TCS Daily

Restoring 'The Medicine Chest of Europe'

By Dan Coats - January 12, 2006 12:00 AM

Germany has a new chancellor, a new government, and a new opportunity to restart the engine of innovation that once positioned it as one of the most powerful and innovative economies in the world. German Chancellor Angela Merkel, who will be in the US this week for her first official state visit, should seize this opportunity before it slips away.

A good place to start would be in the bioscience and biopharmaceutical spheres. Nowhere is the decline of German innovation more obvious than there. German firms once dominated the biopharmaceutical field. Known as the "medicine chest of Europe," German drug makers spawned U.S. divisions that are now multinationals in their own right. But today, as The Philadelphia Inquirer detailed in a recent series, there is not one German company among the top ten drug-makers.

German medical and biopharmaceutical firms are now lagging far behind their younger cousins in the U.S. when it comes to developing the new "wonder drugs" that are shaping the 21st century: By some estimates, U.S. labs are churning out 70 percent of all new drugs.

A range of shortsighted government policies did much of the damage: Reference-pricing policies, in which the government will pay only for a certain amount of low-cost medicines in a class of drugs, have become one more disincentive to develop improvements in any category of drugs. Price and access controls make private R&D too expensive, even forcing some labs to shut down. And by steadily scaling back the government resources available to support research, Germany has put its drug-makers at a severe disadvantage.

In fact, early drafts of a forthcoming study indicate that Germany's share of global pharmaceutical R&D spending fell from 13 percent in 1973 to a mere 7 percent in 2000. Looked at another way, if Germany simply invested the same share of global R&D resources in bio-pharmaceuticals it invested in 1973, it could create 35,000 more jobs in the field.

Unfortunately for Europe, Germany's decline is just part of a Europe-wide problem. Media on both sides of the Atlantic have reported the piecemeal relocation of Europe's biopharmaceutical industry to America. Upon moving its global research headquarters to the U.S., Switzerland's Novartis created a cutting-edge biomedical research campus in Cambridge, Massachusetts, in 2002. Likewise, after transplanting its international headquarters to New Jersey in 2002, Dutch drug giant Organon launched a new biotechnology research facility in Cambridge in mid-2005. Organon officials call the region "the perfect breeding ground for medical biotechnology." The Anglo-Swedish AstraZeneca is investing hundreds of millions of dollars in new labs in the U.S., and almost 30 per cent of its employees are now based in the Americas. The UK's GlaxoSmithKline has manufacturing and research facilities across the U.S., and almost one-quarter of its workforce is now based here.

The transatlantic shift is the result of a friendlier environment to competition and consumer choice in America. Unhobbled by price controls, companies in the U.S. have a greater incentive to invest on the front end of drug development, because risk is matched with potential rewards. And risk-taking and innovation go hand in hand, as innovative firms attract the talented individuals who are the real fuel of future progress.

There's a lesson here for those Americans who want to flirt with price and access controls, while still expecting drug-makers to take risks in producing new drugs and absorb all the costs that go into R&D. As Germany and Europe in general demonstrate, you simply can't have it both ways.

In the meantime, is it too late for Germany to turn around? In the four years I served in Germany, there was much I came to respect and admire about its people. But as many Germans themselves concede, they are averse to change. Since change is an intended and inevitable byproduct of innovation, it's no wonder that German industry in general -- and its pharmaceutical industry in particular -- face an innovation crisis. 3M Deutschland's Kurt-Henning Wiethoff addressed this issue recently when he noted, "The importance of innovation for growth and prosperity is underestimated" in Germany. He called on policymakers, business leaders and the scientific community to "team up to make sure that a culture of innovation is renewed."

In short, if Germany wants to put life back into its life sciences, it should learn from the U.S. And if America wants to maintain its dominance in this crucial field, it must learn from Germany.

Coats served as U.S. Ambassador to Germany from 2001-2005 and U.S. Senator from 1989-1999. He is co-chairman of the government relations group at King & Spalding.


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