U.S. Industry in 2000 Studies in Competitive Performance (1999) / Chapter Skim
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13 Pharmaceuticals and Biotechnology
13 Pharmaceuticals and Biotechnology
Pages 363-398
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From page 363... ...
On the supply side, public funding for health-related research supplies both new knowledge and highly trained employees to pharmaceutical firms. New drugs can be sold only with the explicit ~ This paper draws on an ongoing program of work exploring the determinants of research productivity in the pharmaceutical industry, funded by the Program on the Pharmaceutical Industry and the Center for Innovation in New Product Development under NSF Cooperative Agreement Number EEC-9529140.
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From page 364... ...
The industry used molecular biology in two forms as a new process technology in making large molecular weight drugs and as a new research tool in searching for more conventional, small molecular weight drugs. The vast majority of drugs prescribed today are "small" molecular weight drugs relatively small, simple molecules that can be synthesized in a test tube and that often can be taken orally.
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From page 365... ...
We suggest that molecular biology as a process technology "biotechnology" was competence destroying for the vast majority of established firms, while molecular biology used as a research tool was competence enhancing for those firms that had already made a transition to science driven, or more "rational" drug discovery. Further, we describe the ways in which the revolution shaped the evolution of the industry across the world, focusing particularly on the ways in which response in the U.S.
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From page 366... ...
Understanding the evolution of the industry in the first two periods is important because their history illustrates the role public policy played in shaping the industry and because both the industrial and institutional structure of the industry and the organizational capabilities of individual firms were molded during these early periods. Early History By almost any measure pharmaceuticals is a classic high-technology or science-based, industry.
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From page 367... ...
Due partially to the technical experience and organizational capabilities accumulated through the intense wartime effort to develop penicillin, as well as to the recognition that drug development could be highly profitable, pharmaceutical companies embarked on a period of massive investment in R&D and built large-scale internal R&D capabilities. At the same time there was a very significant shift in the institutional structure surrounding the industry.
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From page 368... ...
pharmaceutical firms (Figure 1~. Before the 1970s publicly funded research was probably most important to the industry as a source of knowledge about the etiology of disease.
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From page 369... ...
The industry's increasing reliance on advances in fundamental science dramatically increased the importance of public sector research in shaping industry productivity. Publicly funded research was important for several reasons.
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From page 371... ...
For any particular firm, the shift in the technology of drug research from "random screening" to one of "guided" discovery or "drug discovery by design" depended critically on the ability to take ad 3 The use of coauthoring behavior to measure connectedness to the public sector was pioneered by Zucker et al.
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From page 372... ...
Japan is the second largest pharmaceutical market in the world and is dominated by local firms, largely for regulatory reasons; but Japanese firms have to date been conspicuously absent from the global industry. Only Takeda ranks among the top 20 pharmaceutical firms in the world, and until relatively recently the innovative performance of Japanese pharmaceutical firms has been weak compared with their U.S.
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From page 373... ...
Public funding of biomedical research also increased dramatically in Europe in the postwar period, although the United Kingdom spent considerably less than Germany or France, and total spending did not approach American levels (Table 2~. Moreover, the institutional structure of biomedical research in continental Europe evolved quite differently from its evolution in the United States and the United Kingdom, creating an environment in which science is far less integrated with medical practice.
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From page 374... ...
In practice, however, patient care has tended to absorb the largest fraction of time and financial resources. The weakness of the research function within hospitals in continental Europe is one of the reasons that several governments have decided to concentrate biomedical research in national laboratories rather than in medical schools.
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From page 375... ...
The institutional environment surrounding drug approval in the United Kingdom was quite similar to that in the United States. Regulation of product safety, which began in 1964 and was tightened with passage of the Medicine Act in 1971, relied heavily from the beginning on formal academic medicine, in particular on well-controlled clinical trials, to demonstrate the safety and efficacy of new 5See, for example, Chien (1979)
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From page 376... ...
Under this regime the primary technology strategy for Japanese pharmaceutical companies became the identification of promising foreign products to license (Reich, l990~. The Structure of the Health Care System and Systems of Reimbursement Perhaps the biggest differences in institutional environments across countries was in the structure of the various health care systems.
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From page 377... ...
Because manufacturing costs often fall with cumulative experience, old drugs thus probably offered the highest profit margins for many Japanese companies, further curtailing the incentive to introduce new drugs. Moreover, generally high prices in the domestic market provided Japanese pharmaceutical companies with ample profits and little incentive to expand overseas.
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From page 378... ...
More recently, as the industry has gained experience with the new technologies, these two trajectories have converged, and contemporary efforts in biotechnology are largely focused on the search for large molecular weight drugs that must be produced using the tools of genetic engineering but whose therapeutic properties are not, as yet, fully understood. Understanding the distinction between these two trajectories is of critical importance to understanding the role of public policy in the history of the industry because the two require quite different organizational competencies and have had quite different implications for industry structure and for the nature of competition across the world.
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From page 379... ...
biotechnology industry undoubtedly had a multitude of causes, few observers doubt that a unique mix of publicly funded research and an institutional and financial climate that encouraged the formation of new firms was of key significance. The use of genetics as a tool for small molecule discovery, in contrast, appears to have reinforced the dominance of the large, global pharmaceutical firms at the expense of smaller regional players.
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From page 380... ...
As a result much of the relevant theoretical knowledge has been codified in scientific journals and textbooks and, in searching for and selecting alternative chemical processes for the development of small molecular weight drugs, the pharmaceutical firm has at its disposal a wealth of scientific laws, principles, and models that describe the structure of relationships between different variables such as pressure, volume, and temperature. Thus process research chemists approaching the manufacture of a small molecular weight drug can often begin their work by deriving alternative feasible synthetic routes from theory.
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From page 381... ...
In contrast, small molecule pharmaceutical process development requires the capability to exploit the rich theoretical and empirical knowledge base of chemistry through laboratory research. Biotechnology as a Research Tool The new techniques of genetic engineering have also had a significant impact on the organizational competencies required to be a successful player in the pharmaceutical industry through their effect on the competencies required to discover "conventional" small molecular weight drugs.
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From page 382... ...
These differences were critical in shaping responses to the use of biotechnology as a research tool. For those firms that had already made the transition to guided drug discovery, the adoption of the tools of genetic engineering as an additional resource in the search for small molecule drugs was a fairly natural extension of the existing competence base.
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From page 383... ...
New firms play a negligible role in Japan, Switzerland, and Germany. Comprehensive data that would allow us to match trajectory to institution type is not available, but we believe that the vast majority of the new biotechnology firms initially pursued the first trajectory, or a focus on biotechnolo~v as a TABLE 4 Patent Activity in Genetic Engineering by Type of Institution ~7~ Percent of patents filed at European patent office NBFs Established corporations Universities and other research institutions 1978-1986 U.S.
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From page 384... ...
present an analysis of 21 new biological entities approved for the U.S. market by 1994: 7 were discovered by small independent firms, 12 by small firms that were subsequently acquired, and only 2 by established pharmaceutical firms acting "in their own right." More recently, as the two trajectories have merged, intracompany agreements have proliferated, the majority between new biotechnology firms and the larger, established firms.
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From page 385... ...
. Although newly founded firms pioneered the use of genetics as a source of large molecular weight drugs, established firms led the way in the use of genetic technology as a tool for the discovery of traditional or small molecular weight drugs.
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From page 386... ...
Britain has the largest number of new biotechnology firms, followed by France, Germany, and the Netherlands (Escourrou, 1992; SERD,1996~. Recent data, moreover, suggest a dramatic increase of new biological firms in Germany, with different sources estimating their number in the 400 to 500 range or as more than 600 (Coombs, 1995~.
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From page 387... ...
Thus in mainland Europe a few firms account for a large proportion of biotechnology patents, and innovation in biotechnology rests essentially on the activities of a relatively small and stable group of large established companies. However, in contrast to the majority of the established American firms that adopted the techniques of genetic engineering as a manufacturing tool primarily through acquisition and collaboration with the small American start-ups, the European firms showed considerable variation in the methods through which they acquired the technology.
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From page 388... ...
Second, did national systems of innovation play a role in shaping the diffusion of the use of molecular biology as a research tool? This technology was pioneered by established pharmaceutical firms in almost every case, yet its rate of adoption varied widely across the world.
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From page 389... ...
There seems to be little question about the superiority of the American and British scientific systems in the field of molecular biology, and it is tempting to suggest that the strength of the local science base explains much of the regional differences in the speed with which molecular biology was exploited as a tool for the production of large molecular weight drugs. Although this explanation might seem unsatisfying to the degree that academic science is rapidly published and thus, in principle, rapidly available across the world, the American lead appears to have been particularly important because the exploitation of biotechnology in the early years required the mastery of a considerable body of tacit knowledge that could not be easily acquired from the literature (Zucker et al., 1997; Pisano, 1996~.
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pharmaceutical firms, European and Japanese firms were well positioned as partners for U.S. new biotechnology firms.
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From page 391... ...
Finally, a one-year grace period was introduced for filing a patent after publication of the invention. It is often stressed that the lack of adequate patent protection was a major obstacle to the development of the biotechnology industry in Europe.8 First, the grace period available in the United States is not available in Europe; any discovery that has been published is not patentable.
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From page 392... ...
To the degree that those firms that had already adopted the techniques of "rational" drug discovery were at a significant advantage in adopting molecular biology as a research tool, the pre-existence of a strong national pharmaceutical industry with some large internationalized companies may have been a fundamental prerequisite for the rapid adoption of molecular biology as a tool for product screening
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From page 393... ...
As a result of the combination of patent laws, the policies surrounding drug licensing, and the drug reimbursement regime, Japanese pharmaceutical firms had little incentive to develop world-class product development capabilities, and in general they concen
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From page 394... ...
Moreover, Japanese firms were protected from foreign competition and simultaneously had strong incentives to license products that had been approved overseas. Under this regime the predominant technology strategy for Japanese pharmaceutical companies became the identification of promising foreign products to license.
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From page 395... ...
In the case of biotechnology, or the use of molecular biology as a production technique, advances in basic science rendered obsolete several of the core competencies of existing firms, particularly those related to process development and manufacturing. In the United States, institutional flexibility on a wide range of dimensions led to the formation of specialized biotechnology firms that could provide these competencies and bridge the gap between basic university research, on the one hand, and clinical development of drugs on the other.
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From page 396... ...
Pharmaceutical firms adopted biotechnology as a research tool as a way to use molecular biology to enhance the value and productivity of their existing assets and competencies, and in this sense biotechnology tools were "competence enhancing." But they were only competence enhancing for some pharmaceutical firms those that were already oriented toward "high science" research and already firmly embedded in the global scientific community. Thus this case is one of existing institutional arrangements and structures shaping, rather than creating, the path of technical change.
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From page 397... ...
. "Influences on R&D Growth among Japanese Pharmaceutical Firms, 1975-1990." Journal of High Technology Management Research 6(1)
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From page 398... ...
Washington, DC: American Enterprise Institute. Zucker, L., and M
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