Politics & Policy

The Transatlantic Innovation Gap

Can Europe bridge this cultural and economic divide?

Europe’s ailing economy is facing a new challenge: the ever growing innovation gap with the U.S. Take the example of pharmaceutical research. Twenty years ago Europe was still a main center for pharmaceutical R&D. Today more than 70 percent of all new medical patents are filed in the U.S. What happened to make this gap appear? And from a European perspective (no less important), what can be done to make it disappear?

Cultural differences may not explain the appearance of the gap, but they do go someway towards explaining why it is growing so quickly. The risk-avoiding tendency in (West) European business culture makes the continent less suited to play a leading role in today’s high-stakes pharmaceutical industry. With nine out of ten new medicines never making it beyond the testing phase, and total R&D costs per successfully launched new medical product estimated at $800 million, this is no place for the fainthearted.

Then there’s the high interstate-labor mobility rate in the U.S. At any given time, almost 4 percent of the American workforce works outside its home state. This allows for a rapid spread of skills and ideas. The much lower European rate — a mere 2 percent — means that researchers hardly ever take their knowledge and experience abroad. If they do, their final destination is usually not another European country but the U.S. — no less than 400,000 European scientists currently live and work in the U.S. Of those, less than one in three will eventually return to Europe. This brain drain not only deprives Europe of many of its finest research talents, thereby severely limiting its ability to carry out fundamental research, it also robs European patients of the chance to participate in clinical trials of new, potentially life-saving (or at least quality-of-life enhancing) medicines.

More important than cultural disparities are the differences in regulatory regimes. In spite of recent legislative efforts, Europe still doesn’t have a decent regime of intellectual property protection, which leaves companies uncertain about the profitability of any investments they are looking to make. America’s fortunes turned when it got serious about promoting R&D through the 1980 Bayh-Dole act. Europe’s fortunes deteriorated because of a constant stream of regulations, all aimed at limiting the freedom of research institutes to do their work quickly and efficiently. Extra bureaucracy in the R&D phase on the European side means it now takes European pharmaceutical companies one year longer than their American counterparts to bring a new product out of testing to market.

What can Europe do to bridge the gap? Changing entrepreneurial culture is easier said than done, of course. But the so-called Lisbon package of structural economic-reform measures does at least contain a number of legislative proposals that would allow entrepreneurs greater freedom in conducting their own affairs. As is usual in matters European, actions speak louder than words. Most policy measures contained in the Lisbon package haven’t yet made it beyond the stage of lofty declaration. Once implemented, though, these measures could lead to the creation of a business climate that encourages investments of all sorts, even in potentially high-risk projects like the research and development of new drugs.

Most of the proposals included in the package are aimed at tackling the legislative obstacles that currently make investing in that type of project unattractive. Parallel imports from low price countries like Greece severely limit profitability. The absence of a single European patent means extra bureaucracy and less predictability. The lack of access to venture capital makes it very difficult for all but the biggest market players to set up potentially ground-breaking research projects. Simply executing the existing plans as contained in the Lisbon package would already make an enormous difference.

Individual European countries can take additional measures to make R&D investment by pharmaceutical companies more attractive. Probably the single most important step they could take would be the abolition of price controls. This may be a politically sensitive subject in Old Europe. But if Europe is serious about recreating a first-class pharmaceutical research infrastructure, it has no other option but to abolish them. No company in its right mind would spend several hundred million dollars on the development of a new drug if there is no prospect of a decent return on investment.

In The Road to Wigan Pier, George Orwell observed that “in modern Western man the faculty of mechanical invention has been fed and stimulated till it has reached almost the status of an instinct.” It makes you wonder how Orwell would have explained the existence of today’s transatlantic innovation gap. Instead of contemplating the answer to that question, Europeans would do better to start working on closing it. If they are serious about attracting investment and stopping the brain drain to the U.S., they have to start turning words into actions.

– Joshua Livestro is an independent political commentator and columnist. He writes for Dutch and international newspapers and magazines, his columns appearing in the Dutch political magazine Vrij Nederland and in the Benelux edition of Reader’s Digest.

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