The Worldwide Campaign Against Pharmaceutical Innovation

The American Enterprise Institute held a conference yesterday to examine innovation in the pharmaceutical industry around the world. Speakers included Sidney Taurel, chairman and CEO of Eli Lilly, Frank Lichtenberg of Columbia University, Tom Thomas of Emory University, and John Calfee of AEI.

Sidney Taurel said that the topic of this conference would have more long-term implications than the impending war with Iraq. He stressed throughout his discussion that market-based pricing and intellectual property protection are the most important aspects of maintaining innovation. “Under weaker intellectual property protections and market controls, pharmaceutical companies would not have incentives to produce new drugs,” said Taurel.

Of all the countries in the world, Taurel said only the United States encourages innovation. “The U.S. is the last free market where global innovators can keep pushing ahead,” he said. Taurel also emphasized the risks associated with new drug research and development, comparing the R&D process to a funnel where 5,000 compounds go in, but only one comes out. “The prospect of return commensurate with risk is the only incentive for pharmaceutical companies to continue to develop new drugs,” said Taurel. Even for those drugs that make it to the market, just one in three makes enough to cover the research costs.

Taurel described what would happen if the United States adopted price controls on the pharmaceutical market:



  1. Pharmaceutical companies would focus resources on the marketing of existing drugs, not new drug development.
  2. Money currently in R&D budgets would be focused towards those drugs in the later stages of development, neglecting those in earlier stages.
  3. Pharmaceutical companies would pursue lower-risk strategies such as producing only “me-too” drugs.
  4. Pharmaceutical companies would diversify their operations into the over-the-counter market and supplements.
  5. Biotechnology companies would die off because they cannot adapt as easily to this environment as pharmaceutical companies could.

We know this would be the result of price-controlled markets because experience from other countries, notably France, provides evidence. The real question, according to Taurel, is, “Do we already have all the medical innovation we need?” For those who support price controls, the answer is yes. But Taurel argued that “Innovation is not the problem, it is the solution.”

Tom Thomas described the pharmaceutical industry in Japan where a government-directed pricing system has stifled innovation. According to Thomas, Japan does not have a global presence in the development of new drugs because of the controlling political environment in the country and the resulting dysfunctional marketplace. Pharmaceutical companies in Japan do not focus on the development of new blockbuster drugs because the unique pricing system in Japan sets prices based on the release date of a drug. This system leads to the proliferation of duplicative “me-too” products that are mainly sold only in Japan. Thomas said U.S. pharmaceutical companies are more successful in Japan than Japanese firms because they have learned to better maneuver in the system. “Japanese firms do well playing their own little game, but its too late for them to join the world market,” said Thomas.

Jack Calfee discussed why Germany is losing its pharmaceutical industry to the United States. The top German pharmaceutical company, Bayer, now ranks 17th in the world in sales. Calfee compared the successful German automobile industry to the floundering pharmaceutical industry, both of which are driven by technology, and concluded that the pharmaceutical industry is not as competitive as the automobile industry because of tightly restricted pharmaceutical markets in Germany and across Europe. If new product development is successful in the automobile industry, there are no artificial constraints on pricing or profits because they are determined by competition and consumer choice. However, if new pharmaceuticals are developed, companies still confront severe uncertainties in profit potential because of pricing restrictions. “The problem is the anti-competitive environment,” said Calfee.

Frank Lichtenberg presented results of his work that shows new prescription drugs provide significant benefits compared to older drugs. One study showed a strong correlation between the launch of new HIV/AIDS drugs and a reduction in HIV mortality between the years 1987 and 1998. A separate analysis by Lichtenberg showed that launches of New Chemical Entities (NCEs) accounted for about 40% of the increase in longevity in the overall population between 1986 and 2000.

–Joe Moser
Galen Institute

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The American Enterprise Institute held a conference yesterday to examine innovation in the pharmaceutical industry around the world. Speakers included Sidney Taurel, chairman and CEO of Eli Lilly, Frank Lichtenberg of Columbia University, Tom Thomas of Emory University, and John Calfee of AEI.

Sidney Taurel said that the topic of this conference would have more long-term implications than the impending war with Iraq. He stressed throughout his discussion that market-based pricing and intellectual property protection are the most important aspects of maintaining innovation. “Under weaker intellectual property protections and market controls, pharmaceutical companies would not have incentives to produce new drugs,” said Taurel.

Of all the countries in the world, Taurel said only the United States encourages innovation. “The U.S. is the last free market where global innovators can keep pushing ahead,” he said. Taurel also emphasized the risks associated with new drug research and development, comparing the R&D process to a funnel where 5,000 compounds go in, but only one comes out. “The prospect of return commensurate with risk is the only incentive for pharmaceutical companies to continue to develop new drugs,” said Taurel. Even for those drugs that make it to the market, just one in three makes enough to cover the research costs.

Taurel described what would happen if the United States adopted price controls on the pharmaceutical market:



  1. Pharmaceutical companies would focus resources on the marketing of existing drugs, not new drug development.
  2. Money currently in R&D budgets would be focused towards those drugs in the later stages of development, neglecting those in earlier stages.
  3. Pharmaceutical companies would pursue lower-risk strategies such as producing only “me-too” drugs.
  4. Pharmaceutical companies would diversify their operations into the over-the-counter market and supplements.
  5. Biotechnology companies would die off because they cannot adapt as easily to this environment as pharmaceutical companies could.

We know this would be the result of price-controlled markets because experience from other countries, notably France, provides evidence. The real question, according to Taurel, is, “Do we already have all the medical innovation we need?” For those who support price controls, the answer is yes. But Taurel argued that “Innovation is not the problem, it is the solution.”

Tom Thomas described the pharmaceutical industry in Japan where a government-directed pricing system has stifled innovation. According to Thomas, Japan does not have a global presence in the development of new drugs because of the controlling political environment in the country and the resulting dysfunctional marketplace. Pharmaceutical companies in Japan do not focus on the development of new blockbuster drugs because the unique pricing system in Japan sets prices based on the release date of a drug. This system leads to the proliferation of duplicative “me-too” products that are mainly sold only in Japan. Thomas said U.S. pharmaceutical companies are more successful in Japan than Japanese firms because they have learned to better maneuver in the system. “Japanese firms do well playing their own little game, but its too late for them to join the world market,” said Thomas.

Jack Calfee discussed why Germany is losing its pharmaceutical industry to the United States. The top German pharmaceutical company, Bayer, now ranks 17th in the world in sales. Calfee compared the successful German automobile industry to the floundering pharmaceutical industry, both of which are driven by technology, and concluded that the pharmaceutical industry is not as competitive as the automobile industry because of tightly restricted pharmaceutical markets in Germany and across Europe. If new product development is successful in the automobile industry, there are no artificial constraints on pricing or profits because they are determined by competition and consumer choice. However, if new pharmaceuticals are developed, companies still confront severe uncertainties in profit potential because of pricing restrictions. “The problem is the anti-competitive environment,” said Calfee.

Frank Lichtenberg presented results of his work that shows new prescription drugs provide significant benefits compared to older drugs. One study showed a strong correlation between the launch of new HIV/AIDS drugs and a reduction in HIV mortality between the years 1987 and 1998. A separate analysis by Lichtenberg showed that launches of New Chemical Entities (NCEs) accounted for about 40% of the increase in longevity in the overall population between 1986 and 2000.

–Joe Moser
Galen Institute

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About the author