of big multinational companies whose research activities are carried out either in their country of origin or in locations outside of Spain.

Demand system There are a number of actors in the health system. Among them are patients’ associations, medical or professional societies, foundations/non-profit organisations, etc. Among the patients’ associations, the most prominent are those of patients suffering from specific diseases, although none has played a very active role in the innovation process. Their general mission is to give advice to patients as well as to their families on the disease, its potential treatment and secondary effects, as well as initiatives to improve the quality of life of both patients and their relatives. The scientific and medical societies also play a limited role and focus their activities on promoting the dissemination of scientific and technical knowledge through seminars, congresses, scientific meetings and publication of bulletins and reports. A minor role is played by private firms involved in medical care. The Sanitas foundation deserves particular mention; it promotes research and medical and public health education by means of fellowships, grants to research projects, scientific publications, etc.



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Key drivers of and barriers to in biotechnology innovations in industry Factors that favour and hamper the innovation process can be derived from qualitative information gathered from a group of experts and some representative companies in the sector.

Drivers • The availability of a good scientific community. It is well known that Spain has a good scientific base in terms of internationally recognised qualified scientists and good support personnel. One supporting indicator is the number of publications by Spanish researchers. For the period 1999/2000, Spanish researchers had 679 publications per 1 000 researchers, a figure slightly higher than the European average (619), and surprisingly 30% higher than the figure for Germany (525). Among the countries studied, only the Netherlands (923) and United Kingdom (891) show higher performances. For publications in the specific field of biopharmaceutical sciences, Spanish publications doubled in the period 1994-2001, from 438 in 1994 to 936 in 2001. Moreover, Spain’s contribution to the EU total has grown from 5.5% of EU biopharmaceutical publications in 1994 to 7.2% in 2001. • The existence of a variety of policies and tools aimed to promote innovation processes (National Plan on R&D, Profit Programme, Torres Quevedo, etc.). • The implementation of a number of tools aimed at improving the relationship between the public and the private sectors. Initiatives to foster collaboration between public centres of excellence and industry to carry out co-operative projects are in the initial phases. • The adoption and development of bioincubators. The establishment of technological parks and bioincubators has helped the innovation process. A technology park provides a number of facilities that stimulate the creation and growth of innovative businesses. It also affords an ensemble of services that facilitate the technology transfer process between the universities, research centres and firms. These local infrastructures foster the creation and development of knowledge-based businesses. They may also promote synergies between different companies settled in the location as well as access to the knowledge capacities and skills of the university and its personnel. The Scientific Park of Barcelona offers a good example of this type of initiative which is now being followed by the Scientific Park of Madrid located at the Autonomous University of Madrid as a joint venture with the Complutense University and CSIC. There are also interesting initiatives in the Basque Country. There is an interesting case of a bioincubator in Madrid located in an industrial park near Madrid (Fuencarral) named Vivozonia which deserves attention. Vivozonia has been the venue for an interesting initiative created some years ago by the Spanish Society of Biochemistry and Molecular Biology (SEBBM). This initiative, called “La empresa puedes ser tú” (you can be your own company), took place for the third time in 2003 with the aim of driving the “creation of biotechnological businesses”. • More efficient technology transfer by technology transfer offices. • The emergence of small research-based firms that provide value added by means of services to large companies. These firms are involved in clinical trials of biopharmaceutical products.


100 – SUMMARY OF COUNTRY STUDIES • The development of collaborative initiatives between biopharmaceutical companies. Through a culture of collaboration firms are coming together to share risks and R&D expenses. • Steps towards greater flexibility of the full-time concept for researchers in the public system. • Increasing interest of public-sector researchers in opening their research to interaction with other actors. • The existence of fiscal legislation to give incentives to scientific research. • The G10 recommendations to foster R&D in Europe. • The “Agreement for Stability and Innovation” signed by MSYC and Farmaindustria.

Barriers • The uncertainty of the processes involved. (Bio)pharmaceutical R&D has two main features. The process is both long (it generally takes 10-12 years to bring out a new product) and it is uncertain. When a company starts an R&D project it is impossible to know if, at the end, it will have a possible new product. • The traditional lack of a research culture among decision makers in Spain. • The scarcity of public funds to finance R&D processes. • Administrative inflexibility in terms of accountability and the financial rules underlying governmental programmes to fund research projects. This inflexibility makes the situation for small firms extremely difficult. • The absence of a “culture of patenting”. Spain has a very low propensity to patent. About 15-20% of North American patents related to biotechnology are supported by research carried out in Spain by Spanish researchers. There is a need for a change in the reward system of public researchers. The current system favours publication but not patents. • The increase in the cost of research, and in the biopharmaceutical sector in particular. Recent estimatesgive EUR 900 million as the average cost to make a new drug. • The increase in the cost of technology transfer as a consequence of professionalism. • The inadequate size of Spanish companies. No Spanish firm can cope alone with the very high costs of the innovation process. • The absence of ad hoc regulations to promote the development of an industrial network. • The lack of specific regulations and norms for small firms based on biotechnology. • The absence of determined government action to promote the industrial sector hampers the consolidation of research processes and initiatives. • The absence of an auxiliary industry to accompany and help develop scientific knowledge.



101

• An excellent national health system with a high level of service cover that makes it extremely costly. This leads to pressures on expenditure and restrictions. This environment reduces the possibilities to favour R&D initiatives. • Public intervention in the pricing of biopharmaceutical products.

Systemic failures and policy implications Missing or inappropriate functions in the system of innovation Spain has a relatively favourable position in terms of production of knowledge but there are difficulties for adequately applying the knowledge produced. The number of researchers, which had been lower than in other countries, grew significantly during the period 1990-2001. During this period, the number of R&D personnel (full-time equivalent) rose by more than 80% to reach 0.7% of the labour force in 2001. More specifically, the number of researchers grew even more rapidly, more than doubling during the period under examination to reach 0.45% of the labour force. In sum, there is a good scientific base in Spain, although linkages for transferring knowledge for application by business are unsatisfactory. Apart from the deficiencies of the business system, which will be discussed below, there may be deficiencies in the scientific system itself for any of the following reasons: • Spanish scientists work with limited resources and infrastructure in a highly competitive world. • The programmes of Spanish teams may be either too conventional to reach international excellence or, alternatively, too sophisticated to be understood and applied by the Spanish business system. • The Spanish teams may lack “critical mass” to solve high-level scientific problems.

Missing or inappropriate actors in the system of innovation The small size of the Spanish (bio)pharmaceutical sector represents a great handicap for its consolidation. Micro firms and small companies compose half of the sector. This implies a strong need for financial, technological and human resource support if they are to carry out research and develop and consolidate satisfactorily. Financial support can be improved by specific policies and programmes aimed at mitigating the high costs of (bio)pharmaceutical R&D projects. Technological support can be improved by creating adequate infrastructure and the establishment and development of technological parks and bioincubators may be an important asset for the creation and evolution of innovationbased enterprises. In relation to the critical issue of human resources and their availability for this type of firms, it should be emphasised that small companies find it difficult to hire high-level researchers mainly owing to the high salary costs to the company and problems of compatibility between public research (civil servant statutes) and private activities. Some steps have been taken towards solving these problems. The programme Torres Quevedo promotes the hiring of PhD researchers, through the state administration’s contribution to the company’s salary costs. Spanish society is calling for greater flexibility in transferring human resources between the public and private sectors but there is no easy solution. Spain lacks an entrepreneurial culture. Spanish society is “risk averse”, and this conservative position is hard to change in view of the prevalence of precarious labour INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

102 – SUMMARY OF COUNTRY STUDIES market relations. Obviously, the firms involved are both new and small, and this also hampers the system’s openness. Taking into account the characteristics of the Spanish pharmaceutical and the (bio)pharmaceutical sector in particular, it is difficult to promote internationalisation and co-operation with foreigners. Efforts are being made in this respect by the Spanish Association of Biobusinesses (ASEBIO), by the Fundación Genoma (a semi-public agency established by the Spanish government to promote the development of biotechnology in Spain) and in collaboration with the Institute for Foreign Trade (ICEX) but continuing efforts are needed.

Missing or inappropriate interactions in the innovation system Failures associated with the weak links between the university and the entrepreneurial realms are endemic. Programmes and schemes have been put in place over the last decades with some success. Continuous evaluation of these initiatives and reshaping based on the outcomes of the evaluation seem pertinent.

Missing or inappropriate institutions in the system of innovation, including framework conditions During the two last decades, Spain has made significant efforts to establish policies and launch programmes to promote the development of the biotechnology sector. The National Plan for R&D and Innovation, with specific instruments such as the National Programme for Biotechnology and the National Programme for Health, has helped to promote knowledge production in this sector. A fiscal policy allowing tax deductions for private investments in R&D and innovation activities has been attracting the interest of firms in increasing their efforts to promote biotechnology. The Stability Agreement, signed in 2002 between the pharmaceutical sector and the Ministry of Health and Consumption (MSYC), has played an important role in creating the environment of trust that can foster research and innovation. However, this may change because the Spanish government is developing a policy to reduce public pharmaceutical expenditures, which is creating controversy with the pharmaceutical industry. In any case, it seems evident that the positive evolution of the (bio)pharmaceutical industry requires an adequate environment built around three key factors: • An adequate and stable regulatory framework able to secure investment in R&D. • A market with sustained growth. • The generation of an appropriate environment to foster innovation.

Conclusions A series of interviews with managers of the main Spanish (bio)pharmaceutical companies and with a group of experts suggests the following conclusions regarding systemic failures: • The lack of active instruments for achieving effective knowledge transfer between the public and private sector induces a failure to create linkages. If these linkages were more robust and effective, innovation activities in Spain would increase. • The lack of clear, focused and determined government policies to foster innovation. There is a need for real prioritisation of R&D and innovation activities by the government. Governments must promote the system.



103

• While the last two decades have witnessed the implementation of several measures and instruments to promote innovation and create a culture of innovation, the outcomes remain poor. The policies and programmes appear to be insufficient and inefficient. If a strong argument for such activities is not made, Spain will continue lag behind in the innovation race. Europe will also have difficulties attaining the goal of the European Council of Ministers (March, 2000) and the Barcelona Council (March, 2001) to make Europe the world’s most competitive economy based on knowledge and an investment of 3% of GDP in R&D. • There is an evident need to increase investment in the public research system. Public institutions play an important role in the system’s positive evolution, and they are totally dependent on government policies and the general budget. • The lack of linkages between academia and industry hampers the application of many academic innovations to the objectives of the enterprises. The technology transfer offices have helped to improve the situation, though the results are not yet sufficient to overcome the Spanish deficit in this area. • There is an inadequate R&D culture. It is still generally believed that money allocated to R&D activities represents expenditure rather than investment. A change in this way of thinking seems imperative. It has started but a faster pace seems essential. • Promotion measures to foster the profile “researcher-entrepreneur” are needed. Public-sector researcher requirements create hurdles both for creating their own enterprises and for working in them. New measures to foster flexibility are required in order to accelerate the creation of businesses based on biotechnology. • There is a lack of entrepreneurial culture in Spain. Spaniards are not prone to undertake entrepreneurial initiatives as they prefer to be employees or civil servants. In addition, business failures are considered as irreversible and a one-way street with no return. • The absence of seed capital and the absence of a sufficiently developed venture capital market. Because the Spanish venture capital market is quite small, it is difficult to foster innovation initiatives. • Mechanisms to protect innovations are inadequate. Business calls for a modification of the duration of patent protection. The 12 years of protection appear insufficient to allow companies to recover their R&D investments. • The absence of an industrial web and the lack of R&D promotion in the industrial sector. The small size of the Spanish (bio)pharmaceutical sector impedes the achievement of synergies between firms. • Spanish public opinion calls for more and clearer information on biotechnology. The positions taken by the public differ depending on the topic. Those responding to the survey considered application of genetic engineering to medical treatment the most acceptable, followed by the diagnosis of diseases. The least valued application is livestock fattening. • Some government policies have developed instruments to facilitate innovation while others have served as barriers. Fiscal regulation in relation to innovation clearly encourages firms to innovate. Another factor that helped promote scientific research in Spain was the design and launching of the National Plan for R&D in 1986. However, the exhaustive and demanding regulations for the authorisation of a new INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

104 – SUMMARY OF COUNTRY STUDIES biopharmaceutical product, for advertising it, public intervention in prices (established and regulated by the MSYC) and problems with legal protection offered by patents, etc., are not geared to supporting such innovation. • In addition, specific policies targeting small biotechnology-based companies are needed in order to foster their development, diminish the management hurdle and introduce greater dynamism and flexibility into the system.

References Mangamatin, V. et al. (2003), “Development of SMEs and Heterogeneity of Trajectories: The Case of Biotechnology in France”, Research Policy, Vol. 32, pp. 621-638. OECD (2002), Dynamising National Innovation Systems, OECD, Paris.


COMPARISON OF PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS –

105

Chapter 3 Comparison of Performance in National Biopharmaceutical Innovation Systems

The performance of the national biopharmaceutical innovation systems in the countries participating in this Case Study in Innovation is analysed mainly along three dimensions. First, scientific performance and the performance of the higher education system are explored. Next, performance is analysed in terms of innovative activities. Finally the performance of the industrial system is explored. Performance data for these three areas are combined in an overall assessment of the performance of the national biopharmaceutical innovation systems. The analysis is based on various output indicators derived mainly from bibliometric and patent data. In addition, data in the national reports on the activities of the biopharmaceutical industry as discussed. The performance analysis covers the eight participating countries and the United Kingdom. For purposes of comparison, data on the United States and OECD or European averages are sometimes included.


106 – COMPARISON OF PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS Scientific performance and performance of higher education systems In all participating countries scientific output in biopharmaceuticals, as measured by number of publications, increased considerably between 1994 and 2001 (Figure 3.1). Growth rates in biopharmaceuticals were well above the general growth rate for publications for all countries (Table 3.1). Not surprisingly, the larger countries (Japan, Germany, the United Kingdom, France) contributed the most publications. Spain had the highest growth rates between 1994 and 2001 not only for biopharmaceutical publications but for all publications. It was followed by Germany, Norway, Belgium and Japan which all presented annual growth rates in biopharmaceutical publications above the European and the OECD average. The United Kingdom, the Netherlands, Finland and France as well as the United States experienced below-average growth in this period. Figure 3.1. Number of publications in biopharmaceuticals, 1994-2001 4 000 Japan 3 500 Germany 3 000 United Kingdom 2 500

France

2 000

1 500

Netherlands 1 000 Spain Belgium 500 Finland Norway 0 1994

1995

1996

1997

1998

1999

2000

2001

Source: Science Citation Index (SCI) via host STN, searches and calculations by Fraunhofer ISI.

To compensate for country size, biopharmaceutical publications are related to population figures. The resulting indicator of biopharmaceutical publications per million population puts the smaller countries (Finland, the Netherlands and Belgium) in a leading position at the end of the 1990s (Figure 3.2). Norway, another smaller country, is positioned well behind. Among the larger European countries, the United Kingdom performed best, slightly better than the United States. The position of Germany and France is similar and above the European average. Spain and Japan, on the other hand, did not achieve the European average at the end of the 1990s. A comparison of performance between 1994/95 and 1999/2000 indicates that Finland and the Netherlands



107

maintained their leading position and that Belgium and Germany made the largest improvements. Table 3.1. Annual growth rates of biopharmaceuticals and total publications, 1994-2001 Annual growth rate (%) Biopharmaceutical publications

All publications

Spain

11.5

6.8

Germany

10.3

3.8

Norway

9.6

3.6

Belgium

9.6

3.9

Japan

8.3

3.3

World

7.3

2.0

EU

7.2

2.8

OECD

7.0

1.9

United Kingdom

6.5

1.8

Netherlands

6.3

2.1

United States

6.2

0.5

Finland

5.9

4.5

France

5.9

2.4

Source: Science Citation Index (SCI) via host STN, searches and calculations by Fraunhofer ISI

Figure 3.2. Biopharmaceutical publications per million population, 1994/1995 and 1999/2000 1999/2000

1994/95

160 140 120 100 80 60 40 20

W or ld

Sp a in

D OE C

Ja pa n

EU

Fr an ce

Ge rm an y

No rw ay

Un

ite d

St ate

s

ng do m Ki

um Un ite d

Be lgi

ds Ne the rla n

Fin lan

d

0



108 – COMPARISON OF PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS In order to assess the efficiency of the various research systems in terms of scientific output, publication figures were also related to the number of researchers in each country (Figure 3.3). Unfortunately, statistical data are not available on the number of researchers in the biopharmaceutical subsector or even in the pharmaceutical sector. Hence, publications had to be related to each country’s total number of researchers. The following data therefore should be interpreted with caution because they can be influenced by different national specialisations. Again, smaller countries, in particular the Netherlands and Belgium, but also Finland, are the most efficient. The United Kingdom is the only larger European country whose efficiency is above the European average. Finland is the only country where the efficiency indicator dropped between the middle and the end of the 1990s. Spain, France, Germany and Norway performed above the OECD average but below the European average. The American research system seems to be less efficient than the European system. Among the participating countries, Japan is positioned at the lower end of the ranking list.

Figure 3.3. Biopharmaceutical publications per 100 researchers (FTE), 1994/1995 and 1999/2000 1999/2000

1994/95

50 45 40 35 30 25 20 15 10 5

Ja pa n

OE CD

No rw ay

es dS tat Un ite

rm an y Ge

Fr an ce

Sp ain

EU

an d Fin l

dK ing do m

ium

Un ite

Be lg

Ne th

er lan

ds

0


The contribution of different types of actors to overall publication output in biopharmaceuticals is analysed to gain deeper insight into the structures and functions of the various national biopharmaceutical innovation systems (Figure 3.4). Universities contribute by far the most to the generation of scientific knowledge in all countries, a contribution that universities increased in all countries between 1994 and 1999. Spain is a INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


109

special case in that hospitals also contribute significantly to overall publication output. Hospitals play a lesser role in other countries. Industry plays a minor role: in most countries the pharmaceutical and biotechnology industries provide less than 5% of all publications. In Japan industry plays a more important part in terms of publication output. Figure 3.4. Contribution of different actor types to biopharmaceutical publications, 1994 and 1999 University 100%

PSRO (1)

Other (2)

1.5 6.6 13.9

80%

Hospital

6.5

5.2

4.6

11.0

13.5

4.4 11.0

5.5 11.0

6.1 2.3

10.2

3.4

6.7

8.9

13.7 10.5

8.6

8.3 7.8

6.7 5.8 8.5

4.0

2.8

13.8

12.3

2.6

4.2

7.3

28.6

29.6

7.4

60% 90.0 40%

73.0

72.4

76.5

79.0

79.6

80.6

68.5

1994

1999

1994

1999

1994

1999

80.1

77.1 56.0

52.3 20%

0% 1994

1999

Germany

1994

1999

Spain

1994

1999

Finland

Japan

Netherlands

Norway

1. PSRO: public sector research organisations. 2. Including pharmaceutical and biotechnology firms as other actors. Source: SCI Science Citation Index (SCI) host STN, searches and calculations by Fraunhofer ISI.

In addition to the scientific output in biopharmaceuticals, data on publication activities in biotechnology from the Biotechnology Innovation Scoreboard of the European Commission 2003 were examined. These data are relevant because they include research activities in the biomedical area, although they also cover scientific activities in areas such as agriculture, food, chemicals or environment. Nevertheless, the data shown in Figure 3.5 basically confirm the above observation: the smaller European countries generally present the best performance as measured by publication intensity per million population, although the United Kingdom ranks second. The Biotechnology Innovation Scoreboard also analysed the impact of biotechnology publications as measured by citations per publication. Publications from the United Kingdom and Germany have the highest impact according to this measure, but Finland, the Netherlands, Belgium and France also perform above the European average. Publications from Norway, Spain and Japan, on the other hand, fall below the European average. The number of higher-education graduates in the relevant disciplines at different qualification levels in the participating countries gives an indication of the performance of the higher education system. Relevant disciplines include medical sciences (ISCED1 72) and the life sciences2 (ISCED 42). At the master’s level (ISCED 5A) the 1.

International Standard Classification of Education.

2.

ISCED 42 includes biology, microbiology, biochemistry, biophysics, zoology.


110 – COMPARISON OF PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS United Kingdom produced the most health graduates in 1999, followed by Japan and Spain, which produced more health graduates at this level than Germany (Table 3.2). At the PhD level (ISCED 6), most health PhDs between 1998 and 2001 were in Germany, followed by Japan and the United Kingdom (Table 3.3). Germany, Japan and the Netherlands had the highest shares of health PhDs in all PhDs, indicating a strong specialisation. The United States and France appeared least specialised.

Figure 3.5. Publications in biotechnology per million capita in 2000 and citations to biotechnology publications between 1996 and 2000 Publications per million capita, 2000

Citations per publication in biotechnology, 1996-2000

160

10 9

140

Publications per million capita, 2000

7 100

6

80

5 4

60

3 40 2 20

Citations per publication in biotechnology, 1996-2000

8 120

1

0 in Sp a

an Ja p

y Ge rm an

EU

ce Fr an

wa y

Be lg

No r

ium

ds er lan Ne th

Un it

ed K

Fi nla

ing do

nd

m

0

Source: Biotechnology Innovation Score Board of the European Commission (2003).

Table 3.2. Health graduates at the master’s level (ISCED 5A) in selected countries, 1998-99 1998

1999

United Kingdom

42 224

45 248

Japan

25 604

26 053

Spain

23 765

24 472

Germany

22 275

22 490

Netherlands

14 077

14 560

France

7 896

6 824

Norway

7 390

6 719

Finland

3 154

3 796

2 286

2 398

Belgium th

Source: OECD Health Data 2002, 4 edition.



111

Table 3.3. Number of health graduates at the PhD level (ISCED 6) in selected countries, 1998-2001 Number

Share in all graduates (%)

1998

1999

2000

2001

1998

1999

2000

2001

Germany

8 774

8 142

8 618

8 339

35

33

33

34

Japan

3 370

3 559

3 876

4 173

34

32

32

32

United States

2 672

2 484

2 676

2 855

6

5

6

6

United Kingdom

1 510

1 560

1 627

2 001

14

14

14

14

Spain

1 316

1 196

1 283

1 295

22

19

21

20

Netherlands

647

675

n.a.

668

26

27

n.a.

26

France

n.a.

597

542

575

n.a.

6

5

6

Finland

274

301

327

337

16

17

17

19

Belgium

158

101

174

197

n.a.

n.a.

15

15

Norway

94

159

148

150

13

23

25

20

Source: OECD Education Database.

For the life sciences, data are only available for some of the participating countries and the United Kingdom (Table 3.4). On this basis, the United Kingdom, Germany and France produced the most PhDs in the life sciences between 1998 and 2001. Relating life sciences PhDs to all graduates at the PhD level, however, shows that among these countries only the United Kingdom and France seem to be specialised in the life sciences; Germany has a rather low ratio of life sciences PhDs to all PhDs. The Belgium higher education system seems to be the most specialised in the life sciences among the countries considered. Table 3.4. Number of life sciences graduates at the PhD level (ISCED 6) in selected countries, 1998-2001 Number

Share in all graduates (%)

1998

1999

2000

2001

1998

1999

2000

2001

United Kingdom

1 377

1 300

1 757

2 153

12.5

11.5

15.2

15.2

Germany

1 799

1 881

1 962

2 045

7.2

7.7

7.6

8.2

0

2031

1 564

1 656

n.a.

20.0

15.8

15.9

631

709

625

686

10.6

11.2

10.4

10.6

Belgium

-

-

479

343

n.a.

n.a.

41.8

26.0

Finland

109

91

113

115

6.4

5.3

6.0

6.4

France Spain

Source: OECD Education Database.

Innovative performance The innovative performance of the participating countries was assessed mainly on the basis of various patent indicators, on the assumption that patenting reflects innovative activities related to technology generation (see, for example, OECD, 1994).


112 – COMPARISON OF PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS The general trends in patenting activities of participating countries (Figure 3.6) indicate that in all countries the volume of patent applications in biopharmaceuticals increased considerably between the middle and the end of the 1990s. To put these figures into perspective, it should be noted that most patent applications in biopharmaceuticals originated from the United States which contributed 46% of all patents in 2000, while Europe had a share of 29%. The relative weight of the United States and Europe in terms of patenting activities in biopharmaceuticals is different from their weight in patenting in all technologies. Here Europe is the leading region with a share of 41%, while the United States counts for 33% (OECD Patent Database, 2003). This indicates the United States’ strong specialisation in biopharmaceuticals. Among the countries participating in the case study, the larger countries – Japan, Germany, the United Kingdom and France – contribute most of the patent applications in biopharmaceuticals (Figure 3.6). However, growth rates in the United Kingdom and France slowed at the end of the 1990s. To facilitate comparisons of patenting activities among the different countries, adjustments were made for country size (Figure 3.7). Belgium, followed by the Netherlands, had the highest relative patenting activities in biopharmaceuticals in 1999/2000. The United States falls between Belgium and the Netherlands. The United Kingdom and Germany present rather similar relative patenting activities. Finland, Norway, France and Japan form another group with comparable relative patenting activities, although at a lower level. Spain is at the end of the scale. However, changes in patenting activities between the middle and the end of the 1990s show that Spanish performance improved considerably. Only Norway and Belgium exhibited higher growth rates during this period, and patenting activities also grew considerably in Germany and the Netherlands. Figure 3.6. Biopharmaceutical patent applications at the European Patent Office (EPO), 1994-2000 800

700

Japan Germany

600

500

400

United Kingdom France

300

200

Netherlands Belgium

100 Spain Finland Norway

0 1994

1995

1996

1997

1998

1999

2000

Source: OECD Patent Database 2003, calculations by Fraunhofer ISI.



113

Figure 3.7. Biopharmaceutical patent applications per million capita, 1994/95 and 1999/2000 1999/00

1994/95

14

12

10

8

6

4

2

Sp ain

Ja pa n

OE CD

Fr an ce

No rw ay

d Fi n lan

ma ny Ge r

Ki ng

do m

ds lan

Un ite d

Ne the r

St ed Un it

Be lgi

um

ate s

0

Source: OECD Patent Database 2003, OECD Quarterly Labour Force Statistics 2003, calculations Fraunhofer ISI.

The following gives a more detailed analysis of patenting activities in some of the participating countries which takes account of the contributions of different types of actors to overall patenting output in biopharmaceuticals (Figure 3.8). In 1994, patenting activities in biopharmaceuticals were dominated in most of the countries by the pharmaceutical industry, which contributed, for example, 43% of all patents in Germany, 38% in Japan, 44% in Spain and 39% in Norway. Biotechnology firms, universities3 and public sector research organisations also contributed substantially to overall patenting. In the Netherlands, the system’s configuration is different: more types of actors contribute similar shares to overall patenting output. In particular universities play an important role, comparable to that of the pharmaceutical industry. Owing to the specific properties of German and Finnish patent legislation,4 private persons appear to make the most important contribution to German and Finnish biopharmaceutical patenting. Comparing 3.

Germany’s patent legislation which previously granted a so-called “professor privilege”, according to which the university inventor and not the university owned the patent. In the patent statistics these inventors were classified as private persons. Therefore, a realistic picture of the role of universities could be obtained by combining the figure for private persons with the figure for universities. In 2002 the legislation was amended to transfer responsibility for patenting from the inventor to the university which can decide whether it wants to file a patent application or leave it to the inventor. Inventors receive 30% of the compensation profit.

4.

Germany, as noted above, and Finland present special cases with respect to patent legislation. In Finland, employees, rather than organisation they are employed by, are generally given rights of ownership of intellectual property.


114 – COMPARISON OF PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS the structure of patent applications between 1994/1995 and 1999/2000 reveals dramatic trends in all countries considered. The weight of the pharmaceutical industry declined (its share of patent applications dropped from 44% to 11% in Spain and from 39% to 9% in Norway). At the same time other types of actors, in particular biotechnology firms, universities and public sector research organisations, became more important producers of technological knowledge as indicated by patent applications. This comparison suggests that important reconfigurations took place in the various national innovation systems. Figure 3.8. Contribution of different actor types to patent applications in the biopharmaceutical sector Pharmaceutical firms 100%

11.2

18.7

12.8

5.5

Others

9.3

1.5 1.5

5.4

11.6

0.1

9.8

19.8

26.1

13.7

44.4

12.4

52.9

12.5 2.5

27.9

1.6

3.4

60% 23.6

PSRO

3.6

5.6

18.8

9.8

8.9

1.6

7.8

13.0

Hospitals

3.0

80% 1.0

Private persons

12.4 16.0

7.9

Universities

3.4

6.1 20.5

Biotechnology firms

53.6

39.0

24.1 18.7

17.4 29.6

27.0

28.1

7.0

5.6 5.6

40%

11.8 15.0

8.9

25.4 34.9 20%

21.9

43.5

43.0 33.9

37.6

33.7

17.9

23.5

9.3

10.7

8.8

1999

1994

38.9

27.6 19.4 10.9 0%

1994

1999

Netherlands

1994

1999

Germany

1994

1999 Japan

1994

1999 Spain

1994

Norway

1999 Finland

Source: OECD Patent Database 2003, calculations Fraunhofer ISI.

Since patent applications may include multiple inventors from various countries, it is possible to use such data to measure the level of international partnerships in inventive activities. Analysis of the nationalities of co-inventors of participating countries, including the United Kingdom, shows that the United States was by far the most important partner between 1994 and 2001, an indication that the participating countries are well connected to the leading location (at least in terms of size) for biopharmaceutical R&D (Figure 3.9). Germany, the United Kingdom, France and Switzerland follow the United States as preferred partners for co-operation. Comparing the situation in biopharmaceuticals with all pharmaceuticals reveals interesting differences. In pharmaceuticals the United States still remains the most important location for co-inventors of the participating nations. However, their share is lower than for biopharmaceuticals. Some European countries – Germany, France and in particular Switzerland – seem to be more important partners for pharmaceuticals than for biopharmaceuticals. All in all, European countries appear to contribute more to innovative activities in pharmaceuticals than in biopharmaceuticals.



115

Figure 3.9. Nationalities of co-inventors in biopharmaceuticals and total pharmaceuticals, 1994-2000 As a percentage of participating countries

Sweden 2.5 Italy Canada 3.1 3.0 Belgium 3.5

Biopharmaceuticals Total pharmaceuticals

2.9 3.3 3.5

United States 37.6

3.7 3.9 6.8

41.3

Netherlands 3.4

Switzerland 10.6

7.1 7.7 11.6 Other 12.4

8.3

France 8.0 United Kingdom 7.4

Germany 8.5

Note: Countries that contribute less than 2% of all co-operating nationalities in the biopharmaceutical sector are not shown. Source: OECD Patent Database 2003, calculations Fraunhofer ISI.

When examining the relation between international co-operation in pharmaceuticals and in biopharmaceuticals and its development over time, most countries (except for Belgium and the Netherlands) manifest a stronger international orientation for biopharmaceuticals. However, between 1994 and 2000, internationalisation in biopharmaceuticals decreases slightly, closing the gap with pharmaceuticals. This seems to indicate that although international co-operation in biopharmaceuticals remains important, patenting actors increasingly draw on national competencies. Finally, patent indicators were also used to assess the relative specialisation in biopharmaceuticals of the participating countries, the United States and the United Kingdom by calculating the revealed patent advantage (RPA).5 Belgium, the Netherlands, the United States and Finland are specialised to some degree in biopharmaceuticals, while Germany, Japan, the United Kingdom, France and Spain are not (Figure 3.10). The Netherlands, the United Kingdom, Finland and Spain are interesting cases in that they present opposite specialisations in biopharmaceuticals compared to pharmaceuticals. While the Netherlands and Finland are specialised in biopharmaceuticals but not in total pharmaceuticals, the opposite is true for the United Kingdom and Spain. The 5.

The RPA indicator measures the share of patenting activity of a certain country in biopharmaceuticals in relation to its share in all patents.


116 – COMPARISON OF PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS development of specialisation patterns between the middle of the 1990s and the end of the 1990s indicates that Germany, Japan, Spain and Norway became more specialised in biopharmaceuticals, while the Netherlands, the United States and Finland became less so. Figure 3.10. Relative specialisation in biopharmaceutical patenting Revealed patent advantage(RPA)

1994/95

100

1999/00

80 60 40 20 0 - 20 - 40 - 60 - 80

Spain

France

United Kingdom

Japan

Germany

Finland

United States

Norway

Netherlands

Biopharmaceuticals

Pharmaceuticals

Biopharmaceuticals

Pharmaceuticals

Biopharmaceuticals

Pharmaceuticals

Biopharmaceuticals

Pharmaceuticals

Biopharmaceuticals

Pharmaceuticals

Biopharmaceuticals

Pharmaceuticals

Biopharmaceuticals

Pharmaceuticals

Biopharmaceuticals

Pharmaceuticals

Biopharmaceuticals

Pharmaceuticals

Biopharmaceuticals

Pharmaceuticals

- 100

Belgium

Source: OECD Patent Database 2003, calculations Fraunhofer ISI.

Industrial performance As a first indication of the future commercial performance of the biopharmaceutical sector, numbers of drugs under development in various countries were compared.6 It should be noted that these data refer to pharmaceuticals as a whole and not specifically to biopharmaceuticals. Since biopharmaceuticals represent only part of the output of the biopharmaceutical system – a major part still consists of “classical” pharmaceuticals developed with the help of biotechnological tools – the data can be used as a proxy for the performance of the biopharmaceutical system.

6.

Data for this analysis were provided by the Turku School of Economic and Business Administration based on the IMS database R&D Focus (R&D Focus© 2002 IMS Health Incorporated or its affiliates. All rights reserved. 23 June 2003). The term “drugs developed in country X” means that the results contain both the drugs developed in country X by a lead company and those developed by a collaborative partner from this country, including agreements for co-development or licensing. This procedure leads to some overestimation of the drugs developed in a country because some drugs may be counted twice: for the lead company and for the co-developer or licensee. Data were retrieved in June 2003 and owing to the process of entering data into the database, correspond best to the situation in 2002.



117

Figure 3.11. Drugs under development in selected countries, 20021 As a percentage of total drugs in the pipeline Preclinics

100

Clinics I

Clinics II

Clinics III

3 147

843

493

374

486

6.4

5.1

8.5

9.4

5.8

15.0

19.6

80 12.4

16.7 30.4

20.9

58 12.1 10.3

88

88

6.8

6.8

12.5

24.1

15.0

25

19

20.0

15.8

10.2

16.0

26.3

64.8

64.0

Belgium

Finland

18.2

8.0

9.1

13.5

60

Total number of drugs in the pipeline

15.2 40 66.3

45.8

20

72.7

68.5

61.8

54.8

53.4

57.9

0 United States

United Kingdom

Japan

France

Germany

Spain

Netherlands

Norway

1. The information corresponds best to the situation in 2002. Source: R&D Focus© 2002 IMS Health Incorporated or its affiliates. All rights reserved. 23 June 2003.

The drug development pipelines of the various countries are basically similar in the sense that in most countries, between 60% and 70% of all drugs are still in the preclinical stage, while only between 5% and 10% have entered clinical phase III and are expected to reach the market soon (Figure 3.11). Japan, France and Spain are exceptions since they have a rather low share of preclinical drugs and the highest shares of drugs in phase III. In Germany and the Netherlands, the share of preclinical drugs is rather high, while the clinical stages have low shares. In these two countries it will therefore be some time before the well-filled first part of the drug pipeline reaches the market. If these countries succeed in bringing preclinical drugs successfully through clinical development, their competitive situation may be expected to improve in five to ten years.7 In addition to the pattern of the various countries’ drug pipelines, absolute numbers of drugs under development should be considered as well. The United States is the leader by far with more than 3 000 drugs under development. Among the other countries, the United Kingdom leads with almost 850 drugs. Thus, although these two countries’ shares of drugs in later clinical stages are rather low, a relatively high absolute number of new drugs will originate in them. The United Kingdom and the United States also perform best with respect to drugs under development per capita (Table 3.5). Belgium takes third place, followed by France and Germany. Except for Belgium, the smaller countries exhibit lower figures than larger countries for relative number of drugs under development. This indicates that the industrial systems of larger countries are better

7.

BioCentury (6 October 2003) estimates the average time from clinical phase I to market approval to be about 7.5 years.


118 – COMPARISON OF PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS suited to move drugs into clinical development. Japan, however, does not fit into this general scheme. Table 3.5. Number of drugs under development per million capita Country

Number of drugs under development Per million capita

United Kingdom

14.3

United States

11.4

Belgium

8.6

France

6.4

Germany

6.0

Netherlands

5.6

Finland

4.8

Norway

4.2

Japan

3.9

Spain

1.5

Source: R&D Focus© 2002 IMS Health Incorporated or its affiliates. All rights reserved. 23 June 2003.

The amount of venture capital invested in biotechnology per capita is a second indicator of industrial performance. This indicator integrates two types of information. First, since venture capital is invested mainly in promising start-up biotechnology firms, the volume of invested venture capital mirrors the intensity of the country’s start-up activities. The second type of information relates to the process of providing venture capital. Venture capital firms carry out careful evaluations of potential recipient companies according to strict criteria. Therefore, venture capital investment may also be interpreted as a quality indicator which reflects the quality of biotechnology start-up activities as assessed by venture capital companies. Until the mid-1990s in all participating countries (and the United Kingdom), low amounts of venture capital were invested in biotechnology, reflecting the general low availability of venture capital in Europe at that time8 (Figure 3.12). Belgium, the United Kingdom and the Netherlands were the first countries in which the venture capital situation improved (between 1994 and 1997) followed by Germany in 1998. At the end of the 1990s, there was a boom in venture capital investment in biotechnology in all of the countries but Norway and Spain. In the United Kingdom, rather high levels of venture capital investment were achieved earlier than in other countries, and a comparable boom did not take place in the late 1990s. Between 2001 and 2002 venture capital investment in biotechnology dropped dramatically in Germany and investment also decreased in Belgium. In most other countries, 2001 only marked a temporary slump in venture capital investment and investment rates recovered towards 2002. Norway, where considerable amounts of venture capital were invested in biotechnology in 2001 and 2002, can be considered a latecomer. Spain stayed at a low level throughout the period considered.

8.

Japan was not included in this comparison owing to a lack of comparable data.



119

Figure 3.12. Venture capital invested in biotechnology (PPPs) per capita 7 Belgium 6

Germany

5

Netherlands 4 Norway 3

2 Finland 1

France

United Kingdom Spain

0 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Source: EVCA Yearbooks 1991-2003.

The data on venture capital investment in biotechnology indicate that towards the end of the 1990s there was strong confidence in biotechnology among venture capital investors in most European countries. However, Spain did not participate in this development and others such as Norway participated only belatedly. In addition, the sustainability of confidence in biotechnology investments among venture capital firms cannot be taken for granted, as indicated by the strong fluctuations in investment during the last years, at least in some countries.

Summary In terms of overall scientific performance, smaller countries – Belgium, Finland, the Netherlands – and the United Kingdom take a leading position among the countries studied. Japan and Spain are situated at the lower end of the performance scale. The output of education systems in the health sector does not seem to be closely related to scientific output. Only the Netherlands shows a rather high share of PhDs in the health sector. Better matches between education output and scientific performance can be observed for the life sciences in three of the best-performing countries – Belgium, Finland and the United Kingdom – which also lead in terms of the share of PhDs in the life sciences among all PhDs. In terms of innovative performance measured by patent applications and the number of drugs in the pipeline (both related to country size), Belgium, the Netherlands, the United States and the United Kingdom are among the leading countries. Spain, Japan and Norway perform less well.


120 – COMPARISON OF PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS Combining both performance categories reveals different country clusters. In the United Kingdom, Belgium and the Netherlands good scientific and good innovative performance seem well matched. Four other countries – Japan, Norway, Spain and France – do not perform very well in either category. Finally, a pronounced discrepancy between the two performance categories can be observed in three cases. Finland shows good scientific but not very good innovative performance. The United States and Germany, instead, are quite advanced in innovative performance, but their scientific performance ranks behind that of the leaders.

References BioCentury (2003), Vol. 11, No. 44, 6 October, p. 15. EVCA (1990-2003), Yearbooks, Brussels. OECD (1994), The Measurement of Scientific and Technological Activities: Using Patent Data as Science and Technology Indicators - Patent Manual, OECD, Paris.


OPENNESS OF THE BIOPHARMACEUTICAL INNOVATION SYSTEM –

121

Chapter 4 Openness of the Biopharmaceutical Innovation System

The openness of the national innovation system is particularly important for sciencebased industries such as the biopharmaceutical industry, where knowledge flows can make a crucial difference in a short period of time. This chapter focuses on trade openness, the presence of foreign-owned firms, international mergers and acquisitions, and global business and research alliances and makes particular reference to some of the findings in the national reports on biotechnology innovation systems.


122 – OPENNESS OF THE BIOPHARMACEUTICAL INNOVATION SYSTEM Trade openness in the pharmaceutical industry Pharmaceutical firms using biotechnology depend heavily on global research and business networks, international R&D activity and the presence of foreign-owned firms for growth and innovation. In the biopharmaceutical industry, knowledge flows can quickly make a crucial difference. Knowledge moves through various channels, including international trade in goods and services, capital and labour flows, technology licensing, international strategic alliances and foreign direct investment (FDI) (both greenfield investment and mergers and acquisitions). These knowledge flows are important for the national biopharmaceutical innovation system and are particularly relevant for national policy making. The presence of large multinational corporations and low transport costs relative to the value of the product help to make the pharmaceutical industry relatively open. Except for the Netherlands and Norway, exposure of the pharmaceutical industry to international trade increased from 1994 to 2001. Figure 4.1 shows that the share of the pharmaceutical industry’s exports and imports in total manufacturing exports increased from 1994 to 2002 in every country included in the case studies. It presents these countries plus the United Kingdom and the United States in their order of appearance in 2002 and shows the share of pharmaceutical trade in 1994 as a transparent bar that overlays the bar for 2002. Belgium increased most rapidly, with exports reaching over 13% of total manufacturing exports in 2002. Japan had the least open pharmaceutical system in terms of international trade. Figure 4.1. International trade in the pharmaceutical industry, 1994 and 2002 As a percentage of manufacturing exports

Note: Data for the United States are for 2001. Source: Own calculation based on OECD Stan Database, 2004:2.



123

Table 4.1 shows that the propensity to export, measured as the share of output exported, and the import penetration ratio, measured as the level of domestic demand satisfied by imports, vary considerably across countries. A relatively low import penetration ratio, especially when compared with a high propensity to export, indicates that firms that produce locally are highly competitive. A relatively high propensity to export combined with high import penetration generally indicates the possibility that some intra-industry and intra-firm trade as well as international outsourcing is taking place. Finally, a large difference between the two ratios may indicate a pattern of national specialisation (OECD, 2003). Large multinational pharmaceutical firms often locate in a country in order to supply goods to the local market, and this often involves importing pharmaceuticals, including those that make use of biotechnology. This explains much of the difference between imports and exports in Norway (see the national report on Norway). By contrast, more than half of the German pharmaceutical and biopharmaceutical firms have their main markets abroad (see the national report on Germany). Table 4.1. Trade openness in pharmaceuticals, average 1998 to 2002 Propensity to export

Import penetration ratio

Belgium

135.6

141.9

Denmark

86.1

70.4

Finland

52.5

72.6

France

44.6

39.2

Germany

75.7

66.4

Japan

5.6

9.1

Netherlands

75.0

74.7

Norway

51.3

63.5

Spain

29.2

43.1

Sweden

73.0

50.0

United Kingdom

62.2

55.3

United States

12.8

15.7

Note: Data for the United States are for 2001. Source: Own calculation based on OECD Stan Database, 2004:2.

These figures, however, can be deceiving. The presence of parallel markets, i.e. markets where brand-name drugs are imported (usually by wholesalers) from a country where the drug is marketed at a lower price (often because of national price controls), may explain the high ratios (especially in Belgium) as well as why they declined so rapidly in the Netherlands. This market declined very dramatically in the mid1990s when the price level went below the EU average. The very high export intensity and import penetration ratio observed for Belgium indicate that pharmaceuticals are imported then re-exported to other markets in different packaging. New measures introduced in Germany to encourage pharmacists to substitute parallel for domestically sourced products may also have been responsible for the rapid increase in pharmaceutical imports in 2002, as well as the rapid growth of exports from Belgium in that year. The prices of pharmaceuticals in France, Spain and the United Kingdom are also below the INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

124 – OPENNESS OF THE BIOPHARMACEUTICAL INNOVATION SYSTEM European Union average. This distortion makes it difficult to fully assess the openness of pharmaceutical trade as well as the imbalances between exports and imports.

Foreign ownership in the pharmaceutical industry Foreign ownership in the pharmaceutical industry has also had an important impact in many of the countries included in this study. Although it is difficult to measure the precise flows of FDI to the pharmaceutical industry, it is known that most of these flows were due to mergers and acquisitions (M&As), especially in the late 1990s (UNCTAD, 2000). All of the top 15 pharmaceutical companies were involved in M&A transactions in the 1990s, each seeking partners to help finance R&D for new drugs and products (OECD, 2001). Some of these acquisitions were very large. In 1999, the Zeneca group (United Kingdom) acquired Astra AB (Sweden) for USD 34.6 billion to create AstraZeneca, and Rhône-Poulenc SA (France) acquired Hoechst AG (Germany) for USD 21.9 billion to create Aventis. These were the sixth and tenth largest cross-border acquisitions during the merger boom between 1998 and 2000. Nevertheless, in the case studies, M&As involving dedicated biopharmaceutical firms were not very important. International M&As became an increasingly important strategy for lowering the high cost of R&D and achieving economies of scale in the pharmaceutical industry. The extent of foreign ownership depends on several factors, including the size and attractiveness of markets, the complementarity of strategic assets and capabilities, and the institutional environment. As Figure 4.2 shows, among the participating countries, the share of value added under foreign control in the pharmaceutical industry ranged from more than 90% in Norway to under 30% in the Netherlands.1 Although there are no data on the share of value added generated by foreign owners in Germany, it is known that two-thirds of the top 30 members of the German association of research-based pharmaceutical firms are affiliates of large multinational pharmaceutical firms. The large pharmaceutical firms can be important for transferring technology, both to their affiliates and back. Since most R&D activity takes places in the most advanced economies, some firms may invest in the country with the most advanced technology in order to gain access to the technology. Other firms were less interested in obtaining new technology than in gaining access to local markets. European firms, for example, were actively acquiring US pharmaceutical firms throughout the 1990s. Parent firms can also transfer technology directly to their affiliates, which can then “spill over” to other firms in the host economy. The innovation system of the host economy is important in this context since spillovers to other firms depend on competitive pressure, absorptive capacity of local enterprises and linkages with the local economy. The most common linkages found in the national case studies are R&D co-operation with local partners, including universities and other public research organisations (see Chapter 3) and labour mobility across countries (see the national report on Finland).

1.

Although the United Kingdom was the top acquirer of pharmaceutical firms in the 1990s (OECD, 2001), domestically owned firms generated less than 20% of pharmaceutical value added in 2000.



125

Figure 4.2. Share of pharmaceutical value added under foreign control, 2000

Sweden

Norway United Kingdom (1999) Spain

France

Finland

Netherlands %

Denmark (1998) 0

20

40

60

80

100

Source: OECD, Activities of Foreign Affiliates database, 2004:2.

One important indicator of globalisation is the degree to which the parent firm depends on its affiliates for R&D activities. Figure 4.3 shows the share of R&D expenditure under foreign control in the pharmaceutical industry. This figure shows that some multinational firms depend heavily on their affiliates for R&D activity. When compared with Figure 4.2, most countries have a similar share of R&D activity under foreign control as value added, but France and the United Kingdom are two notable exceptions. In these countries, locally owned firms tend to be much more R&D-intensive. Senker (2001) observed that some multinational firms had subsidiaries that developed biotechnology products. The total extent of these activities is not known, but in the Netherlands Akzo-Nobel and GSM appear to have had some influence on industrial biotechnology activities. In France, Swiss pharmaceutical firms have set up several laboratories. A survey indicates that this is not very common in Norway. Almost all of the small, dedicated biopharmaceutical firms in participating countries are locally owned. This is to be expected since most of the biopharmaceutical firms were created in the second half of the 1990s, and many were spun off from universities and other publicly funded research organisations. However, there are considerable differences among countries. In the Netherlands, for example, four firms were foreign-owned in 1994 and represented 22% of dedicated biotechnology firms, whereas there were seven in 2001 and represented less than 10%. In Norway, virtually all of the dedicated biotechnology firms were under local control. There were also very few M&As between large pharmaceutical firms and dedicated biotechnology firms. While the completion in 2000 of the project to sequence the human genome gave pharmaceutical firms added incentive to acquire these firms, poor economic conditions dramatically slowed the pace of M&A INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

126 – OPENNESS OF THE BIOPHARMACEUTICAL INNOVATION SYSTEM activity. In Germany, for example, acquisitions of firms using biotechnology dropped from 12 in 2000 to just four in 2002. Nevertheless, this indicator can be deceiving since successful dedicated biotechnology firms depend much more heavily on global strategic alliances than on foreign ownership. Figure 4.3. Share of R&D expenditure under foreign control in the pharmaceutical industry, 2001 (or nearest year)

Sweden

Spain

United States

United Kingdom

Netherlands

France

Finland %

Japan 0

20

40

60

80

100

Source: OECD, Activities of Foreign Affiliates database, 2004:2.

Global technology alliances in the pharmaceutical and biopharmaceutical industries Rapidly rising R&D costs, lengthening time lags to commercialisation, and increasing consumer expectations from new methods of medical treatment are forcing pharmaceutical firms to engage in global co-operative agreements. DiMasi et al. (2003) estimated that R&D costs to the point of marketing approval were USD 403 million in the late 1990s, an increase of 7.4% above general price inflation since the late 1970s. Large multinational firms can economise on research and development, minimise the lead time for new products, and serve emerging markets through alliances with small biotechnology firms. Alliances, in turn, provide small firms with much-needed capital and broader distribution networks. These alliances often include licensing agreements that provide the small biotechnology firms with revenue and expand the product range of large pharmaceutical firms without high R&D costs (OECD, 1996). About half of the strategic alliances between these two kinds of firms included licensing agreements between 1995 and 1999 (OECD, 2001). Global technology networks have been essential for innovative activity in the pharmaceutical industry. International scientific collaboration is important for creating INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


127

new knowledge about how to apply biotechnology in the pharmaceutical industry. There were about two international strategic alliances for every domestic partnership in the industry during the 1990s (OECD, 2001).2 This was also the case among the dedicated biotechnology firms covered in the case studies, but both the size of the country and degree of foreign ownership were important. In Norway more than two-thirds of the dedicated biotechnology firms were in foreign partnerships, and all of the alliances with large firms were foreign since virtually all pharmaceutical firms were foreign-owned by the late 1990s. About two-thirds of the Dutch firms using biotechnology formed alliances with foreign partners,3 and the percentage was significantly higher when the alliance was with a large firm. In Germany, pharmaceutical firms using biotechnology formed alliances with foreign firms only about a third of the time, but over half of the time when the co-operation involved a large firm. A similar pattern was found in Finland, but the percentage jumped to about half when university and other research institutes were excluded.4 The number of European Patent Office (EPO) patent applications that involve international co-operation can also measure global technology alliances. Several factors may affect the globalisation of scientific research: size, technological endowment, geographical proximity to regions with high research activity, language, industrial specialisation, existence of foreign affiliates, etc. Figure 4.4 reveals that international scientific collaboration is high in the biopharmaceutical industry. Globalisation of scientific research tends to be higher in smaller countries and in countries where biotechnology is below average. Spain relies more heavily on scientific collaboration than the other participating countries. Japan and the United States have the lowest share of coinventions in the biopharmaceutical industry. However, as indicated in Chapter 3, the extent of globalisation in biopharmaceuticals appears to have decreased slightly from 1994 to 2000, indicating that patenting activity is increasingly drawing on national competencies. Nevertheless, the United States, where knowledge of and skills for biotechnology are most advanced, was the most common partner. As Figure 3.9 in Chapter 3 shows, the United States was included in 37.6% of pharmaceutical and 41.3% of biopharmaceutical patent applications that involved international co-operation. Other European partners accounted for virtually all the rest, with Germany, the United Kingdom, France and Switzerland the most important partners. This strongly suggests that small biotechnology firms on both sides of the Atlantic are seeking new competences at the technological frontier which will allow them to create new products.

2

An earlier report (OECD, 1996) also indicated that strategic alliances between small firms using biotechnology and large pharmaceutical firms were very common in the early 1990s, while alliances with other small biotechnology firms and universities were not. This changed considerably in the late 1990s as many of the new dedicated biotechnology firms were spun off from universities and allowed to market the fruits of academic research.

3

Europe (mainly Belgium, Germany and the United Kingdom) accounted for 31% of all partners and the United States for almost 21%.

4

However, there were also very few collaborations between the large pharmaceutical firms and public research laboratories in Finland.


128 – OPENNESS OF THE BIOPHARMACEUTICAL INNOVATION SYSTEM Figure 4.4. Percentage of patents in biopharmaceuticals with foreign co-inventors

Spain Finland United Kingdom Netherlands Norway Belgium Germany United States %

Japan 0

10

20

30

40

50

Source: Own calculation based on OECD Patent Database, 2003.

Openness of the biopharmaceutical innovation system in comparative perspective This chapter has looked at the openness of the pharmaceutical and biopharmaceutical innovation systems from different points of view. It started by looking at trade in pharmaceuticals and found that this tells little about the openness of the innovation system because of the existence of parallel markets. Nevertheless, this indicator shows that Finland, Japan and Norway tend to be more import-oriented while France, Germany, and the Netherlands tend to be more export-oriented. Activities of large multinational pharmaceutical companies help explain these patterns. The second indicator focused on the activities of multinational pharmaceutical companies. Here it was found that most of the value added of pharmaceutical production was created by foreign-owned firms in France, Norway and Spain, while domestic enterprises were more prominent in Finland and the Netherlands. However, very few of the small dedicated biotechnology were foreign-owned, reflecting the domestic origin of these firms as spin-offs from universities, public research organisations and other firms. Finally, the third and fourth indicators focused on the international dimension of collaboration. The pharmaceutical industry is one of the most global industries in terms of alliances and collaborative activities. A survey of dedicated biotechnology firms found that a majority of these firms that were involved in collaborative arrangements with other firms had foreign partners. The percentage of patent applications in biopharmaceuticals which involved international co-operation was also high in Europe when compared with the United States and Japan. During the late 1990s there was a noticeable shift towards INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


129

relying more on domestic knowledge sources, but this appears to be due to the entry of many new dedicated biotechnology firms that were spun off from universities, firms, etc. Biotechnology firms active in the biopharmaceutical sector but without alliances with the large pharmaceutical firms also tend to rely more heavily on domestic sources for their innovative activities, including universities and public research organisations.

References DiMasi, J.A., R.W. Hansen and H.G. Grabowski (2003), “The Price of Innovation: New Estimates of Drug Development Costs”, Journal of Health Economics, 22, pp. 151-185. OECD (1996), Globalisation of Industry: Overview and Sector Reports, OECD, Paris. OECD (2001), New Patterns of Industrial Globalisation: Cross-border Mergers and Acquisitions and Strategic Alliances, Paris, OECD. OECD (2003), OECD Science, Technology and Industry Scoreboard, OECD, Paris. Senker, J., M. Brady and P. van Zwanenberg (2000), “European Biotechnology Innovation System: UK Report”, EC TSER Contract No. SOE1-CT98-1117 (DG 12SOLS), September. UNCTAD (2000), World Investment Report 2000: Cross-border Mergers and Acquisitions and Development, United Nations, Geneva



COMPARISON OF SELECTED DEMAND-SIDE FACTORS –

131

Chapter 5 Comparison of Selected Demand-side Factors

This chapter examines whether specific demand-side factors influence the biopharmaceutical innovation process and the potential effects on innovation. It looks at each country’s pharmaceutical market, its role as lead market compared to other biopharmaceuticals markets, the role of national regulations and cost-containment measures and of socio-ethical debates as well as differences and similarities in the role and function of specific demand-side actors in the innovation process. It is based on comparative material collected for the purpose of performing as consistent an analysis as possible as well as information from the national reports. Information on the United Kingdom and the United States is included owing to their importance for certain aspects of biopharmaceutical innovation.


132 – COMPARISON OF SELECTED DEMAND-SIDE FACTORS An overview of the pharmaceutical and biopharmaceutical market Market size Between 1991 and 2002, the world market for pharmaceuticals more than doubled. Annual growth rates during the period ranged between 2% and 15%. Major structural changes also took place. In the early 1990s, the United States and Europe each contributed about one-third to the world market. Between 1991 and 2001 the US market grew by 11.6% a year, well ahead of Europe’s average weighted growth rate of 7.4%. The United States’ world market share was 45% in 2001 and close to 50% in 2003 (Figure 5.1), while Europe’s market share dropped to about one-quarter (VFA, 2002; EFPIA, 2003). Figure 5.1. Breakdown of world pharmaceutical market by geographical region, 2003 As a percentage of global sales

AAA 8%

Latin America 4%

Japan 11%

North America 49%

Europe 28%

Note: Actual sales of approximately 90% of all prescription drugs, and specific OTC drugs. “AAA” signifies Africa, Asia except Japan and Australasia. Source: IMS World Review 2004.

Of the larger countries studied, Japan, Germany and France dominate in terms of total market size (Table 5.1). Germany’s market share declined from about 8% in the early 1990s to about 4% in 2002 (VFA, 2003). For Japan, the size of the pharmaceutical market expanded consistently until about 1990 and then remained steady. Per-capita consumption is clearly led by a group consisting of France and the United States; Belgium, Germany, Japan and Norway follow as a second group. The ratio of prescription to over-the-counter (OTC) drugs tends to be inversely related to total market size. The smaller European markets have significantly higher ratios of prescription drugs (Figure 5.2).



133

Table 5.1. Pharmaceutical market value (retail sales), 2000 Total (EUR millions)

Per capita (EUR)

Belgium

3 973

387.87

Finland

1 648

318.09

France

27 698

470.32

Germany

30 624

372.81

Japan (2001)

42 467

335.00

Netherlands

4 035

254.11

Norway

1 406

313.70

Spain

10 626

264.84

United Kingdom (1999)

14 172

238.18

United States (2001)

119 931

420.80

Source: Farmaindustria (2002, p. 92), IMS Strategy Group (Japan, United States), and own calculations (Japanese, US per capita figures).

Figure 5.2. Approximate comparison of the ratio of prescription drugs to OTC drugs, 2001

93.5

Spain

91.3

Norway

90.5

Netherlands

87.6

Belgium

86.5

Finland

83.9

United Kingdom

France

80.2

United States (2000)

79.6 78.3

Germany

77.3

Japan (1999) 0

20

40

60

% 80

100

Note: Additional reservation, related to source see below. Source: Compiled from IMS Health data as cited in EC (2003), calculated as reverse of OTC shares United States and Japan compiled from OECD Health Data 2002, 4th edition.


134 – COMPARISON OF SELECTED DEMAND-SIDE FACTORS In addition, the ratio of generics (i.e. out-of-patent pharmaceuticals) is an important element in a particular market’s competitive situation. In 2001 the market share of generics ranged from 27% in Germany, to just 2% in Belgium (Figure 5.3). Figure 5.3. Market share of generics, 2001

Germany

United Kingdom

Netherlands

Norway

United States

Japan

Spain

France

Belgium

% 0

5

10

15

20

25

30

Note: Finland not available. Definitions of generics are not consistent across countries. Source: Various trade association data as cited in EC (2003, p. 48).

Expenditures on health and pharmaceuticals Most of the countries examined are small markets in absolute terms. With the exception of the United States, Japan, Germany and France, total health expenditures are not very large (Figure 5.4; Table 5.2). However, smaller countries may be of interest to the pharmaceutical industry if they are big spenders in particular categories of medicines.



135

Figure 5.4. Total spending on health care at market prices As a percentage of GDP 1990

2000

13

United States 11.9

7.3

United Kingdom 6

7.7

Spain 6.6

7.8

Norway

7.8

8.1

Netherlands

8

7.8

Japan 5.9

10.6

Germany 8.7

9.5

France 8.6

6.6

Finland

7.9

8

Belgium 7.1 0

5

% 10

15

Source: Compiled from OECD Health Data 2002.

Lead markets A lead market is a preferred location for the introduction of innovative products. The role of lead markets is considered crucial for industries such as telecommunications and electronics. For science-based industries such as biopharmaceuticals, the role of lead markets is also significant: “The importance of lead markets in anchoring existing industrial R&D activities and attracting new activities has increased. (…) In fields of technology that are strongly science-based, it is the results of scientific research that constitute a driving force in the internationalisation of innovation processes. (…) [R]egional proximity to external partners such as customers, competitors and scientific institutions is an advantage” (Meyer-Krahmer and Reger, 1999).


136 – COMPARISON OF SELECTED DEMAND-SIDE FACTORS Table 5.2. Expenditures on health and pharmaceuticals, 1995 and 2000 Total health expenditures

Pharmaceuticals expenditures

USD million (PPPs)

As a % of total health expenditures

1995

2000

Belgium

19 257

23 255

16.3

16.3

Finland

7 227

8 623

14.0

15.5

France

114 544

138 342

17.5

20.1

Germany

184 843

225 862

12.4

13.6

Japan

204 822

234 638

21.5

16.4

27 630

35 766

11.0

11.8

8 131

9 661

9.0

9.2

Spain

46 410

61 422

17.7

19.0

United Kingdom

77 055

87 403

15.3

15.9

973 170

1 274 113

8.9

12.0

Netherlands Norway

United States

1995

20001

1. 1999 instead of 2000 for Japan; 1997 instead of 2000 for Belgium, Norway and United Kingdom. Source: Compiled from OECD Health Data 2002.

The Japanese and European markets, taken together, may be significant in this respect, as they account for more than one-third of global sales. In terms of individual country markets and the biopharmaceuticals market in particular, the issue is whether any country market other than the US/North American market can be characterised as a lead market. Products of the biopharmaceutical sector are expected to provide innovative solutions to medical problems. After the first US approval of a biopharmaceutical drug in 1982, the development of new drugs evolved relatively incrementally until about 2000 when there was a significant influx of new products. Annual global sales rose from USD 9.1 billion in 1994 to USD 11.6 billion in 1996 and USD 22.7 billion in 2000, to USD 32.4 billion in 2002 (Bibby et al., 2003). Sales were estimated to rise to approximately USD 41 billion in 2003 (Research and Markets, 2003). The share of biopharmaceuticals in the global market was, as of 2003, approximately 10% and should increase gradually, since the compound annual growth rate for biopharmaceuticals is considerably higher than for conventional pharmaceuticals (28.3% to 14.0% over the five years to 2002) (Bibby et al., 2003). As Table 5.3 shows, the types of products that dominate global sales have on the one hand remained stable, with erythropoietins (treatment for anaemia, i.e. products for kidney and cancer patients since they stimulate the growth of red blood cells) and human insulin leading both in 1996 and 2002. On the other hand, interferons (proteins interfering with a cell’s ability to produce and serving as a basis for drugs for osteoporosis, multiple sclerosis, and other diseases) are on the increase. This is also the case for the more recent product type monoclonal antibodies (individual antibodies produced in the blood in order to recognise and bind to foreign invaders, singling them out for elimination by immune defences, “MAbs”), such as Remicade used for Crohn’s disease and rheumatoid arthritis, and Rituxan/Mabthera used for a certain type of lymphoma (Bibby et al., 2003; PhARMA, 2002; Szymkowski, 2004; Medical Research Council, n.d.).



137

Table 5.3. Top-selling biopharmaceuticals on the global market, 1996 and 2002 USD millions 1996

2002

Epogen (erythropoietin)

1 150

Procrit/Erypo (erythropoietin)

3 972

Neupogen (erythropoietin)

1 017

Epogen (erythropoietin)

2 840

Procrit (erythropoietin)

995

Remicade (MAb)

1 520

Humulin (human insulin)

884

Neupogen (erythropoietin)

1 503

Engerix-B (hepatitis B vaccine)

568

Rituxan/Mabthera (MAb)

1 183

Intron A (interferon for leukemia etc.)

524

Avonex (interferon for multiple sclerosis)

1 097

Betaseron (interferon for multiple sclerosis)

353

Enbrel (soluble receptor for rheumatoid arthritis

938

Epivir (antiviral drug active against both HIV and HBV)

306

Viraferon PEG

857

Activase (tissue plasminogen activator for infarctions etc.)

184

Betaseron (interferon for multiple sclerosis)

682

Humatrope (human growth hormone)

268

Humalog (human insulin)

630

Sub-total Total market

6 349 11 600

Sub-total

11 298

Total market

32 402

Notes: Explanations added (in parenthesis). Betaseron is in the 2002 listing listed as Betaferon. Misprint in 1996-source corrected to “Humatrope”. Source: Chemical Market Reporter, 22 June 1998, p. 16, as cited in Office of Industries, US International Trade Commission (1999) (1996 products and sub-total); Bibby et al. (2003) (2002 products and sub-total and 1996 and 2002 market total); PhARMA (2002) and www.hivandhepatitis.com regarding product characteristics.

As of 2002, 119 products classified as biopharmaceuticals were on sale globally, but the regional distribution of sales was very uneven: North America led with 58%, followed by Europe (22%) and Japan (9%) (Bibby et al., 2003). Information for the countries participating in this study is neither complete nor directly comparable. Below, some information is provided regarding actual sales and market shares of biopharmaceuticals in all pharmaceuticals and two proxy measures (share of new substances in total and share of particular therapeutic groups especially relevant to biopharmaceuticals). Examples of market penetration of biopharmaceuticals include: Germany’s market share of biopharmaceuticals was 8.3% in 2002, slightly below the US share of about 9%. Since 1996 the biopharmaceutical market segment has grown at an annual rate of about 26%. Three groups of biopharmaceuticals (erythropoietin, beta-interferon, insulin) are among the top 15 pharmaceuticals in terms of market growth (VFA, 2003). In Japan the market share of biopharmaceuticals was 12.4% in 2001, i.e. higher than in the United States. The best selling pharmaceutical group by far was erythropoietin products (20.3%), followed by monoclonal antibodies (11.0%), interferons (10.7%), growth hormones (10.5%), and human insulin (8.0%) (based on calculations derived from market figures reported in Matsushima and Miyamoto 2003, p. 282). The Dutch market share was 8.6% INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

138 – COMPARISON OF SELECTED DEMAND-SIDE FACTORS in 2001 and 9.2% in 2002, and was expected to account for 15% to 20% of the total in the “very near” future. As of 2001, human insulin was the largest product group. Norway has a complex market structure with great regional variations. Owing to high levels of rheumatoid arthritis in many regions, one biopharmaceutical directed at this problem has been among the top 25 best-selling drugs nationwide for several years and held 1.1% of the total pharmaceutical market in 2003, and a new MAb drug for the same disease entered this list in 2003 with 1.0% of total pharmaceutical market. One proxy that may give a somewhat more illuminating picture is the share of new substances – biological and conventional – in the market. According to this measure, the country markets that stand out as least innovative are Japan, despite its high level of biopharmaceuticals usage, and the United Kingdom (Figure 5.5). The United States and Spain – and to a certain extent Germany – stand out as markets accepting a very high ratio of innovative drugs. The ratio of biopharmaceuticals would therefore be likely to be high in these markets. Figure 5.5. Share of market in each national market for new products launched in the five years before 2001

United States

Spain

Germany

Norway

Belgium

Finland

France

United Kingdom

Japan % 0

10

20

30

40

Source: IMS Health as cited in EC (2003, p. 44).

Another proxy is the share of particular therapeutic groups for which biopharmaceuticals are especially relevant. This share varies greatly. Table 5.4 cover a very short period, so that the observed increases should be interpreted with caution. However, it indicates that Japan and Finland are exceptionally high consumers of blood INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


139

and blood-forming agents, followed by a second group composed of the other countries except the United States and the United Kingdom. For cytostatics, Finland and Norway stand out together with Japan. For drugs aimed at the musculo-skeletal system, the situation is more balanced. Note that the US market characteristics are special, since even modest shares signify very high sales figures in international comparison.

The role of regulations and cost containment measures at the national level This section reviews institutional arrangements which may have a potentially constraining effect on the market, namely national practices for containing costs related to expenditure on pharmaceuticals. It looks first at overall policy and pricing instruments and then at the reimbursement system with special reference to innovative drugs. Table 5.4. Three main therapeutic groups with particular relevance to biopharmaceuticals, plus the cardiovascular system, 2001-03 Percent of total turnover C. Cardio-vascular system

World

B. Blood and blood-forming L. Anti-neoplastics and organs immuno-modulating agents

2001

2002

19.5

19.3

19.4 n.a.

Finland

17.8

18.6

France

24.5

24.1

Germany

23.2

22.3

Japan

19.5

Netherlands

2003

2001

2002

3.1

3.2

2003

2003

M. Musculoskeletal system

2001

2002

2001

2002

2003

3.5

4.1

4.5

4.6

6.1

6.0

6.3

n.a.

6.3

7.9

n.a.

6.6

6.2

2.9

2.9

3.9

5.7

5.8

6.1

6.2

2.9

3.2

22.1

3.2

3.5

3.9

5.7

6.5

6.9

4.9

4.9

5.1

19.3

19.6

7.0

6.8

6.8

6.7

7.6

7.7

6.7

6.5

6.4

23.6

23.7

n.a.

2.1

2.9

n.a.

5.1

5.6

n.a.

4.4

4.5

n.a.

Norway

21.7

21.8

20.5

4.8

4.9

5.2

8.1

8.4

9.7

5.2

5.8

5.9

Spain

23.0

23.2

22.7

3.3

3.6

3.6

4.1

4.3

4.6

5.8

5.5

5.7

United Kingdom

23.4

24.4

25.3

1.5

1.8

2.1

3.0

3.1

3.0

5.1

5.4

5.8

United States

18.4

18.2

17.5

1.8

2.2

2.6

3.3

3.7

3.9

6.0

6.0

6.3

23.5

3.5

n.a. 5.8

Note: Finland = 2000, 2002 and 2003. n.a. = not available. Belgium not available. Source: Compiled from calculations based on national pharmaceutical industry annual reports (Finland, Netherlands, Norway) and IMS Drug Monitor.

Expenditures on pharmaceutical products in most countries have increased continuously over the last decades. In addition, except in Japan, growth in pharmaceutical expenditures has been faster than growth in total expenditures on health. Worth particular notice is the exceptional growth in France and the United States (Table 5.2). The persistently high ratio of pharmaceutical spending has led a number of countries to implement cost-containment measures. All national governments in the countries studied have some kind of cost-containment policy (Table 5.5), ranging from quite extensive measures in Germany and Norway, to less strict ones in Finland, France, Japan and Spain. Countries have also implemented various criteria for reimbursement of prescription drugs (Table 5.6); Japan is the only country that explicitly rewards drug innovativeness. Belgium, the Netherlands and Spain use proven comparative efficacy as a criterion for reimbursement. Finland and Norway allow for the possibility of case-by-case entry of new drugs through the possibility of controlled individual treatment when warranted. INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

140 – COMPARISON OF SELECTED DEMAND-SIDE FACTORS Table 5.5. Cost containment/pricing control measures, 2003 (unless otherwise noted) Belgium

Notification of the price of the product in other EU countries

Finland

Overall notification of the price of the product in other EU countries. A reasonable wholesale price for a medicine set on the basis of nine different criteria.

France

As of 1997 prices require approval before product is authorised for reimbursement. Government can reduce prices.

Germany

Negotiation regarding total volume which can be spent for drugs since 2001; fixed prices for certain drugs; discount of 6% for patented drugs since March 2003 (16% since 2004); incentives for parallel and re-imports of cheaper drugs; “aut-idem” rule requiring the physician to prescribe only the active substance and not a brand

Japan

Drug price standard (DPS) determining price based on similar drugs and adding a certain allowance for originality, usefulness and marketability.

Netherlands

Use of generics encouraged. Average price level for the same active substance in Belgium, France, Germany, and United Kingdom.

Norway

Average of the three lowest prices in nine countries (Austria, Belgium, Denmark, Finland, Germany, Ireland, Netherlands, Sweden, United Kingdom.

Spain

As of 1997 certain drugs not allowed to be prescribed. As of 2003 notification of the price of the product in other EU countries.

United Kingdom

As of 2000 "Selected List" of named medicines which cannot be prescribed on prescription, to encourage the use of generic medicines. Recommending the use of new expensive products only if a significant clinical benefit can be attributed to their use. Agreement with firms regarding limits to profits.

United States

No legislation for price setting. Rebates to state-level Medicaid programme

Sources: Compiled from Senker et al. (2000), Senker (2001, p. 29), Martikainen and Rajaniemi (2002), Ager (2003) and national reports.

Table 5.6. Criteria for prescription drugs reimbursement, 2001 Belgium

Efficacy, economic implications and social importance.

Finland

Nature of illness, necessity and cost implications of drug, and therapeutic value, plus sub-group “significant and expensive drugs” since 1999 reimbursed only if the illness fulfils certain criteria.

France

Three reimbursement levels/categories (100%, 65% and 35%) according to efficacy, adverse effects, existing treatments available, public health issues, and the severity and duration of illness.

Germany

All pharmaceuticals on positive list reimbursable, while there are two different negative lists. Latter products reimbursable on a named patient basis.

Japan

Innovativeness, usefulness and marketability.

Netherlands

Drugs included in positive list based on therapeutic value, efficacy, possible adverse effects, and method of administration. Positive list frozen for a time in the mid-1990s as part of cost containment policy.

Norway

Drugs used for long-term treatment (over 3 months). Four different methods for reimbursement: drugs on positive list (90% of all reimbursed drugs), individual decisions justified by specialist physicians (for particular treatment using innovative drugs), drugs for infectious diseases, and reimbursement to individual patients on social grounds.

Spain

Nature of illness, therapeutic value of drug, efficacy, price, and total cost. Negative list since 1994 (e.g. cough medicines, laxatives, antacids and creams).

United Kingdom

All covered 100% except products on negative list introduced in 1985 (e.g. antacids, analgesics, cough medicines, laxatives, anxiolytic drugs, vitamins, and asthma medication).

United States

Varies according to type of insurance coverage.

Sources: Compiled based on Martikainen and Rajaniemi (2002) and JPMA (2003).



141

Character of socio-ethical debate One way of assessing the level of public support for biotechnology in general as well as for biopharmaceutical research and products in particular is to refer to longitudinal public opinion survey data. Such surveys exist for a selection of countries participating in this study (Table 5.7). Levels of support and opposition vary. There is a tendency towards increased criticism for genetically modified food, especially in France and Norway. In contrast, support for medicinal purposes is strong, except in Japan and Norway. In Germany, the United States and the Netherlands, levels of opposition to medical applications of biotechnology have tended to decrease. Opposition to this kind of research does not seem to place very tight constraints on the development, production and marketing of such products. Table 5.7. Levels of opposition to genetic testing and genetically modified food in selected OECD countries, 1996 and 1999 Percentages Genetic testing

Genetically modified food

1996

1999

Change

1996

1999

Change

Belgium

5

10

5

28

53

25

Finland

5

9

4

23

31

8

France

4

6

2

46

65

19

Germany

13

10

(3)

44

51

7

Japan

11

20

9

16

20

4

Netherlands

7

4

(3)

22

25

3

Norway

22

22

0

56

65

9

Spain

4

6

2

20

30

10

United Kingdom

3

4

1

33

53

20

United States

10

6

(4)

26

20

(6)

Notes: Data for the United States and Japan are based on a separate source and are for “medical” and “agricultural” biotechnology, 1995 and 1998. For methodology and reservations regarding interpretation for countries other than Japan and the United States, see Gaskell et al. (2000). Source: Compiled from Gaskell et al. (2000, p. 938) and Hoban (1999, p. 51).

The role of patients and physicians in the innovation process User-producer interaction and its role in the innovation process have increasingly attracted attention in the innovation systems literature (see, for example, Moors et al., 2003). In the case of the biopharmaceutical industry the most direct interaction is in patient-producer and physician-producer relationships. Patient-producer interaction has become increasingly the focus of both industry representatives (MindBranch, Inc., 2000) and policy makers (EC, 2003, for “strengthening the role of patients in public health decision making”). The national reports show that patient groups are active in all the countries involved. However, their role is mainly restricted to general lobbying activities rather than direct interaction with INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

142 – COMPARISON OF SELECTED DEMAND-SIDE FACTORS the industry. Structural traits may partly explain the inability or unwillingness to enter into direct relationships with industry. In some countries the patient group population is quite fragmented and uncoordinated. For example, there are over 400 patient associations in the Netherlands and over 500 in Germany. Japan has fewer patient groups and those that exist are less active and organised than elsewhere. In Norway, as in many other countries, there are conglomerate associations for the more common disease clusters such as cancer and lung and heart diseases, and they direct substantial financial means towards R&D related to the diseases in question. This research funding is, however, invariably channelled to university and hospital research institutes, and thus does not involve direct collaboration with industry. The role of physicians also varies greatly. Although their role is similar and significant across countries in that they have great influence on the choice of treatment, the time lags and economic implications vary. It has been reported that the market penetration of biopharmaceuticals and other advanced drugs on the US market is partly explained by the ability – and, one might add, willingness – of US physicians to implement new treatments quickly (Bibby et al., 2003), and the considerably shorter time from the first application for approval to implementation compared to other markets (EC, 2003, p. 52). Japan has long been known to be a special case, since hospital pharmacies dispense drugs directly and hospitals’ income has thus been closely linked to the level of drug sales. In Germany, physicians’ decisions may have a more direct financial impact than elsewhere since the association of CHI physicians together with representatives of insurance companies control access to a large share of the German market through their recommendations and decisions on reimbursement. In other countries, the more or less autonomous decisions of individual physicians are obviously important, but their direct financial power has been neutralised and their direct interaction with producers is less pronounced.

Conclusions This chapter covers a selected set of demand-related concerns, ranging from the character of a country’s pharmaceutical and biopharmaceutical market to the role of socio-ethical debates and particular user groups. It is difficult to split these issues into separate sets of indicators and undertake a comprehensive assessment. Nevertheless, Table 5.8 provides an overall comparison. The assumption is that when seen from the perspective of industrial actors, demand may be structured in a way that is conducive to innovation. A lack of such demand factors may work the opposite way, making a particular location less attractive. The relevant factors can be divided into market-related factors in a narrow sense (total market size, pharmaceutical spending, etc.), and social and regulative factors (level and nature of cost-containment policies, public attitude towards biopharmaceuticals, role of users). Each country was evaluated by assigning each factor a value of between one and four, with a low value signifying an absence or low level of attractiveness. This does not imply a normative assessment; there may, for example, be political reasons for keeping a factor at a “low” level. The assessments of Belgium and France should be interpreted with special caution, since very limited information was available to serve as a basis for an assessment. In terms of the market dimension, there are roughly three clusters of countries. The United States stands first with a high mean value of 3.4, followed by France with 3.1. These two countries score high for a number of the market factors. A second group INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


143

consists of Belgium, Germany, Japan and Spain, with mean values between 2.5 and 2.9. However, the countries in this cluster score more unevenly across market-related factors. The third group consists of Finland, the Netherlands, and Norway and the United Kingdom, with mean values between 1.9 and 2.0. With the exception of the United Kingdom, this third group of countries shows a higher degree of overall internal consistency. For the social and regulatory dimension, the United States stands out once again. France and the United Kingdom form a second group for which these issues do not operate as a serious disincentive. The third group includes Belgium, Finland, Japan and Spain, whereas Germany, the Netherlands and Norway form a fourth group for which a high level of regulatory and/or social forces may be perceived as a disincentive by industry. Combining market and social dimensions, the United States, not unsurprisingly, has a high mean value. In other words, when looking at the demand factors separately, industry faces very few market-related and social and regulative disincentives. France also performs quite well, followed by a group consisting of Belgium, Finland, Germany, Japan, Spain and the United Kingdom. The Netherlands and Norway have a particularly low total mean score. Table 5.8. Indicative evaluation of industrially attractive factors in terms of innovative drugs demand Ranging from 1 (limited attractiveness) to 4 (highly attractive)

Market factors

Social and regulative factors

Mean value

B

FI

F

G

J

NL

NO

S

UK

US

Total market size

1

1

2

2

3

1

1

2

2

4

Health expenditure relative to GDP

2

1

3

3

2

2

2

2

2

4

Pharmaceutical expenditures

3

2

4

2

3

2

1

4

3

2

Pharmaceutical expenditures per capita

3

2

4

3

2

1

2

1

1

4

New drugs consumption

2

2

2

3

1

n.a.

2

4

1

4

Generics consumption

4

n.a.

4

1

3

2

2

4

2

3

Biopharmaceutical consumption

n.a.

n.a.

n.a.

3

4

3

2

n.a.

n.a.

3

Biopharmaceutical growth potential

n.a.

4

3

3

4

2

4

3

3

3

Intermediate mean value

2.5

2.0

3.1

2.5

2.8

1.9

2.0

2.9

2.0

3.4

Cost containment policy

3

3

3

1

3

2

1

3

2

4

Reimbursement of innovative drugs

3

3

3

3

4

3

2

3

4

n.a.

Social-ethical concerns

2

2

3

2

1

3

1

3

3

3

Patient’s role

n.a.

n.a.

n.a.

1

1

1

2

1

n.a.

n.a.

Physician’s role

n.a.

n.a.

n.a.

2

3

1

1

1

n.a.

3

Intermediate mean value

2.3

2.3

2.7

1.6

2.2

1.8

1.4

2.0

2.7

3.3

2.4

2.1

3.0

2.2

2.5

1.8

1.8

2.5

2.2

3.4

Notes: Belgium (B), Finland (FI), France (F), Germany (G), Japan (J), Netherlands (NL), Norway (NO), Spain (S), United Kingdom (UK), United States (US). “Biopharmaceutical growth potential” is roughly assessed based on current demand for particular therapeutic categories (Table 5.4). “Cost containment” is rated with a low value when comparatively strict measures are in place. n.a. = not available.


144 – COMPARISON OF SELECTED DEMAND-SIDE FACTORS An assessment of the influence of specific demand-side factors on biopharmaceutical innovation requires linking the demand issues discussed in this chapter to aspects covered elsewhere in this report. Looking at the demand aspects alone, the following remarks can be made. First, demand conceived as market pull in the broad sense, i.e. where sheer market size functions as an attraction to industry, is not necessarily conducive to innovation as less innovative products may be sold in sufficient volumes. Second, in a more narrow sense and corresponding to the lead market concept, a market may have a pull effect if it presents high demand for sophisticated products. Such requirements may be voiced by patients themselves or indirectly by their physicians, or they may be set by regulatory authorities. The need for cost containment measures often leaves little incentive to develop innovative products and incentives for using generic products predominate. This may lead industry to adopt a less risky strategy, since the risk of failure in financial terms may be very high when strict cost-containment policies are superimposed on conventional risks. Third, the US/North American market is overwhelmingly attractive from the industry perspective. This is true both in the narrow and the broad sense, and as a result, innovation outcomes may in the long run become biased towards the specificities of this particular market. Fourth, one of the main findings is that user influence is extremely limited in all countries studied. This is perhaps not surprising given the complex nature of the products in question. The above discussion suggests that the effect of the specific demand-side factors identified may in the long run contribute to a standardisation of innovation processes and less innovative outcomes. Indeed, this may seem inevitable owing to the huge investments required combined with the need to contain costs. In order to stimulate diversification and the diffusion of innovative products, decisions to reward product differentiation and products developed for specific niches may be warranted in the future.



145

References Ager, B. (2003), “Pricing Policy in Europe: Evolution and Assessment”, 8ème Conférence Annuelle Pharmacie: Prix du Médicament, 2 July. Beise, M. and K. Rennings (2003), “Lead Markets of Environmental Innovations: A Framework for Innovation and Environmental Economics”, ZEW Discussion Paper 03-01. Bibby, K., J. Davis and C. Jones, IMS Global Consulting (2003), “Biopharmaceuticals: Moving to Centre Stage”, in 2003 BioPeople North American Biotechnology Industry and Suppliers’ Guide, pp. 3-11. European Commission (2003), “A Stronger European-based Pharmaceutical Industry for the Benefit of the Patient: A Call for Action”, COM(2003) 383. EFPIA (2003), “The Pharmaceutical Industry in Figures”, 2003 edition, Brussels. Farmaindustria (2002), La Industria Farmacéutica en Cifras, Madrid. Gaskell, G. et al. (2000), “Biotechnology and the European Public”, Nature Biotechnology, Vol. 18, September, pp. 935-938. Hoban, T.J. (1999), “Consumer Acceptance of Biotechnology in the United States and Japan”, Food Technology, Vol. 53, No. 5, pp. 50-53. JPMA: Japan Pharmaceutical Manufacturers Association (2003), “Pharmaceutical Administration and Regulations in Japan”, Tokyo, March. Martikainen, J. and S. Rajaniemi (2002), “Drug Reimbursement Systems in EU Member States, Iceland and Norway”, Social Security and Health Reports 54, The Social Insurance Institution, Helsinki. Matsushima, S., and I. Miyamoto (2003), “Biotechnology-kanren sangyô” [Biotechnology-related industries], in A. Goto and H. Odagiri, eds. (2003), Sciencegata sangyô [Science-based Industries], NTT Shuppan, Tokyo. Medical Research Council (n.d.), Research in Focus: Monoclonal Antibodies. What are Monoclonal Antibodies?, London. Meyer-Krahmer, F. and Reger (1999), “New Perspectives on the Innovation Strategies of Multinational Enterprises: Lessons for Technology Policy in Europe”, Research Policy, Vol. 28, No. 7, pp. 751-776. MindBranch, Inc. (2000). Patient Groups and the Global Pharmaceutical Industry, Urch Publishing Ltd., Washington. Moors, E., C.M. Enzing, A. van der Giessen and R. Smits (2003), “User-Producer Interactions in Functional Genomics Innovations”, Innovation: Management, Policy & Practice, Vol. 5/2-3, December, pp. 120-143.


146 – COMPARISON OF SELECTED DEMAND-SIDE FACTORS Office of Industries, US International Trade Commission (1999), Staff Research Study 25: Review of Global Competitiveness in the Pharmaceutical Industry, Publication 3172, April. PhARMA (2002), 2002 Biotechnology New Medicines in Development Survey 371, “Biotechnology Medicines in Testing Promise to Bolster the Arsenal against Disease”, Pharmaceutical Research and Manufacturers of America, Washington, DC. Research and Markets (2003), Biopharmaceuticals: Current Market Dynamics and Future Outlook, Dublin. Senker, J. (2001), European Biotechnology Innovation System (EBIS): Analysis of the Biopharmaceuticals Sector”, EC TSER Contract No. SOE1-CT98-1117 (DG 12-SOLS) Contribution to Work Package 4, June. Senker, J., M. Brady and P. van Zwanenberg (2000), “European Biotechnology Innovation System: UK Report”, EC TSER Contract No. SOE1-CT98-1117 (DG 12SOLS), September. Szymkowski, D.E. (2004), “Rational Optimization of Proteins as Drugs: A New Era of ‘Medicinal Biology’”, Drug Discovery Today, Vol. 9, No. 9, pp. 381-383. VFA (2002), Auf einen Blick. Forschende Arzneimittelhersteller in Zahlen und Fakten, Berlin.


STRUCTURE, DYNAMICS AND PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS –

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Chapter 6 Structure, Dynamics and Performance in National Biopharmaceutical Innovation Systems

This chapter discusses the structure and dynamics of the sciences base, the business system, the demand system, framework conditions and the policy system. It then summarises the countries’ performance in science, innovation and industry. Finally, it draws conclusions concerning the structural characteristics of the countries’ innovation systems and their dynamics which may explain differences in their performance.


148 – STRUCTURE, DYNAMICS AND PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS Structure and dynamics of the science base This chapter asks: Can one identify differences in the structure and dynamics of the national biotechnology innovation systems of the participating countries, specifically in the field of biopharmaceuticals, which can explain differences in their performance? To describe the general structural features of the biopharmaceutical science base and its dynamics in a given country, three categories of indicators are used: the organisation of the public research systems, the contribution of different types of actors to the total output of scientific biopharmaceutical publications and the contribution of different types of actors to patent applications in this area. To this end, the national reports gathered information on structure and dynamics according to a common methodology. Definitions of structural and dynamic aspects of biopharmaceutical innovation systems and a methodology were given in a guidebook (Enzing et al., 2002). Data concerning performance were collected by the Fraunhofer Institute for Systems and Innovation Research (ISI) (see Chapter 3).

Dominant organisation model of the public biotechnology research systems The organisation of public research systems encompasses the following aspects: the structure of the allocation of funds, the role of funding organisations, and the position of universities and national research institutes in the system. Three different types of national biotechnology “research systems” are distinguished according to funding structures and complementarities between the organisations involved (Enzing et al., 1999): • In research systems in which public research institutes play a dominant role, the institutes are quite free to define their priorities and research programmes and coordinate their research infrastructures. Moreover, they can allocate public funds received from national governments relatively autonomously. Universities have a much less significant presence in terms of funds, research positions and access to programmes. Close relations often exist between the research institutes and the national ministries from which they receive block funding based on multi-annual programmes. Such national research institutes can be considered sectoral research institutes. • Research systems that are primarily based on research councils have a strong programme orientation and relatively high flexibility concerning subjects and research themes. Funding and allocation procedures are generally based on competition instead of block grants. The research councils are quite independent from the responsible government body. • Research systems that are based on public support funding organisations which often have one tool for funding basic research and a second one for applied research and interactions with industry. Ministries as well as funding agencies can be directly responsible for the two tasks. Many countries have developed a public research system that has features of two or even all of the above mentioned systems. However, the relative importance of the type of systems varies across countries (Table 6.1)



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Table 6.1. Models of national public research systems Model of public research system

Country

Public research institutes

Germany, France, Spain

Research councils

Netherlands, Norway

Public support funding organisations

Belgium, Finland, Japan

Source: National reports and Enzing et al. (1999).

The biopharmaceutical research systems in Germany, France, and Spain can all be characterised as public research institute-based. In Germany, a major share of public research in biotechnology and biopharmaceutics at the federal level is performed by the Max Planck Institutes, Helmholtz Centres, the WGL institutes, Fraunhofer Institutes and AIF Institutes. In France, these are, in particular, the CNRS (scientific research), INRA (agriculture), CEA (atomic energy), INSERM (health), Institut Pasteur and Institut Curie. In Spain, the many institutes of the CSIC, the National Centre for Scientific and Technical Research, are the dominant research organisations. The public research systems in the Netherlands and Norway can be characterised as research council-based. In both countries, the research councils (NWO in the Netherlands and the Research Council in Norway) play a dominant role in the co-ordination and funding of biopharmaceutical research. The dominant system in Finland and Japan is the public support funding organisation-based model. In Finland most scientific research in biotechnology and pharmaceutical biotechnology is funded by the Academy of Finland and TEKES. Each organisation has very specific functions: the Academy of Finland essentially supports basic research and TEKES mainly targets applied research and interaction between industry and the public research system. Project funding is mostly based on bottom-up approaches and open calls for proposals. In Japan funding is largely determined by several ministries that have developed their own research programmes in biotechnology and biopharmaceuticals. Research funds are set according to these research programmes which are open to universities and public research institutes. As regards changes in the organisation of public research systems since 1994, only the Netherlands has undertaken significant changes. Until the second half of the 1990s, the public research system was based on public research institutes and these were closely related to ministries. However, since then, government funding of many of these institutes has decreased and the research institutes have become independent. At the same time, the role of the National Research Council has increased considerably in terms both of its budget and its tasks. It also became responsible for technical and application-oriented research and even, for some fields, for its valorisation.

Role of actors in biopharmaceutical publications As Figure 3.4 in Chapter 3 shows, in all eight countries, authors affiliated to universities and university hospitals have the largest share of total scientific publications related to biopharmaceuticals. In Spain, non-academic hospitals which are not directly related to a university also have a significant share in overall publications. The role of non-academic hospitals is less important in most other countries. The contribution of public-sector research institutes is considerable in most countries, although far less than


150 – STRUCTURE, DYNAMICS AND PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS that of universities. The biotechnology and pharmaceutical industry provides less than 5% of all publications in most countries. Table 6.2 shows that since 1994, universities have increased their contribution to the total number of publications in each country. In Finland in 1999, universities had increased to more than 10% their share of biopharmaceuticals in all publications. Furthermore, the contributions of both public research institutes and industry decreased in all countries. Growth in the contribution of biotechnology firms is too small to compensate for the decreasing share of pharmaceutical firms. The Netherlands is an exception, in that the contribution of industry stayed more or less the same. Table 6.2. Changes in the contribution of actor types to publications in biopharmaceuticals, 1994-99 Universities

Research institutes

Hospitals

Biotechnology firms

Pharmaceutical companies

Others

Finland

+

-

-

-

-

-

Germany

+

-

+

+

-

-

Japan

+

-

+

-

-

-

Netherlands

+

-

+

+

~

-

Norway

+

-

+

+

-

-

Spain

+

-

-

+

-

+

Source: Figure 3.4 in Chapter 3. + = increase, - = decrease, and ~ = no change.

Dominant actors in biopharmaceutical patenting The level of patenting is considered an indicator of innovative performance. As new scientific and technological knowledge is one of the most important sources of patenting activities, information about the relative contribution of the types of actors involved in patent applications can be considered a characteristic of the national biopharmaceutical innovation system. In 1994 the pharmaceutical industry dominated patenting activities in biopharmaceuticals in most participating countries (see Figure 3.8 in Chapter 3), in particular in Germany (43% of all patent applications), Spain (44%), Japan (38%) and Norway (39%). However, the pharmaceutical industry has not been able to maintain this level; it has in fact suffered significant decreases. Extreme examples are Norway and Spain where the share of the pharmaceutical industry in total number of biopharmaceutical patent applications dropped to 9% and 11%, respectively, in 1999. In most countries, biotechnology firms contributed significantly to the total number of patent applications in 1994 and made strong gains by 1999. They have only lost impact in Japan, where their share dropped from 39% in 1994 to less than 30% in 1999. Public research institutes played a limited role in 1994, but by 1999 their contribution had increased significantly in most countries. The role of universities varies in different countries. They are strong in Spain and the Netherlands where they had a large share in patenting activities in 1994 and had strengthened their position in 1999. Universities make only a marginal contribution to patenting activities in Germany, Japan and Finland. For Germany and Finland this is mainly due to the national patent legislation (see Chapter 3). In Japan, ownership of intellectual property resulting from public-sector research traditionally went to the Japanese government. This is one reason why Japanese universities have few patenting activities in biopharmaceuticals (see Chapter 3, Figure 3.8). INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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Since 1994, there have been major reconfigurations in all of the national innovation systems. Most importantly, the role of the pharmaceutical industry in patenting has decreased considerably in all countries. In most countries except Japan, high-technology biopharmaceutical companies have increased in importance; they have more or less filled the gap left by the pharmaceutical companies, although universities and research institutes have also become more important (Table 6.3). Table 6.3. Changes in the contribution of actor types to patent applications in the biopharmaceutical sector, 1994-99 Universities

Research institutes

Private persons

Biotechnology firms

Pharmaceutical companies

Finland

+

-

-

+

-

Germany

+

-

+

+

-

Japan

+

+

+

-

-

Netherlands

+

+

-

+

-

Norway

+

+

-

+

-

Spain

+

+

-

+

-

Source: Figure 3.8 in Chapter 3. + = increase, - = decrease, and ~ = no change.

Structure and dynamics of the biopharmaceutical business system The aspects of the national biopharmaceutical business system that were addressed in the national case studies are: the size of the pharmaceutical sector (number of firms and employment), the presence of foreign pharmaceutical firms, and mergers and acquisitions (Table 6.4). These are used to describe the system’s structure and dynamics since 1994.

Number of pharmaceutical firms and employment The pharmaceutical industry is strong in most countries. Japan (1 400 firms in 2001), Germany (577 firms in 2001), France (309 firms in 2003) and Spain (262 in 2000) have the largest pharmaceutical sectors in terms of number of firms. Belgium and the Netherlands have fewer, with 146 and 115, respectively, in 2001. Norway and Finland have only 13 (2000) and three (2002). Since 1994 the rise in the number of pharmaceutical firms has been largely determined by the international process of mergers and acquisitions which has led to concentration and a decrease in the number of pharmaceutical firms. Japan, Germany and France also had the largest numbers of employees in the pharmaceutical industry among the participating countries: 210 000 in Japan (2001), 115 000 in Germany (in 2002) and 98 000 in France (2001). Employment in pharmaceutical companies in Spain was 34 500 in 1999. The Netherlands accounted for 15 100 jobs (2001). The Finnish pharmaceutical sector employed 6 810 in 2002.


152 – STRUCTURE, DYNAMICS AND PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS Table 6.4. Structure and dynamics of the pharmaceutical business systems 1. Pharmaceutical firms

2. Pharmaceutical sector

3. Presence of foreign firms

4. Mergers and acquisitions

Number of firms

Changes since 1994

Number of employees

Changes since 1994

Level

Changes since 1994

Belgium

146 (2002)

n.a.

25 408 (2002)

+3 557 since 1999

High

+

Moderate in pharma Low in biotech

Finland

3 (2003)

n.a.

6 810 (2002)

n.a.

High

+


France

309 (2003)

-40 since 1990

98 000 (2001)

n.a.

Medium

+

Very high in pharma Low in biotech

Germany

577 (2001)

n.a.

115 000 (2002)

-8 000 since 1995

Very high

++

Very high in pharma Low in biotech

Japan

1 400 (2001)

n.a.

210 000 (2001)

n.a.

Low

+


Netherlands

115 (2001)

+ 15

15 100 (2001)

+ 500

Very high

+

Low in pharma Low in biotech

Norway

13 (2000)

-2 since 1996

4 572 (2002)

+ 1 531 since 1993

Very high

++

High in pharma Low in biotech

Spain

262 (2000)

- 22

34 500 (1999)

-1 200

Low

+

Low in pharma Low in biotech

n.a. – data not available. Source: National reports.

Presence of foreign firms The pharmaceutical industry is highly internationalised. Indeed, the pharmaceutical sectors of the participating countries all have high shares of foreign firms. The smaller pharmaceutical industries of Belgium, the Netherlands, Norway and Finland in particular have an extremely strong presence of foreign firms. This has been the case over the entire period under review. However, in large countries such as Germany and France, which have a strong national tradition in this sector, foreign pharmaceutical firms have gained strong positions. In both countries national pharmaceutical firms have been subjected to increased international competition since the early 1990s. In France foreign firms (80 in 1999) already supply two-thirds of the total drugs and medication market. In Spain the major multinational pharmaceutical companies hold more than 50% of the market. The Japanese pharmaceutical industry may still be characterised as dominated by domestic firms. Nevertheless, and despite a traditionally less accessible economy and a strong inward orientation, foreign pharmaceutical multinationals are increasingly gaining ground in Japan.

Mergers and acquisitions The volume of mergers and acquisitions in the pharmaceutical industry since 1994 seems to have been quite high, especially in Germany and France, involving firms with significant numbers of employees and turnover volume. This seems to reflect the global trend towards concentration in the industry. However, for the other participating countries mergers and acquisitions remained rather limited, involving relatively small and less significant firms. The intensity of mergers and acquisitions in the biopharmaceutical INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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sector has been low, even for countries with strong pharmaceutical sectors like Germany and France. In Germany, the 24 mergers and acquisitions over the period 2000-02 consisted mainly of acquisitions by German biopharmaceutical firms. In addition, the majority of the deals by German biopharmaceutical firms involved foreign firms, a sign of intensified international activity.

Structure and dynamics of the demand system To describe the structure and dynamics of the demand system for pharmaceuticals and biopharmaceuticals in the participating countries, the following indicators are used: market attractiveness, changes in expenditures on pharmaceuticals, the share therein of public expenditures, the presence of patient organisations, the impact of the national health-care systems and the regulation of market access for new (bio)pharmaceuticals (Table 6.5).

Market attractiveness On the basis of data on market factors and social and regulatory factors, a mean value was constructed for market attractiveness (see Table 5.8 in Chapter 5). According to this, France, Germany and Japan are the most attractive markets. The Netherlands is the least attractive, followed by Norway. The value of this indicator is greatly influenced by country size, however. The figures for changes in expenditures on pharmaceuticals show that the national markets for pharmaceutical products have increased strongly since 1994. The Japanese market seems to be an exception, although it remains a major market owing to its size. While the smaller countries have also seen strong increases in their national expenditures on pharmaceuticals, total expenditures remain relatively small when considering the turnover figures of major pharmaceutical “blockbusters”. Nevertheless, these smaller countries can provide attractive markets for the relatively smaller pharmaceutical and biopharmaceutical firms as they depend less on introducing blockbusters.

Public expenditure All of the countries have complex public health-care schemes, including elaborate schemes for social security and reimbursement by public authorities. These schemes determine the share of public expenditure in a country’s total health costs, including drugs. Spain has the highest share of public expenditures in total pharmaceutical expenses (78% in 1997). Pharmaceuticals are also paid for mainly with public money in Germany (69% in 2000), France (65% in 2000), the Netherlands (64% in 2000), Japan (63% in 1999) and Norway (60% in 1997). The share of public expenditures has slightly but continuously increased in most of the participating countries over the period 1994-2000, varying from +2 percentage points (Germany) to +5 percentage points (France). In Belgium, Japan and the Netherlands the share of public expenditures has decreased. The Netherlands had a remarkable decrease of 26 percentage points from 1994 (when it had a 90% share). The share of public expenditures in total expenditures on pharmaceuticals highlights the social orientation of the national health-care systems in the participating countries. It also illustrates the influential role that national authorities can play by targeting the level of reimbursement and the number of pharmaceuticals eligible for reimbursement.


154 – STRUCTURE, DYNAMICS AND PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS Table 6.5. Structure and dynamics of the demand system 2. Public share in national expenditures on pharmaceuticals [changes since 1994] (%) Source 2

1. Market attracttiveness (multidimensions indicator1)

Changes in total expenditures on pharmaceuticals since 1994 (%)

Source 1

Source 2

Belgium

2.4

+ 15

45% (1997) [1%]

Finland

2.1

+ 52

France

3.0

Germany

4. 3. 5. Impact of public Presence of patient Impact of regulation health care system on organisations for market access (bio)pharmaceutical [changes since [changes since innovation 1994] 1994] [changes since 1994] (%) Source 3

Source 3

n.a. [n.a.]

n.a. [n.a.]

n.a. [n.a.]

50% (2000) [+4%]

Limited [n.a.]

Strong [Increased]

Strong [Increased]

+ 51

65% (2000) [+5%]

n.a. [n.a.]

Strong [Increased]

Strong [Increased]

2.2

+ 45

69% (2000) [+2%]

Many fragmented [n.a.]

Strong [Increased]

Strong [Increased]

Japan

2.5

0

63% (1999) [-3%]

n.a. [n.a.]

Medium [Increased]

Strong [Same]

Netherlands

1.8

+ 54

64% (2000) [-26%]

Many fragmented [budget cuts]

Strong [Increased]

Strong [Increased]

Norway

1.8

+ 34

60% (2000) [+3%]

Limited concentrated [n.a.]

Strong [Increased]

Strong [Increased]

Spain

2.5

+ 32

78% (1997) [+2%]

Limited [n.a.]

Strong [Increased]

Strong [Increased]

1. On a scale of 1 (limited attractiveness) to 4 (highly attractive). n.a. = data not available. Sources: 1. Table 5.7 in Chapter 5; 2. OECD Health Data 2003; and 3. national reports.

Presence of demand-side actors Demand-side actors can play an important role in the biopharmaceutical innovation process. Patient organisations in particular are an important link between their members and the biopharmaceutical industry. Moreover, they can be influential by lobbying national governments. Patient organisations are present in most countries. There are several hundreds of patient organisations in the Netherlands and Germany. Other participating countries also have patient organisations but the national reports provide neither numbers nor information on the level of co-operation. For the period from 1994, data on changes in the numbers of patient organisations are lacking for most countries. Although many patient organisations are united under umbrella organisations, they are still highly fragmented, small in terms of numbers of members, and represent a wide variety of diseases, all of which limits their influence on government decision making. Moreover, it seems also to limit their co-operation with industry actors. An important development for patient organisations in the Netherlands has been a number of cuts in the subsidies provided by the Dutch government, which has had serious negative consequences for the scope of their activities.



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Public health-care system The characteristics of public health-care systems, especially regulations for pharmaceutical pricing and reimbursement, have important consequences for the size of the market for pharmaceuticals. In most European countries and Japan, public financing of the health-care system is composed of direct contributions from the state or national social insurance schemes. Private contributions by patients are relatively small (in contrast to the United States). Public expenditures on pharmaceuticals represent the largest part of total expenditures on pharmaceuticals in many countries and have been increasing constantly in recent years. For this reason, national governments have implemented a series of measures that include both controls and incentives in order to influence the supply of and demand for pharmaceuticals. Most of these measures mainly aim at limiting the cost of reimbursed pharmaceuticals by controlling their (maximum) price level and/or the level of reimbursement. Moreover, measures often aim at limiting the availability of pharmaceuticals by using positive and negative lists of pharmaceuticals for which reimbursement is or is not allowed. In addition, national governments can try to stimulate the market for so-called generic (i.e. out-of-patent and therefore cheaper) pharmaceuticals or the parallel import of cheaper branded pharmaceuticals. All of these measures have a negative impact on the innovation process in the national biopharmaceutical systems. Japan differs from the European countries in that it applies a system which seems to favour both cost containment and innovation. First, all prescription pharmaceuticals are subject to a mandatory reimbursement price set by the government. Moreover, the Japanese government regularly re-evaluates the costs of drugs on the market and imposes price cuts every two years. Second, the Japanese government offers price premiums for innovative pharmaceuticals, although very few pharmaceuticals qualify for the maximum premiums. Prices of innovative pharmaceuticals undergo price reviews every other year, even when patent protection, or when sales exceed specific limits. However, expected reforms are likely to increase the rewards for innovation and exempt pharmaceuticals from price reviews if their market growth reflects genuine clinical need.

Regulation of market access Stringent regulations for new products are an important feature of the demand side of the biopharmaceutical and pharmaceutical innovation system. Before market introduction can take place, approvals must be obtained regarding the effectiveness, safety, labelling, packaging and patient package insert of new pharmaceuticals. The regulation of market introduction in European countries is nowadays mostly set at the European level, implying regulations that are applicable for all EU member states. Since 1995, the European Medicine Evaluation Agency (EMEA) has been responsible for the approval of pharmaceuticals in the EU. Approval procedures are different for biopharmaceuticals and non-biopharmaceuticals. Decentralised procedures still exist for non-biopharmaceuticals, although approval in one EU country is recognised by other EU countries. For biopharmaceuticals, the procedures are centralised: all pharmaceuticals produced by means of biotechnology must apply for approval at the EMEA. Even though Norway is not an EU member state, its regulation of pharmaceutical market introduction is in accordance with the EU regulatory system for pharmaceuticals. Japan has an extensive and complex system that regulates the development, production and introduction of pharmaceuticals. Most Japanese laws regulating pharmaceuticals are part of the Pharmaceutical Affairs Law. All new pharmaceuticals for the Japanese market have to INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

156 – STRUCTURE, DYNAMICS AND PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS apply for approval at the Pharmaceuticals and Medical Devices Evaluation Centre. Over the last decades, Japanese authorities have pursued increased co-ordination with the US and EU authorities and a relatively high degree of harmonisation has been achieved between the different regulatory frameworks.

Framework conditions For the framework conditions for biopharmaceutical innovations, private equity markets, in particular access to venture capital, and the regulatory framework are considered (Table 6.6). Table 6.6. Structure and dynamics of framework conditions Maturity of private equity markets

Character of regulatory framework

Belgium

Very well developed

Neutral

Finland

Developed

Neutral

France

Very well developed

Neutral

Germany

Very well developed

Restrictive to neutral

Under-developed

Neutral to enabling

Japan Netherlands Norway Spain

Very well developed

Restrictive

Developed

Restrictive to neutral

Under-developed

Neutral

Source: National reports.

Private equity markets Germany, France and the Netherlands have well-developed private equity markets with a large number of providers of financial capital. Moreover, total private equity investments in these countries is relatively high compared to the other participating countries. The availability of and access to venture capital increased considerably during the second half of the 1990s. However, following the subsequent economic crises, access to venture capital for biotechnology has become difficult as investors have been increasingly risk-averse. Finland and Norway have less developed private equity markets in which venture capital plays a limited role. In general, the Nordic financial system has traditionally been bank-based and regulated by government, even though the financial markets were liberalised during the 1980s. As in most other countries, a peak was reached in the late 1990s, followed by serious stagnation after 2000. Japan and Spain have relatively underdeveloped private equity markets, in particular for risk and venture capital. Although the situation has improved since the 1990s, levels of investment and numbers of venture capitalists are still comparatively low. Moreover, the development of a strong national risk capital market seems impeded by generally risk-averse attitudes in Japanese and Spanish societies.

Regulatory framework In general, most regulatory frameworks in most European countries are nowadays set at the European level. This has led to greater harmonisation of regulations. Norway, which is not a member of the European Union, has also harmonised its regulatory framework on that of the EU. Nevertheless, EU member states still have some freedom to INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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introduce more stringent regulations when implementing EU legislation. National governments can also hinder or slow decision making on new EU legislation. This can lead to major national differences in the regulatory frameworks that are relevant for the biopharmaceutical innovation system. In countries that enforce deviant regulations this appears to have had negative consequences for industry and the research sector. In particular, the Netherlands, Germany and Norway have quite restrictive regulations in specific areas of biotechnology research. Japan has developed its own set of regulations and laws concerning biopharmaceutical innovation. However, most of its regulations are based on international standards and very largely in accordance with European regulations.

Structure and dynamics of the policy system This section describes national policy-making systems for biotechnology, the character of the national public policies and the main policy themes or targets (Table 6.7). Table 6.7. Characteristics of public policies

Character of policy instruments Biotech policy-making Commersystem Science base cialisation

Main goals of public biotech innovation policies Basic research

Applied research

Technology transfer

Valorisation

Collaboration/ Networking

Business development

Belgium

Fragmented Pluralistic

Combination

Combination

Yes

Yes

Yes

Yes

Yes

Yes

Finland

Concentrated monolithic

Combination

Generic

Yes

Yes

Yes

Yes

Yes

Yes

France

Fragmented pluralistic

Combination

Generic

Yes

Yes

Yes

Yes

Yes

Yes

Germany


Combination

Combination

Yes

Yes

Yes

Yes

Yes

Yes

Japan

Concentrated monolithic

Combination

Generic

Yes

Yes

Yes

No

Yes

No

Netherlands

Concentrated pluralistic

Combination

Combination

Yes

Yes

Yes

Yes

Yes

Yes

Norway

Concentrated pluralistic

Combination

Generic

Yes

Yes

Yes

No

Yes

No

Spain


Combination

Generic

Yes

Yes

Yes

No

Yes

No

Source: National reports and Enzing et al. (1999).

Biotechnology policy-making systems In all participating countries, ministries and other governmental bodies play a key role in the definition and formulation of biotechnology policies. Two different dimensions can be used to build a typology of the national biotechnology policy-making system: the intensity of co-ordination between key players in a policy-making system and the relative multiplicity of policy actors intervening in policy making and funding. A system with weak interaction and limited co-ordination among the key actors can be considered fragmented. A system with strong relations, a high level of co-ordination and a limited number of key actors can be considered concentrated. When a multiplicity of actors is INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

158 – STRUCTURE, DYNAMICS AND PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS involved with many research actors, initiatives and programmes, the system can be considered pluralistic. Systems in which only a few relevant actors are involved can be described as less pluralistic or monolithic (Enzing et al., 1999). The biotechnology policy-making systems in the participating countries are diverse. The Dutch and Norwegian systems can be characterised as concentrated and pluralistic. Both systems involve a large number of actors in policy making: governmental bodies, research organisations, charities, industry, etc. The strength of such systems is their high level of co-ordination and strong interaction despite the large numbers of actors involved. The German, French and Spanish policy-making systems are characterised as fragmented and pluralistic. Many different actors are involved, but there is much less interaction and co-ordination. Country size may be a factor in the differences in systems between Norway and the Netherlands on the one hand and Germany, France and Spain on the other. In addition, regional policy making, in particular in Germany, creates an extra level in the co-ordination and interaction structure. The Finnish and Japanese biotechnology policy-making systems can be described as concentrated and less pluralistic. In those countries biotechnology policy making involves a relatively small number of actors, and owing to the presence of strong co-ordination tools for science and technology, the interaction between the relevant actors is quite intense. It would appear that the longer a country’s tradition in biotechnology, the larger the number of actors involved in biotechnology policy making. The intensity of interaction and level of co-ordination seem relatively dependent on cultural preferences and institutional traditions.

Character of public biotechnology policy instruments Roughly, there are two categories of public policy instruments that affect biotechnology and biopharmaceuticals: dedicated instruments specifically targeting support for biotechnology research and its commercialisation and generic instruments that support the development and application of technologies in general, including biotechnology and biopharmaceuticals. Each country has developed combinations of generic and dedicated policy instruments for stimulating the biotechnology science base. Most countries started to support biotechnology science before 1994 through public programmes for basic and applied research. Belgium, Germany, France and the Netherlands have developed dedicated policy instruments for the commercialisation of biotechnology; the other countries have only generic policies in place.

Goals of public biotechnology policies The goal of public biotechnology policies is last feature of the policy system reviewed. Each country seems to acknowledge the need to stimulate the science base for biotechnology and biopharmaceutical development. Support of basic and applied research in these areas is necessary to keep up with international scientific developments. Countries differ in terms of which scientific disciplines are prioritised in public research programmes. Furthermore, each of the participating countries also addresses diffusion and commercialisation. Most governments have introduced measures to stimulate technology transfer and collaboration (both between research and industry and between companies). Examples are specific subsidy schemes for R&D collaboration, the creation of incubator facilities and science parks.



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The national reports show considerable differences among countries in this respect. Germany started to include commercialisation of biotechnology goals in its policies during the 1980s. Since then it has developed a broad set of policy instruments aimed at many aspects of biotechnology commercialisation, including the valorisation of publicsector research, intellectual property rights (IPR), availability of risk capital, improvement of the entrepreneurial climate, etc. Most other countries started introducing such measures during the second half of the 1990s. Spain and Japan were relative latecomers; some key aspects of commercialisation, like venture capital, seem underrepresented in their current policies.

Performance The following presents countries’ performance in sciences as well as innovation and commercialisation. For a detailed overview of the scientific and commercial performance of participating countries see Chapter 3.

Performance in science For performance in science the following indicators were used: biopharmaceutical publications per million population and per number of researchers, annual growth rates in biopharmaceutical publications, biotechnology publications per million population and citations of biotechnology publications. Finland, the Netherlands and Belgium perform best in terms of biopharmaceutical publications per million population. Norway, Germany and France lag well behind, and Japan and Spain perform least well. The difference between best performer Finland and worst performer Spain is almost 100 biopharmaceutical publications per million population in 1999/2000. When relating the number of biopharmaceutical publications to the number of researchers, the Netherlands and Belgium again lead. Finland, France, Germany, Norway and Spain follow at some distance. Japan is at the lower end of the scale. Annual growth rates in biopharmaceutical publications for the period 1994-2001 were highest in Germany and Spain (above 10%). The Netherlands, France and Finland showed the lowest annual growth rates (less than 6.5%). The best performers in 2000 in terms of biotechnology publications per million population are Finland and the Netherlands. Belgium, Norway, France and Germany show less good performance figures. Japan and Spain are again the worst performers. Citations are often used as an indicator of the quality of scientific publications. Germany performs best (with 9.2 citations to biotechnology publications). Belgium, the Netherlands, Finland and France follow (citation rates between 8 and 9). Norway, Japan and Spain have fewer than 7 citations per biotechnology publication. Based on the ranking for these five indicators of performance in science, the participating countries can be divided into three groups. First, the best performers for most of the indicators are Belgium, the Netherlands and Finland. The second-best group consists of Germany and Norway. The group with the lowest performance includes France, Japan and Spain (Table 6.8).


160 – STRUCTURE, DYNAMICS AND PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS Table 6.8. Performance in science (order of ranking) Belgium

Germany

France

Finland

Japan

Netherlands

Norway

Spain

Per 1 000 researchers (FTE) (Figure 3.3)

3

5

6

1

7

2

4

8

Per million population (Figure 3.2)

2

6

5

3

8

1

7

4

Annual growth of biopharmaceutical publications, 1994-2001 (Table 3.1)

4

2

8

7

5

6

3

1

Sub-total for biopharmaceutical publications

1/2

5/6

7

3

8

1/2

4

5/6

Biotechnology publications to population, 2003 (Figure 3.5)

3

6

5

1

7

2

4

8

Citations to biotechnology publications, 2003 (Figure 3.5)

3

1

5

4

6

2

7

8

Sub-total for biotechnology

3

4

5

2

7

1

6

8

Total

2

4

6/7

3

8

1

5

6/7

Biopharmaceutical publications, 1999/2000

Source: Figures and tables in Chapter 3 of this volume, as indicated.

Performance in innovation and industrial development For performance in innovation in industry the following indicators are used: biopharmaceutical patent application per million population, number of drugs in the pipeline per million population, and venture capital invested in biotechnology. The number of dedicated biopharmaceutical firms, employment and changes since 1994 provide information about the structure and performance of the national business system. The start-up and success of such companies can be considered a measure of commercial success which provides an indicator of how national systems have dealt with the new scientific and technological opportunities offered by biotechnology and how successful they are in this respect. Among the countries participating in the study, Belgium, followed by the Netherlands and Germany, were the best performers in terms of biopharmaceutical patent applications per million population at the European Patent Office (EPO) in 1999/2000 (see Figure 3.7, Chapter 3). Spain had by far the lowest number of EPO patent applications per million population. For the indicator concerning the number of drugs in the pipeline per million population in 2002, the pattern is the same: Belgium leads (8.6) and Spain has the lowest score (1.5). The amount of venture capital per capita invested in biotechnology in the participating countries in the period 1990-2002 was highest in Belgium (EUR 29.8), followed by the Netherlands (EUR 21.5) and Germany (EUR 20.6). Finland (EUR 11.5), France (EUR 9.4) and Norway (EUR 7.2) lag far behind. A marginal amount of venture capital was invested in Spain (EUR 0.8 per capita). No comparable data were available for Japan. An additional performance indicator for industrial development is the number of new biopharmaceutical firms. Table 6.9 summarises the data on this variable in the national INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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reports. For countries for which data are lacking the number of biotechnology firms is taken as a proxy (health biotechnology has the lion’s share in most countries). Table 6.9. Dedicated biopharmaceutical firms and employment

No. of dedicated biotechnology / biopharmaceutical firms

Changes since 1994

Avg. no. of employees in dedicated biotechnology/ biopharmaceutical firms

Belgium

48 in 2002, health care biotechnology

n.a.

116 in 2002

Germany

350 in 2003, biotechnology

Over 380 biotechnology start-ups to 2001

n.a.

France

148 in 2001, health care biotechnology

280 biotechnology start-ups to 2001

34 in 2001

Finland



10-25 in 2003

Japan



20 in 2003

Netherlands

80 in 2001, bio-pharmaceutical

62 bio-pharmaceutical start-ups to 2003

23 in 2001

Norway



15 in 2000

Spain


n.a.

n.a.

n.a. = not available. Source: National reports.

In most countries the number of new dedicated biotechnology firms has risen considerably since 1994. Nevertheless, employment figures for these firms have remained very modest: most biopharmaceutical and/or biotechnology firms are quite small. French biopharmaceutical firms were the largest with 34 employees on average in 2001. Norwegian biotechnology firms were the smallest with 15 employees on average. In all countries covered, growth in total employment in dedicated biotechnology firms has remained rather low; Germany may be an exception. Comparative data on the number of biotechnology firms per million population (European Biotechnology Scoreboard, EC, 2003) show that Finland was the best performer with almost 15 biotechnology companies per million population in 2000. Belgium and the Netherlands follow at a distance, with approximately 6.5 and 5.5 biotechnology companies, respectively, per million population. Germany had four and France had three biotechnology companies per million population while Spain had fewer than 1. No data were available for Japan and Norway. Based on these four indicators for innovation and industrial development, three performance groups can be distinguished. Belgium leads by far. The Netherlands, Germany, France and Finland follow at a distance. The group with the weakest performance includes Spain and Japan; Norway (for which no complete set of data is available) might be expected to fall into this category (Table 6.10).


162 – STRUCTURE, DYNAMICS AND PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS Table 6.10. Innovation and industrial performance (order of ranking) Belgium

Germany

France

Finland

Japan

Netherlands

Norway

Spain

Biopharmaceutical patent applications, per million capita, 1999/00 ( Figure 3.7)

1

3

6

4

7

2

5

8

Drugs under development related to country size, 2002 ( Table 3.5)

1

3

2

5

7

4

6

8

Venture capital invested in biotechnology per capita, 2002 (EVCA Yearbooks 1995-2003)

1

3

5

4

n.a

2

6

7

Number of biotechnology companies, per million capita, 2000 (European Biotechnology Scoreboard, 2003)

2

4

5

1

n.a.

3

n.a.

6

Total

1

3

4

5

*

2

*

6

n.a. = not available. Source: Figure 3.7 and Table 3.5 in Chapter 3 of this volume; EVCA Yearbooks 1995-2003; European Biotechnology Scoreboard, 2003.

Combined performance in science and in innovation and industrial development The eight countries examined are next classified according to their combined performance in science and in innovation and industrial development (Table 6.11). Belgium performs best, scoring highest in innovation and industry development and second in science. Finland and the Netherlands are quite strong in science but have medium performance in innovation and industrial development. Germany performs relatively less well in innovation and industrial development and somewhat less well in science. France and Norway do not excel in either science or in innovation and industrial development, although France performs better in the latter and Norway in the former. Japan and Spain perform poorly in both science and innovation and industrial development. Table 6.11. Combined performances in science and innovation/industrial development Science Strong Innovation/ industrial development

Strong

Belgium

Medium

Netherlands, Finland

Weak

Medium

Weak

Germany

France

Norway

Spain, Japan

Source: National reports.

Conclusions on structure, dynamics and performance Given the specific structural and dynamic characteristics of the national biotechnology and – for some indicators – the biopharmaceutical innovation systems, it may be asked whether it is possible to explain why some countries perform better in science or in innovation and industrial development than others. Inspection of the two



163

sets of data employed – structural and dynamic characteristics on the one hand and performance on the other hand – suggest that there is no single optimal structure or path of development for national biopharmaceutical innovation systems. Rather, the structural and dynamic characteristics of the biopharmaceutical innovation system of countries with similar performance in science as well as in innovation and industrial development may vary widely. Some structural characteristics identified in this study were found both in countries that perform well and in countries that perform poorly in science. For example, in this study the public research system model, i.e. the dominant organisational model of biotechnology research systems, does not emerge as a powerful explanatory variable with regard to performance in science. Research systems based on competitive funding mechanisms and possessing a high degree of flexibility – like most research councilbased systems – are increasingly seen as favourable to scientific performance. However, best-performing countries such as Belgium and Finland have a system in which support is based on public support. The other best-performing country, the Netherlands, has shifted in the last decade from a public research institute-based system to a research councilbased system. The other country with a research council-based system, Norway, has medium performance in science. Germany and France both have a public research institute-based system and show differences in scientific performance. Spain also has a public research institute-based system but has the lowest performance in science. In addition, the biotechnology policy-making system, described along the dimensions fragmented/concentrated and pluralistic/monolithic, does not seem to have much explanatory power with respect to performance in science, as Belgium, the Netherlands and Finland – the top three performers in science – all have different systems. In contrast, it appears possible to relate the level of performance in innovation and industrial development to some of the structural variables used in this study. The data show that countries that perform very well in innovation and industrial development have well-developed markets for private equity and venture capital. The countries that perform least well in innovation all have financial markets that are underdeveloped but improving. Second, in the early 1990s, the best performers had already introduced specific policies and instruments aimed at the commercialisation of technology in general, but also at biotechnology specifically. Only Belgium, Germany and the Netherlands have dedicated policies that directly target innovation and industrial development of biotechnology. All the other countries use generic policy instruments. The worst performers have generic instruments for stimulating the science base but none for commercialisation. Most are now developing policy portfolios that emphasise stimulation of commercialisation. The size of the national pharmaceutical sector and the attractiveness of the national market for pharmaceuticals do not seem to determine performance in innovation and industrial development directly. Germany and Belgium, both top performers, have a considerable national pharmaceutical sector but the other top performer, the Netherlands, has a very limited one. Moreover, France and Japan both have major pharmaceutical sectors but lag far behind the best performers. Both countries, together with Germany, have the most attractive markets among participating countries. The Netherlands and Belgium have a very limited market for pharmaceuticals and health expenditures are relatively low as well. It may be tentatively concluded that the structural factors examined here show almost no relation to the examined countries’ performance in science. However, a number of structural factors of the national innovation system may have some explanatory power INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

164 – STRUCTURE, DYNAMICS AND PERFORMANCE IN NATIONAL BIOPHARMACEUTICAL INNOVATION SYSTEMS with respect to performance in innovation and industrial development. These are the maturity of the national private equity markets, the existence of policies and instruments for the commercialisation of technology and the biotechnology-specific character of these commercialisation policies. In both cases these factors are part of the framework and institutional and policy subsystems. For a number of reasons, including a lack of information on structural variables, especially for the science system, and the differences in the descriptions of the structure and dynamics of the innovation systems in the national reports, it is not possible to draw conclusions about the impact on performance of variables that concern the science system, the business system or the demand system. The results – in terms of factors in the policy systems that seem related to countries’ performance in biopharmaceuticals – are largely supported by the outcomes of the EPOHITE project (Reiss et al., 2004). This project attempted to find relations between countries’ specific national profile for generic and biotechnology-specific innovation policy instruments and their performance in science and commercialisation. It found that national biotechnology innovation systems that prefer competitive approaches to funding (as in the research council system) seem to achieve better performance levels in biotechnology than countries with block grants (as in systems with large public research institutes). Policies for creating and maintaining the knowledge base are also crucial for commercialisation, but the reverse is not true. Countries with a comprehensive policy approach, in the sense that they use a broad set of policies to promote biotechnology that address all functions of the innovation system, perform better than countries with patchy and fragmented policies.

References Enzing, C.M., J.N. Benedictus, E. Engelen-Smeets, J.M. Senker, P.A. Martin, T. Reiss, H. Schmidt, G. Assouline, P.B. Joly and L. Nesta (1999), “Inventory and Analysis of Biotech Programmes and Related Activities in All Countries Participating in the EU FP4 Biotechnology Programmes 1994-1998”, TNO-STB/SPRU (UK)/ISI-FhG (BRD)/QAP Decision and INRA (FRA), published by the EU Publication Office under the title “Inventory of Public Biotechnology R&D in Europe, Vol. 1: Analytical Report” (EUR 18886/1), Luxembourg. Enzing, C.M., S. Kern and T. Riess (2002), “Case Study on Biotech Innovation Systems: Guidebook”, TNO-STB/Fraunhofer-ISI, Delft/Karlsruhe. European Commission (2003), Biotechnology Innovation Scoreboard 2003, European Trend Chart on Innovation, EC Enterprise Directorate-General, Brussels, available at: ftp://ftpnl.cordis.lu/pub/trendchart/reports/documents/report7.pdf. Reiss, T., S. Hinze, I. Dominguez-Lacasa, V. Mangematin, C. Enzing, A. van der Giessen, S. Kern, J. Senker, J. Calvert, L. Nest and P. Patel (2004), Efficiency of Innovation Policies in High Technology Sectors in Europe (EPOHITE), European Communities, Luxembourg.


SYSTEMIC IMPERFECTIONS IN BIOPHARMACEUTICAL INNOVATION SYSTEMS –

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Chapter 7 Systemic Imperfections in Biopharmaceutical Innovation Systems

This chapter analyses and compares the systemic imperfections – phenomena related to the structure and dynamics of the innovation system that can raise barriers or lead to disadvantages in the process of innovation – that have been identified in the eight national biopharmaceutical innovation systems studied in this project. It focuses on the science base and education, commercialisation and valorisation, the demand system and framework conditions in the countries studied and considers whether such imperfections are sectoral or generic in character.


166 – SYSTEMIC IMPERFECTIONS IN BIOPHARMACEUTICAL INNOVATION SYSTEMS Systemic imperfections This chapter analyses and compares the systemic imperfections identified in the eight national biopharmaceutical innovation systems studied in this project. As Chapter 1 noted, systemic imperfections relate to the structure and dynamics of the innovation system that raise barriers or lead to disadvantages in the process of innovation. Such systemic imperfections are mostly rooted in the absence or inappropriate functioning of actors (e.g. firms and research organisations but also regulatory authorities, users/consumers, funding organisations, etc.) in the production, diffusion and application of new knowledge, demand articulation, financing of innovation activities, education and training of researchers, etc. Examples include rigid actors that are unable to adapt to new scientific and technological knowledge, new competitive forces or political and public values. They also include “transition” and “lock-in failures” which occur when innovation systems fail to take new opportunities on board (Smith, 1997), and inadequacies in companies’ ability, through managerial deficits, lack of technological understanding, learning ability or ”absorptive capacity”, to make use of externally generated technology (Cohen and Levinthal, 1990). Other systemic imperfections relate to missing or inappropriate institutions and framework conditions in the system of innovation (e.g. laws and regulations, entrepreneurship, innovative climate, public policies) and network failures (i.e. problems of interaction or co-ordination among actors in the innovation system). These can be of several types, such as inadequate quantity and quality of interlinkages owing to a lack of trust among companies, social isolation of research groups or lack of teamwork culture in companies and public research organisations. The national case studies identified a large number and variety of systemic imperfections in the functioning of their biopharmaceutical innovation systems. Imperfections were identified in all parts of the innovation system, but most are related to the exploitation and commercialisation of knowledge relevant to biopharmaceutical innovation and to framework conditions (Table 7.1). Most of the systemic imperfections do not seem due to a single category (actors, functions, institutions, interaction) but rather to a combination of factors. In addition, many of the identified imperfections seem interrelated, such as a low level of entrepreneurial spirit and lack of valorisation of public research through academic spin-offs. To achieve good understanding of the (mal)functioning of national systems, it is important to study their interdependence. Public policies aimed at resolving systemic imperfections should be aware of the interrelations of imperfections and of their causes. In other words, policy itself needs to take a systemic approach in order to be able to identify and remedy such imperfections. The following sections elaborate on the four categories of systemic imperfections and their occurrence in the eight national systems examined. The final section offers a brief discussion of whether these imperfections are sectoral or generic in character.



167

Table 7.1. Overview of imperfections in eight national biopharmaceutical innovation systems Belgium

Germany

Spain

*

*

France

Finland

Japan

Netherlands

Norway

*

*

*

Science base and education Size and scientific priorities in public (biopharmaceutical) research Balance between basic and applied research

(*) *

Exploitation & commercialisation Exploitation of public sector research, including: - Technology transfer mechanisms - IPR system - Valorisation policies - Public-private R&D collaborations

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

*

Regulatory barriers

*

*

*

*

Level of entrepreneurial spirit

*

*

*

*

*

*

Business models of young biopharmaceutical firms

*

Size of the (bio)pharmaceutical industry

*

Demand Involvement of lead users in the biopharmaceutical innovation process

*

*

Framework conditions Availability of human resources

*

*

Availability of/accessibility to risk capital

*

*

*

Political system Co-ordination of public policies

*

*

*

The science base and education Suboptimal level and scope of public biopharmaceutical research The science-driven character of biotechnology innovation processes, including biopharmaceutical and biomedical disciplines, requires generating and maintaining a quality national science base. Scientific research largely takes place in the public domain, i.e. in universities and public research institutes. The allocation of financial resources sufficient for building and maintaining a high-level biotechnology and biopharmaceutical research infrastructure is therefore an important prerequisite. Suboptimal levels of public investment in the biopharmaceutical research system were reported in the German and Spanish national reports. In Germany, pharmaceutical research is generally not well represented in the public domain; the (large) pharmaceutical industry is the most important actor. On a per capita basis, public funding for biopharmaceutical research in Germany is lower than in several other countries. Thus INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

168 – SYSTEMIC IMPERFECTIONS IN BIOPHARMACEUTICAL INNOVATION SYSTEMS Germany runs the risk that research strategies with a long-term perspective which do not generate returns on R&D investment in the short term may be neglected. Furthermore, the maintenance and expansion of the knowledge base for less research-intensive mediumsized pharmaceutical firms may be neglected. In Spain, the general level of public research investment was comparatively low, although the Spanish research system in biotechnology and biopharmaceuticals has performed rather well over the last decades in terms of numbers of publications and citations. It is important for a national innovation system to cover all scientific disciplines that are relevant to the biopharmaceutical science base. It does not need to excel in all relevant fields, but a certain critical mass and coverage are needed to have the capacity to pick up new developments and transform them into new products and processes. A lack of knowledge and expertise in a specific scientific domain carries the risk that certain new scientific or technological developments may be missed, with potentially negative effects on economic performance. Such imperfections in the research system were identified in Germany and Japan. Patient-oriented clinical research is a crucial research domain for innovations in biopharmaceuticals. In Germany this field is somewhat underdeveloped. Consequently, the German biopharmaceutical industry seeks access to such knowledge abroad. The Japanese (bio)pharmaceutical industry fell behind, particularly compared to the US pharmaceutical industry, when the biotechnology revolution started in the mid1980s. Although the overall level of investment in the Japanese pharmaceutical research system has been increasing continuously, Japanese universities performed relatively little research in major “knowledge-supplying” areas such as molecular biology. As a consequence, Japanese pharmaceutical companies were forced to abandon their in-house development strategies and to enter into R&D partnerships with foreign partners (mostly high-technology firms from the United States). This was quite a new situation for Japanese pharmaceutical companies.

Imbalance between basic and applied research European countries have often been characterised as having developed an outstanding science base but being unable to realise the associated economic and societal benefits, known as the European paradox. Consequently, national governments have introduced various industry-oriented policies and instruments and allocated increasing amounts of resources to applied research, sometimes at the expense of support for basic research. This trend, which is also observed in most other OECD countries, may result in appealing short-term results, but may, in the long term, put the knowledge pool for the biopharmaceutical innovation system at risk of drying up, making national systems more dependent on external knowledge sources. In the Netherlands and Norway, for example, this shift in public policies from basic to applied research may have gone too far. The Netherlands has strongly favoured industryoriented and applied research over the last decade. In the area of biotechnology this resulted, among other things, in an important increase in the number of scientific publications in applied biotechnology research in the period 1995/1996 to 1999/2000, to become more or less in line with the European average. However, the number of Dutch scientific publications in basic biotechnology research increased by only 3% in the same period, far below the European increase of approximately 45%. Although most Dutch scientific biotechnology publications are still in basic research, stagnating growth might be a first symptom of deterioration in the Dutch science base in biotechnology. The Norwegian national report also mentioned that the balance between basic and applied



169

research in the biopharmaceutical innovation system has shifted towards applied research at the cost of basic research. In France and Japan major public policies aimed at stimulating applied research were introduced later than in many other countries. From the second half of the 1990s the French and Japanese governments introduced several measures and incentives to improve the conditions for applied research such as the French Loi sur l’innovation 1999 and the Plan innovation 2003 and Japanese schemes to promote university-industry collaboration. The French and Japanese national reports also mention that scientists in their national research organisations feel reluctant to perform industry-oriented research. The new public programmes try to encourage researchers to take the step towards more industrially relevant and application-oriented research.

Valorisation and commercialisation Valorisation of public sector research The transfer of scientific knowledge into new products, processes and services is one of the main functions of innovation systems. Governments have introduced various initiatives over the years to stimulate and facilitate this valorisation process. These initiatives aim, for example, at stimulating and/or supporting scientists to protect and exploit their inventions through patenting and licensing. In many countries this support is provided by technology liaison offices whose role is to encourage technology transfer to industry. Other initiatives aim at supporting entrepreneurial scientists who seek to transform their invention into a new start-up firm by providing access to experts who assist the entrepreneurial scientist in writing professional business plans. Nevertheless, the valorisation and commercialisation of public-sector research is a point of concern in many countries, as public research organisations still have a relatively low share of patents granted and licensing deals. Systemic imperfections related to valorisation and commercialisation were identified in all participating countries. To different extents, the case studies pointed in particular at insufficient levels of exploitation of university research. Several reasons were given; these can be grouped into four different categories.

Technology transfer offices A general problem is related to the lack of biotechnology expertise in technology transfer offices. Most transfer offices were set up and organised without any specialisation in specific technologies. However, facilitating the transfer of results of biotechnology or biopharmaceutical research requires in-depth knowledge of the technology, its applications and commercial value. Such technological and commercial skills have to be complemented by legal expertise to support contract design or licensing negotiations. The majority of technology transfer offices lack such skills.

Intellectual property rights The public research system still needs an adequate model for attributing the rights to and returns on intellectual property between the individual scientist and the research organisation. In many countries ownership of intellectual property rights (IPR) lies with the institutions. This is the situation in Japan, France, the Netherlands, Norway, Spain and Finland. A disadvantage is that individual scientists may have insufficient incentives to seek protection of their research outcomes. On the other hand, models that attribute the rights to individual scientists have the disadvantage of not encouraging research INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

170 – SYSTEMIC IMPERFECTIONS IN BIOPHARMACEUTICAL INNOVATION SYSTEMS organisations to support scientists in protecting their results. The German government in particular has recognised the need for changes in the legal and regulatory frameworks for IPR. It has introduced a new model of attribution that takes into account the interests of both the inventor and the research organisation. In Japan, Finland and France, similar changes in the IPR ownership and attribution system for the public research sector are under discussion.

Valorisation policies of universities and research institutes A third issue related to insufficient valorisation and exploitation of public-sector research concerns the heterogeneity of policies in universities and other public research organisations. In the Netherlands, Finland and Norway, these organisations have not developed uniform and consistent policies for exploiting the outcomes of scientific research. This is partly due to research organisations’ relative autonomy in setting valorisation policies and also to limited co-ordination by public authorities. Depending on the priority they assign to the issue, each research organisation develops its own support system with its own set of procedures for valorisation and exploitation. This not only has a negative impact on companies which have to deal with different rules in the various research organisation with which they wish to co-operate, it also inhibits learning processes for developing optimal technology transfer practices among universities and research organisations.

Inadequate public-private linkages Finally, the exploitation of public research can be constrained by missing or inadequate linkages between public research organisations and industry. Public-private R&D collaboration is seen as an important way of providing such linkages. The Japanese and Norwegian reports identified the small amount of public-private R&D linkages as a problem. Japan lacks a culture of strong interaction between industry and public research, as most Japanese companies have a longstanding tradition of performing R&D in-house. Researchers in Japanese public research organisations were reluctant to collaborate with industry. However, the number of public-private collaborations has increased significantly since public research institutes and universities received their independent status. Nevertheless, the Japanese report showed that most collaborations by companies with domestic universities and research institutes entailed the development of general knowledge, while licensing agreements and joint research mainly involved foreign partners and focused on the development of new products. Norway reported an unsatisfactory situation for university employees with respect to IPR and a lack of technology transfer units.

R&D-oriented business models of biopharmaceutical firms The number of start-ups in the biopharmaceutical sector increased considerably in the eight countries over the period 1994-2001. Most new biopharmaceutical start-ups have remained rather small, however, and often face net operating losses; only a few firms have grown and consolidated. Most of these firms have focused on R&D and development of their technology base. Their income must come from licensing of their patents or from technology-based contracts. This R&D-based business model requires large-scale investments that become profitable only over the mid or long term. Only a few start-ups use an exploitation-based business model. These companies produce and sell products and are commercially successful in the short term.



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It may be argued that public initiatives to support start-ups of high-technology firms, especially those that encourage entrepreneurial scientists to set up their own company, have contributed to this plethora of R&D-based companies of which only a few will survive. A complicating factor is the increasing reluctance of venture capitalists to invest in high-risk projects like biopharmaceutical firms. Continuity in income and creating confidence in the market and among investors are prerequisites for growth and even survival.

Size of the (bio)pharmaceutical industry and the presence of dominant firms There is a lack of critical mass, i.e. the small number of large firms, in the national (bio)pharmaceutical industry, particularly in smaller countries such as the Netherlands, Norway and Finland, which lack major domestic multinational pharmaceutical firms, in contrast to France, Germany, Spain and also Belgium. However, discussions about the threat of “dislocation” of large pharmaceutical companies as a response to unfavourable market developments are emerging in Germany as well. The geographical proximity of large, integrated pharmaceutical firms is crucial for young and small firms. Such firms act as demanding customers and are an important driver of innovation (Dahlander and McKelvey, 2003). These large firms have lengthy expertise in managing pharmaceutical R&D processes and in the downstream activities of the pharmaceutical innovation chain. Dedicated biotechnology firms need this expertise as they often lack the necessary skills. Moreover, if the size of the pharmaceutical industry is modest, there is a limited pool of skilled labour available for employment in dedicated biotechnology firms.

Demand system Involvement of users in the biopharmaceutical innovation process As stated above, the biopharmaceutical innovation system is driven by science and technology push factors. Creating and sustaining an excellent science base is therefore a prerequisite for high-performance biopharmaceutical innovation systems. However, a number of innovation studies have pointed out that innovation processes are much more successful if the demand side is taken into account. Users can develop new functions for technologies, solve unforeseen problems and propose or develop innovative solutions. Such user-generated solutions are often more innovative than solutions developed by producers. Moreover, lead users can play a decisive role in the diffusion and adoption of new products or technologies (see Von Hippel, 1978; 1988; Lundvall, 1988). In the biopharmaceutical innovation process, hospital doctors, general practitioners, pharmacists and especially patients (represented by patient organisations) could act as lead users, as they need specific medical tests, treatments, therapies and related services more often and more directly than researchers. The national reports all pointed out that relations and interactions between the (bio)pharmaceutical industry and health-care professionals are well-established and close. This is largely due to the fact that authorisation of new pharmaceuticals is based on the extensive research and evaluation of patients that is carried out by these professionals. Moreover, health-care scientists often act as advisors to innovating pharmaceutical and biopharmaceutical firms. Studies show that patient organisations normally have no direct influence on drug development processes, but they play an important role in increasing pharmaceutical companies’ awareness of certain diseases and the need for new drugs, for instance for orphan diseases INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

172 – SYSTEMIC IMPERFECTIONS IN BIOPHARMACEUTICAL INNOVATION SYSTEMS (Moors et al., 2003). The national reports mention that patients and their organisations play a negligible role in the biopharmaceutical innovation process. Their main role is in the “pre” and “post” phases: to get diseases on the biopharmaceutical firms’ research agenda, participate in funding research (through their charity organisations), and when the drug has been developed, they are an important medium for transmitting product information to patients.

Framework conditions Availability of human resources Biotechnology has led to profound changes in the structure and routines of “traditional” pharmaceutical sciences and industries. One of these changes concerns researchers’ scientific and technological skills. New disciplines, including molecular biology, genetic engineering and more recently genomics, proteomics and bioinformatics, enter biopharmaceutical research and have created increasing demand for staff with expertise in these areas. Moreover, the growth of the biotechnology industry also has led to a strong increase in the demand for laboratory technicians and engineers. In each national report, shortages in one or more of these areas were identified or anticipated in the very near future. Competition for skilled labour in the biopharmaceutical innovation system is becoming tight and contributing to raising costs as salaries increase. Firms and research institutes have to find ways to obtain qualified staff, for instance by attracting foreign employees and dealing with the attendant extensive and expensive administrative procedures. The national reports showed that large firms are at a great advantage in this race for skilled labour as they can offer higher salaries and better career opportunities than small firms or public research organisations. The biopharmaceutical sector is greatly in need of human resources with both scientific and managerial/entrepreneurial skills. Especially in young biopharmaceutical firms, their founder’s limited management experience is a severe problem. Many biopharmaceutical firms are started by scientists with excellent research track records but very little experience in how to run a business, legal affairs, negotiations, etc. In several countries governments, industry and educational institutions have recognised the problem and some action has been taken.

Availability/accessibility of risk capital The availability and accessibility of risk capital is a very important framework condition for the biopharmaceutical innovation system. Most biopharmaceutical firms, especially in their early development and growth stages, rely on external resources for financing their activities. Biopharmaceutical firms, in particular those with an R&Dbased business model, are characterised by comparatively rapid outflows of financial capital because of the huge costs of R&D, filing patent applications and payment of maintenance fees, licensing external proprietary knowledge, etc. All national reports identified problems associated with the availability of risk capital. A complicating factor for Spain and Japan is the early stage of their private venture capital markets: the amount of venture capital available and the number of venture capitalists are small and the culture of financing risky projects is underdeveloped. However, problems also occur in countries with a more developed venture capital market, i.e. Germany, France, the Netherlands, Norway and Finland. To tackle these problems, governments have initiated programmes INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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to support biotechnology start-ups by providing public seed and start-up capital. These initiatives often contributed to the growth in the number of biopharmaceutical start-ups in the last decade. While many of these firms need follow-up financing to expand their activities, the private venture capital market has been turning away from risky investments, and an important financing gap has evolved between the first stages of firm development, which are strongly supported by public funds, and the later stages. As a result, an increasing number of relatively young biopharmaceutical firms encounter difficulties in attracting capital for proceeding to the next stages of development.

Level of entrepreneurial spirit In Spain, Japan, France, the Netherlands and Norway, the lack of entrepreneurial spirit is perceived as an important barrier to the creation of an innovative and dynamic biopharmaceutical sector. This “entrepreneurial deficit”, in particular among scientists, is characterised by a marked adverseness to risk, which is aggravated by recent economic developments. Moreover, entrepreneurs in these countries put their image and reliability at stake, as business failure is looked upon very negatively by society, including industry and the banking sector. The national governments of Spain, France, Japan, the Netherlands and Norway have introduced various measures in the period 1994-2001 to counter this “entrepreneurial deficit”. However, such deeply rooted views take time to evolve.

Regulatory barriers Valorisation and exploitation of public-sector research can be hindered by specific regulatory and legal regimes. For example, Finnish universities are prohibited by law from taking shares in (start-up) companies without the explicit consent of the Finnish parliament. Amendments to remove this barrier are being discussed. In the past, Japanese universities and public research institutes were formally governmental organisations so that all intellectual property resulting from their research was automatically attributed to the Japanese government. This situation changed when public research institutions and national universities received independent status in 2001 and 2004, respectively. In France, there was a general lack of incentives for scientists and research institutes to exploit their research results before the introduction of the Loi sur l’innovation in 1999. Previously, French scientists were forbidden to initiate or take part in new start-up companies if they were working for a French university or public research institute. The Loi sur l’innovation, complemented by the Plan innovation of 2003, enabled the introduction of a large number of valorisation and commercialisation measures, for instance bio-incubators and (semi)public biotechnology funds.

Policy system Co-ordination of public policies and co-ordination among policy-making organisations This systemic imperfection is related to public governance. Numerous policies and regulatory frameworks in different domains affect the biopharmaceutical innovation system: industrial policy, innovation policy, science policy, education policy, health-care policy, health and safety policy, environmental policy, etc. In most countries, these policy domains fall under the responsibility of different policy-making and executive bodies, including national ministries, research councils and supervising authorities. When there is


174 – SYSTEMIC IMPERFECTIONS IN BIOPHARMACEUTICAL INNOVATION SYSTEMS insufficient co-ordination, policies may be inconsistent and even at odds. For many countries’ biopharmaceutical innovation system, the goals of national health-care and innovation policies are conflicting. On the one hand, there is an interest in supporting innovation and commercial competitiveness. Policy instruments have been introduced that aim at supporting biopharmaceutical innovations: financing the science base, stimulating business development and developing favourable framework conditions. On the other hand, there is a wish to keep public health care affordable. The general trend in health-care policies has been to introduce cost-containment programmes and to rationalise the public health-care system. The prices of innovative pharmaceuticals have undergone government scrutiny and the prescription of less innovative pharmaceuticals, i.e. generics, has been encouraged. The focus on cost containment, particularly in Europe, has negative consequences for biopharmaceutical and pharmaceutical firms that want to develop and market new and thus more expensive pharmaceuticals. It directly affects the cash flow of these firms and means longer delays or higher sales volumes to recoup the high costs of pharmaceutical innovation. In addition, it runs the risk of creating a climate that is unfavourable to pharmaceutical innovation. This could lead R&D-oriented pharmaceutical firms to move to other, more advantageous countries. Improving cost effectiveness through innovation strategies does not seem to be an item on the public agenda.

Sectoral versus generic systemic imperfections The question of whether imperfections are linked to specific sectors or are more generic in character is of importance for developing policies able to remove systemic imperfections. Innovation policies need to take into account the specific features and needs of sectors, as generic policies probably cannot provide an optimal solution for a sector’s specific problems. However, innovation policies that are entirely tailored to a specific sector may be too narrow in scope. Table 7.2 lists the sector-specific or generic character of each of the systemic imperfections. A number of systemic imperfections are characterised as both sector-specific and generic. This means that the imperfections are both general characteristics of national innovation systems and have specific effects on the biopharmaceutical sector.

Sciences and education Germany, Japan and Spain suffer from the insufficient size of public biopharmaceutical research and inappropriate priorities. The imperfections typical of Germany’s biopharmaceutical research system are lack of patient-oriented research and lack of public R&D investments compared to industry. In Japan the problem is insufficient research in major biotechnology areas. Spain’s problem is more generic. Although the Spanish government has taken several initiatives in recent years, the level of public investment in the Spanish research system remains relatively low.



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Table 7.2. Character of systemic imperfections Sector-specific

Generic

DE, (JP)

ES

Science base and education Size and scientific priorities in public (biopharmaceutical) research Balance between basic and applied research

F, JP, NL, NO

Exploitation and commercialisation Exploitation of public sector research, including: - technology transfer mechanisms - IPR system - Valorisation policies - Public-private R&D collaborations Business models of young biopharmaceutical firms Size of the (bio)pharmaceutical industry

DE, ES, F, FI, JP, NL, NO B, DE, ES, F, FI, NL, NO ES, FI, NL, NO

Demand Involvement of lead users in the biopharmaceutical innovation process

DE, ES, F, FI, NL

Framework conditions Availability of human resources Availability of /accessibility to risk capital

B, DE, F, FI, JP, NL, NO B, DE, F, FI, NL, NO

Level of entrepreneurial spirit

ES, JP ES, F, JP, NL, NO

Regulatory barriers

F, FI, JP, ES

Political system Co-ordination of public policies

DE, NL, NO

B, DE

B=Belgium, DE=Germany, ES=Spain, F=France, F=Finland, JP=Japan, NL=Netherlands, NO=Norway Source: National reports.

The inappropriate balance between basic and applied research in France and Japan (both strongly oriented towards basic research) and in the Netherlands and Norway (towards applied research) is likely to be a generic imperfection, but may have some specific elements, as biotechnology has a strong technology- and thus applicationoriented component. No specific arguments or evidence are available to support the idea that this is a more sectoral systemic imperfection. On the contrary, it is reported that both the French and Japanese governments identified the risk of mainly supporting the basic research base and introduced several generic policy measures in the second half of the 1990s in order to stimulate applied and industry-oriented research. The Netherlands and Norway, like many other European countries, introduced such generic measures in the early and mid-1990s. An increase in applied and industry-oriented biotechnology research since the second half of the 1990s was reported in both the Netherlands and Norway and may be an effect of such policies. Similar trends can be expected in other technological and scientific areas in the Netherlands and Norway.

Exploitation and commercialisation The valorisation of public research is identified as an imperfection in all participating countries. The lack of valorisation is mainly related to ineffective technology transfer INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

176 – SYSTEMIC IMPERFECTIONS IN BIOPHARMACEUTICAL INNOVATION SYSTEMS organisations in universities and research institutes, the lack of priority given to valorisation in university policies, inappropriate IPR systems and weak linkages between the public research system and industry in some countries. These are not specific to biopharmaceutical research and its valorisation, but rather are characteristics of the national innovation systems in general that affect all domains of scientific research. The R&D-oriented business models of many start-up biopharmaceutical companies seem typical of the biotechnology sector and, more specifically, of the biopharmaceutical sector. This is an important sectoral imperfection in all countries. These companies focus on developing a strong technology position and a commercially and technologically attractive IPR portfolio. They prepare for long-term growth and for exit strategies that give their company a vested place in new joint ventures or incumbent pharmaceutical companies. However, this may come at the expense of attention to the commercialisation of their proprietary knowledge by means of licensing agreements, contract research or even the sale of products and may make them less attractive to venture capitalists. The chances of survival of such companies are decreasing rapidly these days. The biopharmaceutical innovation systems of Spain and of smaller countries such as Finland, the Netherlands and Norway suffer from a relatively small domestic pharmaceutical industry and thus lack major international pharmaceutical companies with their main activities in these countries. This means that most knowledge generated in the country will be sold abroad, as most of the licensing deals and trade sales of small biotechnology firms take place with large multinational companies. To some extent this is a general problem for smaller countries with their smaller industrial sectors. However, smaller countries such as Belgium, Denmark and in particular Switzerland (the latter two did not participate in this project) have a relatively strong pharmaceutical sector. This is therefore a sectoral systemic imperfection as multinational companies have a strong influence on the success rate of small high-technology biopharmaceutical companies, functioning as collaboration partners and drivers for building up a dynamic, competitive environment.

Demand system Although lack of involvement of users and consumers in innovation processes is likely in several technology-driven sectors, this can nonetheless be considered a typical sectoral imperfection as strong users’ organisations, i.e. patient organisations, are present in national biopharmaceutical innovation systems. The existence of patient organisations (representing all sorts of diseases) and their interaction with other stakeholders in the pharmaceutical innovation system, especially pharmaceutical companies, is unusual; similar situations are not found for other technical or sectoral innovation systems. Although their role in the innovation process is limited, they can influence companies’ research agenda and play an important role in the diffusion process when new products are ready to enter the market.

Framework conditions Shortages of qualified human resources in the biopharmaceutical sector are to some extent a generic imperfection as the number of students in the natural sciences, technical studies and engineering has decreased continuously over the years in many countries. However, the biopharmaceutical innovation system has some special features. First, there is an increasing need for human resources trained in the specific scientific disciplines that are the basis of new developments in biopharmaceuticals, such as molecular biology, INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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bioinformatics and genomics. Second, the lack of managerial capacity in many start-ups is typical of the biopharmaceutical sector. The scientists that start most of these companies lack training in business and management studies. In Spain and Japan the lack of risk capital, and in particular venture capital, can be considered a generic systemic imperfection. Although the national reports have indicated significant improvements, the venture capital market in both countries is still relatively underdeveloped when compared to the other countries. It is likely that most hightechnology sectors suffer, mostly depending on the stage of development of the technologies involved, the risk profile and the time horizon for expected financial returns. The equity markets in Belgium, Germany, France, Finland, the Netherlands and Norway have a specific sectoral imperfection related to biotechnology. In all of these countries public policy has strongly stimulated the increase in biotechnology start-ups by introducing public funds, credits and subsidies targeting business activities in the seed and start-up stages. However, an important gap exists between the first stages of development, for which public funds are available, and the later stages. The private equity market and venture capitalists have become increasingly reluctant to invest in high-risk ventures, i.e. in companies that are R&D-based and still in their early stages. As a consequence, there is a strong and unmet need for follow-up capital right after the start-up stage. This is relatively specific to the biotechnology/biopharmaceutical sector. The lack of entrepreneurial spirit reported in Spain, France, Japan, the Netherlands and Norway is a typical generic imperfection, as it is mainly considered a general characteristic of these countries’ innovation system. Entrepreneurship and risk taking are not prominent elements of the national cultures, and particularly of their academic communities.

Policy system Finally, insufficient or inappropriate co-ordination of public policies and policymaking organisations appeared as both sector-specific and generic imperfections in the national reports. These pointed at the negative effects of policies that do not take into account other policies’ goals and instruments. This can be suboptimal or even countereffective. In Germany and Belgium, problems of co-ordination are strongly related to the existence of more than one policy-making level, i.e. the federal government and the states/regions with their own governments (the Bundesländer in Germany and the Communities and Regions in Belgium). Such co-ordination failures are not related to any industrial sector, technology or scientific discipline and must be seen as a generic imperfection. On the other hand, the Dutch, German and Norwegian reports mention that policies directly related to the development and market introduction of biopharmaceuticals are counterproductive: on the one hand, stimulation of innovation and on the other, cost-containment measures in health-care policies that favour noninnovative pharmaceuticals. Although counter-productive public policies might affect products in other sectors as well, given the specific character of public health policies that deal specifically with innovative drugs, this can be characterised as a sectoral systemic imperfection. In conclusion, most of the systemic imperfections identified have a sectoral character as they are closely related to specific characteristics of the biopharmaceutical innovation system such as the business model, role of the large firms in the overall innovation process, existence of patient organisations, specific public policies, etc. In order to improve co-ordination and integration of policies, but also to address the other sectoral INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

178 – SYSTEMIC IMPERFECTIONS IN BIOPHARMACEUTICAL INNOVATION SYSTEMS and generic systemic imperfections addressed in this chapter, specific policy measures can be recommended. These are presented in Chapter 8.

References Cohen, W.M. and D.A. Levinthal (1990), “Absorptive Capacity: A New Perspective on Learning and Innovation”, Administrative Science Quarterly, 35, pp. 128-152. Dahlander, L. and M. McKelvey (2003), “Proximity as a Factor in Biotechnology Research and Development”, Wirtschaftspolitische Blätter, 3. Moors, E., C.M. Enzing, A. van der Giessen and R. Smits (2003), “User-Producer Interactions in Functional Genomics Innovations”, Innovation: Management, Policy & Practice, Vol. 5/2-3, December, pp. 120-143. Smith, K. (1997), “Economic Infrastructures and Innovation Systems”, in C. Edquist (ed.), Systems of Innovation: Technologies, Institutions and Organisations, Cassell, London. Von Hippel, E. (1978), “Successful Industrial Products from Customer Ideas”, Journal of Marketing, January, pp. 39-49. Von Hippel, E. (1988), The Sources of Innovation, Oxford.


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Chapter 8 Policy Implications

The national reports prepared for this study identify some common sector-specific characteristics and systemic failures and policies for addressing these failures. By processes of mutual learning, governments can develop policy practices that are suited to the characteristics of their national biopharmaceutical innovation system. This chapter shows how the role of governments in stimulating innovation has evolved. This provides an analytical framework for discussing the policy recommendations made in the national reports.


180 – POLICY IMPLICATIONS Changing roles of governments in supporting innovation The role of governments in innovation policy making has changed considerably over the last decades. International competition – largely driven by technological developments – has required continuous adaptation of the role of national governments and public bodies. In particular, new developments in biotechnology have had important impacts on the biopharmaceutical system, the economy and jobs. This has led governments to develop and implement innovation policies to strengthen the competitiveness of the economy and increase social welfare through the creation, diffusion and exploitation of knowledge to achieve commercial success and realise social goals. Traditionally, governments’ innovation policies emphasised fostering scientific and technological advances and enhancing the flow of knowledge along the innovation chain. Based on the linear model of innovation, the funding of basic research “at a certain distance from the market” was designed to compensate for the market failures that led companies to under-invest in R&D, because of their limited ability to appropriate returns, the indivisibility associated with minimum efficient scale, and the uncertain character of innovation (Arrow, 1962). This “market failure” concept was the principal rationale for the first generation of innovation policies in the post-war period, with funding of basic – i.e. generally applicable – research as a policy instrument. Since the mid-1990s the complexity of the innovation system has led governments to address “systemic failures” as well. Recognition was also given to the diffusion of innovation, the interactive character of the innovation process (with many feedback loops between the different stages of the process) and the regional and/or sectoral character of innovation processes (innovation systems). Such policies need to address systemic failures that may block the functioning of the innovation process, such as inadequate framework conditions and infrastructure provision, network and capability failures. These failures provide a rationale for government intervention not only through the funding of basic research, but also – and here second-generation innovation policies come into play – more widely in ensuring that the innovation system as a whole performs well. Secondgeneration policy instruments include programmes that stimulate network links, promote technological development, support the development of managerial capabilities in companies, create favourable framework conditions such as regulations, etc. However, as systemic failures depend very much on the characteristics of individual national systems and their interaction, it is not possible to formulate a simple rule-based policy, as can be done for static market failure (Haukness and Norgren, 1999). At the same time there is no general theory of national innovation systems to guide policy makers in developing policy tools. Arnold (2004) argues, however, that a full understanding of innovation systems is practically impossible and that a general theory is not needed. A key role for second-generation policy making is what Arnold presents as “bottleneck analysis”: continuously identifying and rectifying structural imperfections. On the basis of the intelligence they gather continuously, governments can decide where and how to intervene; this makes it possible to make continuous improvements. In the coming years, governments will need to recognise the importance of innovation in the policy system itself. The focus of first- and second-generation policies was on the research and education system, the business system, framework conditions, infrastructure and intermediaries. The focus of third-generation policies will be on government. They will need to close the “co-ordination gap” within the government – between the separate departments that deal with specific aspects of the innovation chain – but also between INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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national and regional governments and international institutions. The quality of the processes of policy making and implementation can be improved through experimentation, search for best practices, international co-operation and performance benchmarking (evaluation, indicators and reviews). This can be an important input into governments’ learning processes as governments themselves should be seen, from a systemic and evolutionary perspective, as learning organisations (OECD, 2002). Implementation of an integrated policy approach requires appropriate governance structures, with open interfaces with the business sector and society at large. Such governance structures require greater participation, and appropriate methods for achieving this goal need to be developed and implemented. For example, public opinion needs to be well informed about innovation, for instance by improving public communication about research and innovation programmes. There will be a need for greater public involvement in decision making in terms of priorities, ethics, etc. (Lengrand et al., 2002). Potential areas of social and ethical concern and mid- and longterm demands need to be identified and addressed. Governments can stimulate public debate on innovation needs. On the national level, relevant stakeholders can contribute to the development of national demand-driven innovation programmes and projects. Addressing public concerns may help avert some types of innovation failures, while informed consumers can play an active role as lead users in developing new products. Third-generation innovation policies thus give governments an active role in the innovation process and focus on government and its constitutive parts (the policy system) as well as on the actors directly involved in the innovation process. Figure 8.1 presents the main components of the innovation system and shows the reach of first-, second- and third-generation innovation policies.

Policy recommendations The national reports present policy recommendations that address both the new and the old roles for governments in stimulating innovation processes in national biopharmaceutical innovation systems. Existing national policies and policy instruments are the basis on which policy recommendations were developed. Most governments regularly evaluate (every three or four years) the overall state of the innovation system and its subsystems. After identifying the critical bottlenecks identified, new instruments can be developed and existing instruments adjusted or abolished in order to improve the working of the system. In some countries these evaluations had been carried out quite recently and new policy measures had been implemented. The main policy recommendations in the national reports are presented below and discussed according to the framework outlined above.

Coherent and consistent innovation policies One of the main policy goals of third-generation innovation policies is to achieve coherence by developing a good match between individual instruments and objectives as well as compatible instruments and objectives in different policy areas. This is a serious challenge for governments, which are generally not accustomed to dealing with crosscutting policy issues (OECD, 1999). This involves not only co-ordination of simultaneous policy actions addressing the core innovation policies for science, technology and education, but also reorientation of policy actions that pursue other primary objectives such as public health and regional development (OECD, 2002).


182 – POLICY IMPLICATIONS Demand Consumers (final demand) Producers (intermediate demand)

Industrial system Intermediaries Research institutes Brokers

Large companies

Education and research system

Policy system

Professional education and training

Government

Higher education and research

Governance

Public sector research

RTD policies

Mature SMEs

New biotech firms systems

Framework conditions and Infrastructure Banking, venture capital

IPR and information

Innovation and business support

Standards and norms

Financial environment

Taxation and incentives

Propensity to innovation and entrepreneurship

Mobility

Focus 1st generation innovation policy Focus 2nd generation innovation policy Focus 3rd generation innovation policy

Source: Arnold and Kuhlman (2001), adapted by Enzing.



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In the biopharmaceutical innovation system of most countries there is a lack of horizontal co-ordination between policies dealing with the beginning and those dealing with the end of the innovation chain. This problem is specifically addressed in the Dutch, German, Japanese and Norwegian reports. It is stated that science and technology policies stimulate the development of new innovative biopharmaceuticals, but health-care policies prohibit putting them on the market. A coherent and consistent systemic policy approach which tries to combine different objectives, such as improving international competitiveness on the one hand and high-quality and affordable public health care on the other, should be developed. This requires co-ordination of a number of stakeholders beyond the ministries of industry and public health. Since various stakeholders in the health-care system – such as physicians and management boards of hospitals – decide whether or not to use a drug, their views should be included in the debate. A sustainable supply of highly qualified personnel is of strategic importance for the competitiveness of high-technology sectors, including biopharmaceuticals. In Germany, a shortage of the qualified scientists and engineers who are important for the pharmaceutical sector, is expected in the medium term. Short-term policy interventions are not sufficient. Rather, aspects of education policy should become an integral part of innovation policy.

Public governance Innovation governance structures reflect the specific national characteristics of the overall political, economic and social system. Public governance can be stimulated at the national level, but also at the level of sectoral innovation systems and even individual innovation processes. The Dutch and German reports include policy recommendations that argue for a more active role of patient organisations in biopharmaceutical innovation processes. Their knowledge and experience can be used more efficiently; important sources of innovations have remained unused. Moreover, better use should be made of the facilitating role of patient groups during clinical trials and market access. Health-care policies need to discover what instruments are effective in supporting and facilitating a more active role of patients and/or their organisations in biopharmaceutical innovation processes. As health-care professionals are often not sufficiently qualified to assess the medical value of biopharmaceuticals adequately, the German report recommends making vocational training oriented towards innovation compulsory for health insurance physicians. It also argues that ethical assessment procedures for clinical trials should be evaluated and adjusted to achieve a better balance between the interests of the various stakeholders (e.g. getting early access to new drugs versus intensive ethical assessments to take into account different ethical perspectives of different communities. Patients’ perspectives on risks and benefits could be a guideline for developing new procedures.

Promoting co-operation and networking It is government’s role to address systemic failures that block the functioning of the innovation system. Creating network linkages throughout the system, especially between actors in the sciences and business, is a prerequisite a successful national biopharmaceutical innovation system. Innovation is the result of an interactive process involving actors from different types of organisations. The innovation process evolves as a result of the behaviour of actors and through market and non-market interactions between these actors. The analysis of the INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006

184 – POLICY IMPLICATIONS biopharmaceutical innovation processes presented in the national reports shows that it is best characterised as an international network involving universities, research institutes, high-technology biotechnology firms and pharmaceutical companies. In Japan, however, the innovation system is characterised by an “in-house development principle” and a disregard for alliance strategies. This is mainly due to the low mobility of researchers in companies and universities, the tendency of universities to focus on basic research and a lack of enthusiasm for university-industry co-operation. Policy recommendations include the introduction of instruments to make the Japanese system more open and more flexible, with a special focus on making the labour market less rigid and encouraging the mobility of scientists and knowledge. The Spanish biopharmaceutical innovation system also has weak links among the main actors, especially in the first stages of the innovation process. The report recommended fostering a culture of collaboration between traditional pharmaceutical and new biotechnology companies in order to share the risks and costs of the innovation process. It also strongly recommended an increase in the participation of the biopharmaceutical industry in joint projects with public research organisations. Especially for small economies, internationalisation is a prerequisite for growth. The size of the Norwegian market is too small for growth-oriented biotechnology ventures. Without effective internationalisation of these firms, in terms both of sales and financing, but also of human resources, development opportunities and positive exit strategies will be limited. Therefore initiatives that facilitate linkages between small domestic hightechnology firms and potential foreign partners are recommended.

Support for an innovative industry Although the extent to which governments can help business to be innovative may be limited, public policy instruments can be used to overcome firms’ inability to cope with technological progress owing to underdeveloped techniques and mechanisms for incorporating new knowledge and technologies. It is important to address the specific factors that restrain the development of new technology-based firms that can contribute directly to the biopharmaceutical innovation system’s creation and diffusion of new products and services. In order to avoid interference with market mechanisms, direct support for the growth stage of firms is not recommended, but rather the creation and maintenance of a supportive framework, including the training of scientists, regulations in general, IPR in particular, and favourable conditions for private financing. This is already a priority in biotechnology policy in a number of countries. In the last decade, national governments in some countries have introduced second-generation policy instruments that stimulate and facilitate the start-up and growth of new high-technology companies in general, and some specifically for biotechnology. However, start-up companies have faced severe difficulties for attracting funds for the next growth stages. The decreasing availability of venture capital has become a major barrier for the growth of dedicated biotechnology firms. After the boom years 1998 to mid-2001, financing has become a major problem for most biotechnology companies. A lack of liquidity and perceived volatility have triggered a retreat from the sector by private capital and institutional investors in favour of less risky later-stage deals. All national reports mention the short supply of venture capital. In some countries governments have recently introduced policies to address this issue. Other national reports propose recommendations for improving the situation. The Spanish report recommends stimulating the growth of a venture market. The Norwegian report recommends bridging the gap between first-stage and follow-up financing (or between public funding and private equity) and exploring the possibilities of additional tax INNOVATION IN PHARMACEUTICAL BIOTECHNOLOGY: COMPARING NATIONAL INNOVATION SYSTEMS AT THE SECTORAL LEVEL – ISBN-92-64-01403-9 ©OECD 2006


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measures and incentives for private investors to invest in biotechnology companies. It draws attention to the need to improve mutual understanding of the needs and demands of biotechnology firms and providers of private equity. The financing issue is also addressed by policy recommendations in the French report. The downstream financing potential that was missing in the 1999 Innovation Plan is addressed in the 2003 Innovation Plan. This support (from the Caisse des dépôts et consignations) should facilitate rapid consolidation of the viability of a dozen high-technology firms. The German report mentions the growing need for early-stage financing of biopharmaceutical firms and the need for public instruments that encourage private financers to redirect their engagement in earlystage investments.

Managerial and organisational capabilities Intangible factors, such as management and organisational capacity and regulations, play an important role in company development. Access to R&D competencies is generally not a bottleneck for these firms, as opposed to the under-utilisation of technological innovations through lack of managerial and organisational assets. Hightechnology start-ups can benefit from more support in managing downstream processes such as commercialisation. It is recommended to stimulate and facilitate learning processes through instruments that support, for example, experiments in which small firms can learn from large firms’ expertise in managerial and downstream business functions (national reports of the Netherlands and Norway). In addition biopharmaceutical and biotechnology studies should be amended in order to include courses for qualification in management, communication and economics (national reports of Germany and Norway).

Regulatory framework The Spanish and Norwegian reports recommend the development of transparent regulations, with short application procedures and good information about procedures, and the development of an adequate system for protecting innovations (including implementation and enforcement of the EU directive on biotechnology patenting) so as to foster the development of biotechnology start-ups. Moreover, a stable regulatory framework that allows planning long-term investment and favours sustainable market growth could create a favourable breeding ground for the Spanish biotechnology sector. The German report suggests that a cost-benefit evaluation of European registration procedures could provide a sound basis for potential modifications that would make access to the biopharmaceuticals market financially more attractive for small and medium-sized firms.

Human resources Biotechnology’s success as a high-technology sector is very much dependent on the availability and quality of the people who work in it. Some countries have had serious shortages of graduates at the master and doctoral levels in the life sciences in general and in specific disciplines (such as bioinformatics) in particular. Partly owing to the consolidation that has taken place recently, these problems have become less severe. The Norwegian report recommends measures to encourage students to choose natural sciences and to improve career opportunities and terms of employment at public research institutes, which are relatively unattractive employers compared to industry. The German


186 – POLICY IMPLICATIONS report recommends integrating education policy elements into innovation policy in order to tackle this structural problem in a more fundamental way.

Diffusion of technology Technology transfer can help to exploit public-sector research and is of strategic importance for commercialisation but is poorly organised in most countries. It is quite fragmented and very much dependent on local initiatives to set up science parks or technology transfer offices. This is also true of the IPR system, as universities in a number of countries decide their own IPR policy. More intensive exploitation of public sector research is recommended. Clear incentives need to be introduced, such as the inclusion of IPR indicators in review and evaluation procedures. The Dutch report recommends (inter)national learning processes for identifying the best valorisation policies and related infrastructures. Governments, universities and public research organisations should be aware that successful valorisation of public-sector research requires a qualified support infrastructure. The Netherlands and Norwegian reports mention that this means allocating sufficient financial resources and qualified human resources to technology transfer and valorisation units. In Finland, uncertainties exist as to when and how the “third mission” of the universities will be put into practice. Acts have been voted to clarify the legal status of IPR in universities, but the additional funds that would reflect this mission are still lacking.

Stimulate sound science systems Market imperfections associated with basic research persist and justify government research policies and funding. As mentioned, all countries participating in this study have general R&D funding schemes and some have biotechnology-specific schemes. Nevertheless, in some countries the quality or quantity of specific lines of research is considered insufficient (Germany, Japan, Spain, the Netherlands) and these imperfections may affect the future orientation of the biopharmaceutical innovation system. In Germany, for example, certain aspects of biopharmaceutical research, such as patientoriented biomedical research, are not well established and pharmaceutical research is not well represented in the public domain. Based on such observations the report recommends close monitoring of the performance of the biopharmaceutical research system and evaluation of its outcomes against the needs of patients and the industry. It proposes reassessing the amount of public funding for biopharmaceutical research from an international perspective. In Spain, on the other hand, R&D policies should receive much higher priority from the government and higher public funding is needed for research.



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References Arrow, Kenneth J. (1962), “The Economic Implications of Learning by Doing”, Review of Economic Studies, Vol. 29, pp. 155-173 Arnold, E. (2004), “Evaluating Research and Innovation Policy: A Systems World Needs Systems Evaluations”, Research Evaluation, Vol. 13, No. 1, pp. 3-17. Arnold, E. and S. Kuhlman (2001), “RCN in the Norwegian Research and Innovation System”, Background Report No. 12 in the evaluation of the Research Council of Norway, Royal Norwegian Ministry of Research, Education and Church Affairs, Oslo. Haukness, J. and L. Norgren (1999), “Economic Rationales of Government Intervention in Innovation and the Supply of Innovation Related Services”, STEP Report No. 8, Oslo. Lengrand, L. and Associates (2002), “Innovation Tomorrow. Innovation Policy and the Regulatory Framework: Making Innovation an Integral Part of the Broader Structural Agenda”, PREST (UK) – ANRT (F), Innovation Paper No. 28, European Commission, DG Enterprise. OECD (1999), Managing National Innovation Systems, OECD, Paris. OECD (2002), Dynamising National Innovation Systems, OECD, Paris.


OECD PUBLICATIONS, 2, rue André-Pascal, 75775 PARIS CEDEX 16 PRINTED IN FRANCE (93 2006 01 1 P) ISBN 92-64-01403-9 – No. 55065 2006

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