Europe’s political leaders have in recent months called for “European industrial autonomy”. Notions of dependency, sovereignty and resilience are now also referred to in policy proposals targeted at pharmaceutical companies, with “strategic autonomy” being the ultimate political ambition. The precise meaning of strategic autonomy in biopharmaceutical industries remains yet to be defined, although the current Pharmaceutical Strategy only refers to “open strategic autonomy” in the context of dependencies and supply chains. This is regrettable, as it does not take into account the importance of strategic research and innovation autonomy, allowing the EU to ensure a high degree of autonomy in innovative medicines and therapies. Current policy conceptions fail to account for businesses’ long-term international innovation competitiveness and Europe’s capability to attract investments in pharmaceutical research and cutting-edge production technologies.
Present conceptions of strategic autonomy of Europe’s pharmaceutical industry disregard the fact that the EU is substantially lagging the USA and, increasingly, other parts of the word in pharmaceutical innovation. Clinical trials’ pipeline data shows that, in the future, EU Member States will very likely become increasingly dependent on innovative medicines that are temporarily protected by patents and market exclusivity rights held by non-EU rights holders in many therapeutic areas. This gives some urgency to Commission President von der Leyen ensuring that the European industry remains an “innovator” and “world leader” (Mission Letter by Commission President von der Leyen to Commissioner Kyriakides).
The European Commission’s current understanding of sovereignty in pharmaceutical industries centres around one core theme: the reduction of dependencies from pharmaceutical suppliers outside the EU. At the same time, in an effort to achieve equitable access to affordable medicines and to foster research into unmet medical needs, it considers changes in the incentive structure for research in medicines for children and rare diseases, and new obligations for companies to achieve a more equitable access to medicines across Member States.
While these objectives are generally merited, the Commission has established a narrow perspective about a concept that is aiming for ambitious long-term achievements for Europe’s pharmaceutical industry. The industry’s future innovation competitiveness and the capacity to develop and produce high value-added medicines, which should be at the core of any concept of long-term autonomy, have largely been ignored.
Therefore, we argue that strategic or long-term autonomy in the domain of pharmaceuticals should focus on the following items, which are all worth being pursued in their own right, but which – as the analysis will show – are highly interrelated:
- An industrial set-up that avoids supply dependencies or vulnerabilities when it comes to critical medicines or active pharmaceutical ingredients (APIs), through secured global supply chains and/or local production capacities.
- A legal framework that is conducive to investments into research and development (R&D) in those areas that are essential to Europe’s health needs, allowing it to respond to both emergency situations and chronic diseases linked to the population, and to be the source of medical innovation.
In this study, we argue that EU policymakers need to account for the critical link between the strength of intellectual property rights (IPRs) and the effective incentives for investments in the development and production of innovative high value-added medicines in the EU. A narrow policy focus on temporary and sometimes negligible supply chain dependencies and affordability considerations would not help European companies to remain or become global leaders in pharmaceutical innovation and high value production. An erosion of pharmaceutical IPRs in the EU would reduce the level of skilled employment in pharmaceutical industries and impede knowledge creation by European companies.
Considering the above, we argue that the core of the concept of long-term autonomy needs to account for European companies’ future capacity to compete with pharmaceutical innovation and the production of high value-added medicines. As such, achieving strategic autonomy in Europe’s pharmaceutical industry requires a public policy framework that rewards risk taking and investment.
For the EU, we show that the geographical location of production of high value-added medicines is closely linked to the geographical location in which R&D activities take place and investments in production capacities are made. We therefore argue that internationally strong IPRs are not only an important prerequisite for high innovation performance in the EU; strong IPRs are also fundamental for the future production of high value-added medicines in the EU and a skilled and well-compensated pharmaceutical labour force.
We highlight two critical functions of IPRs with respect to investments and the production of innovative and high value-added medicines:
1. Pharmaceutical IPRs provide the most effective incentive for private-sector investments in pharmaceutical R&D and clinical trials, and are thus fundamental to any future production of novel and high value-added medicines in the EU. Pharmaceutical IPRs allow successful innovators to earn sufficient revenues to reinvest in innovation, which is why strong IPRs are key for a self-sustaining innovation system in the EU.
2. Pharmaceutical IPRs allow innovators and producers, including EU and third-country entities, to enter into licence agreements through which rights holders can manage the exchange of know-how and the transfer of technology, as well as production and distribution rights.
Recognising these mechanisms, EU policymakers should strive for an internationally competitive IPR incentive regime that allows for a high level of EU and international investments in pharmaceutical innovation and production capacities in the future. By contrast, an erosion of pharmaceutical exclusivity rights in the EU, e.g. reductions of patent terms and patent term extensions, risks reducing investments in research and innovation in the EU. A drop in innovation and the licensing of technologies and manufacturing rights would translate to lower production levels, less employment, and lower wages and salaries in the industry. Less investment in innovation and production in the EU would increase medicinal dependencies from non-EU suppliers over time, contradicting political ambitions for long-term autonomy.
The main body of this study is composed of four sections.
Following the introductory remarks on the concept of strategic autonomy in the light of long-term innovation competitiveness, Section 2 recaps the European debate about autonomy and sovereignty in the pharmaceutical industry and discusses the EU’s latest policy priorities, including those outlined in the “Pharmaceutical Strategy for Europe”. It is argued that:
- Blanket claims regarding shortages in supply and dependencies on third countries are misleading. The overall level of EU dependencies from only a small number of non-EU suppliers is rather low, both for APIs and finished pharmaceuticals, questioning political efforts to intervene through potentially far-reaching regulation.
- Political efforts to reduce IPR-based rewards for investments in pharmaceutical research stand in opposition with the objective to improve Europe’s pharmaceutical innovation track record. Less innovation would result in lower levels of high value-added production and less skilled employment in the EU.
- Measures towards more equitable access to medicines in the EU would require Member States to further harmonise market access conditions, such as health technology assessments and national reimbursement practices. The impact of intellectual property-related reforms for paediatrics and orphan drugs on access to medicines in the EU is largely negligible, while an erosion of universal research incentives in the EU would likely reduce innovation efforts and thus impede European citizen’s access to innovative treatments in the future.
- The current policy priorities are unfit for achieving “EU leadership” in global pharmaceutical innovation.
Section 3 discusses the role of IPRs in the production of high value-added medicines. The focus is on intellectual property as the prime incentive for investment in pharmaceutical R&D and a prerequisite for sharing technical knowledge through the transfer of production and distribution rights globally. The section outlines key industry indicators, including investment in intangibles and R&D spending in the EU, patterns in high value-added production and employment in the EU, and the investment intensities of EU production.
Section 4 provides a discussion of the concept of strategic autonomy in the light of increasing international competition of research-intensive pharmaceutical companies. It is shown that EU pharmaceutical innovators are still strong and internationally competitive in producing and exporting innovative and high-value medicines. On current trend, the EU’s pharmaceutical industry is only surpassed by US innovators, which, on aggregate, generate more innovation and a significantly higher value-added than EU companies for a broad spectrum of medicines. It is also shown that pharmaceutical innovators from Asia are rapidly catching up. Based on the assessment of innovation data, it is outlined that EU producers and healthcare systems in the Member States could, in the future, become increasingly dependent on innovative medicines that are originating from companies outside the EU. It is concluded that strong and internationally competitive IPRs granted by EU law would, in the medium to long term, help mitigate future dependencies from non-EU suppliers. It is also argued that internationally competitive pharmaceutical IPRs would contribute to direct investment and in-licensing of production from non-EU innovators, of which many already have a large manufacturing footprint in EU Member States.
Section 5 outlines potential economic impacts of a loss of long-term autonomy with respect to output losses of innovative and high value-added medicines in the EU. We provide a comparative static analysis of three hypothetical scenarios in which the EU’s overall pharmaceutical research and production mix is assumed to “degenerate” towards less innovation-intensive activities relative to the status quo. Quantitative estimates are provided for lost pharmaceutical production, forgone investments in intangibles, drops in R&D spending and changes in employment in the EU’s pharmaceutical sector. The estimates indicate that a degeneration of Europe’s innovation-driven pharmaceutical sector towards a more generics-driven (off-patent) industry would result in substantial losses of high value-added production in the EU, less investments in intangibles, less R&D spending and less employment in pharmaceutical companies in the EU. The largest losses would be experienced in Western European countries.
It is concluded that a viable innovation-enabling regulatory framework will be key for any political ambition that is aiming at a high degree of long-term autonomy of Europe’s pharmaceutical sector. Political efforts to support the future autonomy of the EU’s pharmaceutical industry should focus on promoting high innovation capabilities, universal IPR-based research incentives, and advanced and internationally connected manufacture capacities.