Government funded research is responsible for almost all pharma innovation

The pharmaceutical industry is interesting because of the new division of innovative labour. Large pharma, small biotech, universities and government labs are all parts of the ecology of the industry. But it is especially government labs and government-backed universities that invest in the research responsible for producing the most radical new drugs—the new molecular entities with priority rating in Figure 5. The ex-editor of the New England Journal of Medicine, Marcia Angell (2004), has argued forcefully that while private pharmaceutical companies justify their exorbitantly high prices by saying they need to cover their high R&D costs, in fact most of the really 'innovative' new drugs, i.e. new molecular entities with priority rating, come from publicly funded laboratories. Private pharma has focused more on 'me too' drugs (slight variations of existing ones) and the development (including clinical trials) and marketing side of the business. It is of course highly ironic, given this sector's constant bemoaning of 'stifling' regulations.

Economists measure productivity by comparing the amount of input into production with the amount of output that emerges. In this sense the large pharmaceutical companies have been fairly unproductive over the last few years in the production of innovations. As Figure 6 shows, there has been an exponential rise in R&D spending by members of the Pharmaceutical Research and Manufacturers of America (PhRMA) with no corresponding increase in the number of new drugs, commonly known as new molecular entities (NMEs). This also holds for patenting: while the number of patents has skyrocketed since the Bayh-Dole Act (1980) allowed publicly funded research to be patented, most of these patents are of little value (Demirel and Mazzucato 2012). When patents are weighted by the amount of citations they receive (the common indicator of 'important' patents), the figure is relatively flat, meaning that there are few important patents.

Of the 1,072 drugs approved by the Food and Drug Administration (FDA) between 1993 and 2004, only 357 were NMEs rather than just variations of existing 'me too' drugs. The number of important 'priority' new drugs is even more worrying: only 140 of these had priority rating (NME with 'P' rating). In Figure 7 we see that only 14 per cent were seen as important new drugs.

For the sake of the argument being made in this book, what is important is that 75 per cent of the NMEs trace their research not to private companies but to publicly funded National Institutes of Health (N1H) labs in the US (Angell 2004). While the State-funded labs have invested in the riskiest phase, the big pharmaceutical companies have preferred to invest in the less risky variations of existing drugs (a drug that simply has a different dosage than a previous version of the same drug).

All a far cry, for example, from the recent quote by UK-based GlaxoSmithKline CEO Andrew Witty: 'The pharmaceutical industry is hugely innovative ... If governments work to support, not stifle innovation, the industry will deliver the next era of revolutionary medicine' (Economist 2010b). It is the 'revolutionary' spirit of the State labs, producing 75 per cent of the radical new drugs, that is allowing Witty and his fellow CEOs to spend most of their time focusing on how to boost their stock prices (e.g. through stock repurchase programmes). Whether this parasitic relationship is sustainable or not is discussed further in Chapters 8 and 9.