Biomedical Project
Strains in the Global Biopharmaceutical Innovation System: An International Research Project

Summary

The biopharmaceutical innovation system is under severe pressure: research productivity has stalled, with fewer new drugs in the pipeline; many major drugs are moving out of patent and new methods of drug pricing are being adopted, so that company sales (and profits) are falling; the cost of finding new drugs continues to rise.

These sharp changes raise many important questions, which will be addressed in this project. How serious are the emerging problems – are they serious enough to impair the future creation of new medical technologies? What are the main factors threatening the innovation system, and what is their relative importance? Would there be major social costs if this innovation system does break down? What role will countries such as India and China play in the global innovation system in the future? How should governments respond to this threat to the ongoing supply of new drugs? What strategies are available to companies to develop viable business models for the future?

These issues are of special significance for the Australian biopharmaceutical sector which has successfully developed its product pipeline to a point where a large proportion of projects are in Phase III and therefore highly dependent for their successful approval and global distribution on alliances with global pharmaceutical companies.

These companies, which have been the key drivers of biopharmaceutical innovation, are facing a very different future as a result of projected falling sales revenue and of other factors. Total actual sales increased by 5.7% p.a. over the five year period 2004 to 2009, to reach $338 billion in 2009, but the projections made by leading analysts (Morgan Stanley and Credit Suisse) are for sales for the same group of companies to decline by nearly 5% or $15 billion from 2009 to 2012. While the decline may appear quite modest, it is a significant reversal for companies used to funding R&D from a rapidly expanding sales base, and the implied reduction in profitability and in available cash flow will be much greater.

More general questions for various dimensions of national policy are also raised. Governments at both national and state levels have identified biotechnology as a priority area, and major structural change in the global innovation system may imply the need for new policy directions or instruments. Policy in important new areas, such as stem cells, will also be affected by how global commercialisation models develop. Since one of the aims of the Australian Governments’ large scale investment in medical research is to support the creation of new products, fundamental change in the global biomedical innovation system may also impact on the effectiveness of this spending.

To address these questions the research team will build a model of the global biopharmaceutical innovation system, using detailed data sources and building up from the individual company and therapy level. The model will be used to study the factors influencing revenue flows and investment in R&D, and the cost, productivity and returns to that investment. This should provide a solid basis for analysing the main factors shaping the future of the innovation system, and the available options for companies and governments. The potential impact of emerging powers such as China and India will also be examined, as will the past and potential future net social value of new medicines.

The initiating partners are the Centre for Strategic Economic Studies (CSES) at Victoria University, Melbourne, and IMS Health, a leading global supplier of information and analysis to the health industry, together with Mr David Anstice, former Senior Vice President of Merck and Professor Frank Lichtenberg of CSES and Columbia University.

The Project

The overall research program is designed to answer five key questions about the challenges facing the global biopharmaceutical innovation system and their implications for both firms and national policies:

1. How serious are the strains that are emerging in this biopharmaceutical innovation system? Are they becoming such as to seriously impair the future creation of new medical technologies?
2. What are the main factors threatening this innovation system, and what are their relative importance?
3. What has been the net social value of these new medical technologies? Would there be major social costs if this innovation system was to become seriously impaired?
4. What will be the role of emerging countries (such as India and China) in this global innovation system in the future? Will the current strains provide them with a greater opportunity to participate? Will rising sales in these markets provide a basis for continued innovation?
5. What are the implications of the findings for business and for countries, including for Australia, and what are their policy implications?

As a step towards addressing these questions, the Centre has established, together with IMS Health and Mr David Anstice, an intense, nine month initial project to document and analyse the key factors working to impair the future supply of new pharmaceutical and biological products, to build a prototype model of the global biopharmaceutical system and to use that model to identify and begin to quantify points of effective intervention for firms, agencies and governments in responding to the present threats. A team from IMS Health (led by Mr Murray Aitken) will provide high level expert input and access to IMS data.

Key Researchers

• Professor Peter Sheehan, Director, CSES, and Project Leader
  - Led the Centre’s Pharmaceutical Industry Project funded by the Merck Company Foundation, and the Victorian Government. Co-Chair (Academic), APEC Life Sciences Innovation Forum.
• Professor Frank Lichtenberg, Columbia University and CSES
  - A leading world expert on technological innovation and the pharmaceutical industry.
  - Author of a wide range of papers on the economics of the pharmaceutical industry and on the benefits of new biopharmaceutical products.
• Mr David Anstice, former Senior Vice President, Merck & Co
  - More than 30 years of industry experience including at very senior levels in one of the major global pharmaceutical companies. Will provide overview and critical industry insight.
• Dr Bruce Rasmussen, Deputy Director, CSES
  - One of the key researchers on the Pharmaceutical Industry Project. Forthcoming book Innovation and Commercialisation in the Biopharmaceutical Sector: Creating and Capturing Value (Edward Elgar, April 2010) provides theoretical and empirical platform for the model.
• Dr Kim Sweeny, Principal Research Fellow, CSES
  - Leading Australian researcher on technology and the pharmaceutical industry. Recently completed a major study on cost effectiveness analysis in the context of the Australian Pharmaceutical Benefits Scheme (PBS), and an influential assessment for Medicines Australia of the recent changes to Australian Government policies on the PBS.