Submission—Industry Commission inquiry into the pharmaceutical industry

On 24 August 1995, the Australian Academy of Science made the following submission to the industry commission inquiry into the pharmaceutical industry. It concentrates on the matters detailed in item 3 (a) through to (h) in the Commission's Terms of Reference.

3 (a) Emerging market trends

The pharmaceutical industry is one of the world's largest manufacturing industry and produces drugs for curing, alleviating, preventing or diagnosing diseases in humans and animals. By its nature, it is a high technology industry which does not require massive expenditure on infrastructure in order to discover drugs which can be highly profitable in the marketplace. In order to discover novel drugs, the pharmaceutical industry spends more on research & development (R&D) than any other industry. In 1993, it spent almost 15 % of its US $200 billion of global sales on R&D. While the cost of R&D has ballooned over the last 10 years, the flow of new drugs has slowed and this is one of the reasons why drug companies have been under financial pressure. Another reason is the long lead time (average = 12 years) required between patenting a new chemical entity and its approval for marketing to the public. As patent protection is only 15-18 years, this means that drug companies only have 5-6 years of exclusive marketing to recoup R&D costs (~ $300M per drug) and make a profit at prices that both governments and consumers perceive to be expensive. Thus there is a dichotomy on one hand between the wishes of the ethical pharmaceutical manufacturers for a longer patent life for their drugs to ensure a fair return for their investments and on the other hand between consumers and generic companies who seek cheaper drugs by reducing the period of exclusive marketing of ethical drugs. A longer patent life for novel drugs does not necessarily reduce competition as The Boston Consulting Group found that 90 % of patented drugs have direct competitors and in 15 % of the 20 most lucrative therapeutic categories, there are three or more drugs available with similar properties.

The major multinational pharmaceutical companies have responded to these financial pressures by merging with companies with complementary drug portfolios and in rationalising staff and facilities. In view of the high cost of R&D, this is an obvious target for cost containment. Fortunately, recent scientific breakthroughs such as combinatorial chemistry to generate a huge array of novel small molecules, robotic high throughput drug screening, gene cloning to produce stablely transfected cells and transgenic animal models of diseases has speeded up the process of drug discovery and development thereby reducing costs.

George Poste, vice-president of research at SmithKline Beecham anticipates that drug companies will soon be spending as little as one-fifth of their future R&D budgets in-house whereas 20 years ago, almost the entire budget was spent in-house. The cost to a multinational drug company of each scientist involved in R&D has been estimated at US $ 150,000 p.a. and cost savings can be made by contracting out research and forming consortia with universities and small start-up companies.

These developments present opportunities for Australian Universities, research institutions and small, wholly-Australian owned companies to form meaningful partnerships with multi-national pharmaceutical companies to participate in drug research and development. Also, the rapid economic growth in South-East Asia provides an opportunity for Australian drug and fine-chemical companies to expand into this market.

An important component of Australia's industrial R&D effort is the research of local subsidiaries of large multinational corporations. Traditional attitudes about all R&D having to be done in huge facilities close to head office are changing. Australia is increasingly being seen as a low-cost R&D provider of excellence by some of these companies. An encouraging and consistent attitude towards multinationals willing to invest in local R&D is advised.

3 (b) Strengths and weaknesses


New drug development is based on two complementary strategies.

One strategy involves the design and synthesis of new compounds which block or mimic targets identified through basic research in biology and medicine. This strategy, which applies modern computer graphic technology to the detailed three-dimensional structures of biomolecular targets, relies on basic research programs in chemistry, biochemistry, pharmacology and medical science. Australia does somewhere between two and five per cent of the world's best basic research in each and every one of these scientific disciplines. A local success story is the development of the chemical, guanidino-sialic acid as a potent, highly selective inhibitor of the enzyme, sialidase on the coat of the influenza virus by scientists at the CSIRO Division of Biomolecular Engineering and the Victorian College of Pharmacy. The development and commercialisation of this 'anti-flu' drug is being undertaken by a partnership between a local company, Biota Holdings and the multinational company, Glaxo.

The other strategy involves the screening of naturally occurring compounds (such as those in plants and microorganisms) for pharmaceutical activity, and subsequent optimisation of that activity by way of structural modification. Australia is one of the twelve mega diverse nations of the world. The flora and fauna of our reefs and forests have attracted international pharmaceutical companies to scour our seas for the microorganisms which may provide the next generation of antibiotics, and to seek extracts of our unique marine and terrestial species in search of novel anticancer and antiviral drugs. The pharmaceutical companies, AMRAD and Astra are setting up in Australia, high throughput screening laboratories to assess extracts of our flora and fauna for in vitro pharmacological activity. Hopefully, these companies will also set up in Australia, chemical facilities to prepare semi-synthetic analogues of the endogenous chemicals with in vitro pharmacological activity as well as pharmacological laboratories to test these compounds on isolated organs and whole animal preparations.

Australia's scientific strengths and our biodiversity both provide a clear competitive edge in the development of an international pharmaceutical industry. There is an ongoing need to develop workable legislation not only governing access in all States to Australian biological resources but also protecting Australia's genetic resources. Australia must endorse the principles of the Manila Declaration and the Melaka Accord.


In October 1983 a meeting of researchers, industrialists, bankers and public servants convened by the Medicinal and Agricultural Chemistry Division of the Royal Australian Chemical Institute identified a number of factors inhibiting the development of an Australian pharmaceutical industry. Among these were:

  1. lack of defined national priorities;
  2. inadequate communication between researchers, industrialists, financiers and government;
  3. insufficient capital at the intermediate stage of research and development;
  4. lack of toxicological facilities conforming to Good Laboratory Practice Guidelines.

Regrettably, no meaningful action was taken to redress these deficiencies.

In November 1991 the report of the Task Force on the Commercialisation of Research (the Block Report) to the Minister for Science and Technology (the Hon Ross Free) stated that the significant factors hindering the commercialisation of research in Australia could be grouped into three broad categories:

  1. those arising in the public research sector or in the interactions between the research sector and industry (including the need to develop public sector research priorities in the light of national benefits and industry capability to commercialise the results);
  2. those arising from the structure and characteristics of Australian industry (including the need to develop industry networks and associated research, development and innovation groups); and
  3. capital availability.

Similar conclusions are reached in the draft Innovation Strategy commissioned by Senator Cook.

The time has come to stop inquiring into weaknesses and to start redressing them in innovative ways.

3 (c) Australia as an investment location

A recent study (J H Taggart, R&D Management 21, 3, 1991) of the factors involved in the foreign R&D locational decisions of major US and European pharmaceutical companies revealed twelve significant factors (each accounting for between 5% and 9% of the determinant scores) in the companies' decisions. The twelve factors identified fell into three groups:

  1. market factors - strategic importance (eg subsidiary pressure), presence of competitors' R&D, national expenditure on pharmaceuticals, potential market growth;
  2. resource factors - stock of scientists and technologists, excellence of tertiary education, number of new drugs developed (track record), local technical expertise;
  3. regulatory factors - efficient patent law, helpful drug development regulations (stringent, but well-defined), government empathy with industry, sympathetic drug safety regulations.

How can we influence these?

The impact of government activity on market factors is probably limited to control over pharmaceutical pricing, which is already linked to export levels and R&D expenditure through the Factor (f) guidelines. This and the patent extension measures currently under review will clearly enhance the ability of the subsidiaries of multinational pharmaceutical companies to exert strategic pressure on the parent company to locate more R&D in Australia, although increasing PBS prices to something more than 50% of the OECD average would no doubt do even more!

In the human resources area, there is a clear need to enhance the quality and quantity of school leavers entering Universities to study drug sciences. One way to do this is to start early, with untied pharmaceutical industry funded scholarships for the best undergraduates. One of the outcomes would be students who (a) understand the relationship between research and industry and (b) recognise that there are real financial rewards for scientists working in industry. At the postgraduate level, there is an urgent need to promote interdisciplinary skills between students studying chemistry and pharmacology. This could be achieved through short summer courses of (i) pharmacology for chemists and (ii) chemistry for pharmacologists. However, the true costs of this training must be recognised and universities recompensed accordingly. With regard to academic staff, they also need to understand what the pharmaceutical industry requires and this can be promoted through conjoint appointments and secondments of senior staff between industry, CSIRO and academia. In particular, the short term placement of industry staff in a University environment would be highly beneficial. This arrangement has worked well in Sweden and Denmark over the last 30 years and should be a model for Australia.

There is also an urgent need to establish post-graduate training and research in toxicology relevant to drug development in a National Toxicology and Drug Safety Centre within a University. This specialised aspect of toxicology is best taught to pharmacology and chemistry graduates as a postgraduate degree by coursework and requires experienced staff who are actively carrying out research in this area. Toxicity testing is often a 'bottleneck' in drug development and research is essential for implementing and validating new toxicity tests which are inexpensive, use fewer laboratory animals, and give more reliable predictions for human toxicity.

At the regulatory level, some countries, notably France and Canada, have been successful in building or attracting industry by forcing a nexus between industry investment and access to markets. In 1989, the Canadian Government passed Bill C-22 which gave new, patented brand name medicines an increased period of market exclusivity from generic brands in return for a commitment both to keep price increases within the rate of inflation and to increase medical research spending in Canada to 10 % of annual sales by 1996. The Canadian Pharmaceutical Industry has met this commitment and its funding of basic medical research will ensure it remains a key player in the global research for new drugs. Others countries, such as Ireland, have used tax incentives to attract major manufacturing facilities. According to Taggart's analysis, it seems that government can exert its most immediate influence on companies' decisions by sending a clear signal of government empathy with the pharmaceutical industry. Of particular importance in this regard has been the implementation of the Baume report.

3 (d) Potential market share

World sales of ethical pharmaceutical products total over $200 billion per annum, with some individual drugs earning their manufacturers in excess of $2 billion per annum. In other words, a single pharmaceutical product can achieve sales of the same order as our major export industries, such as wheat, wool or coal. At least two arguments suggest that Australia should be earning at least 2% of the ethical pharmaceutical market, ie approximately $4b per annum:

  • Australia spends around $500 million per annum on health-related R&D, about the same as a largish international pharmaceutical company. Shareholders in such a pharmaceutical company expect, and get, annual turnovers of about $4 billion in return for their investment;
  • Worldwide, an average of forty new drugs are introduced to the market each year. As noted above, these drugs come from two sources- natural products, which we have in abundance, and high quality research, of which we do about 2% of the world total. A reasonable target for the Australian industry is therefore the introduction of one new drug each year.

3 (e) Impact of regulatory measures

The introduction of the Pharmaceutical Industry Plan, including Factor (f), has been a dramatic success. Between 1987 and 1992, the first five years of its operation, the Australian pharmaceutical industry invested around $500 million in new plant and equipment and investment in R&D went from less than 2% of sales to something in excess of 6%. We have gone from a pharmaceutical industry that was $800m in the red to one which is predicted to have a positive trade balance at the turn of the century. Despite all that, we still have a very long way to go. This is particularly true of the industry-research interface.

3 (f) Research-industry linkages

A key factor in the impending reversal of our import-export figures has been the emergence of major collaborations between research institutions and industry. These collaborations are not yet robust enough to be sustained independently of government initiatives. Positive support is required for both researchers and industry.

At the industry level, it is important to structure initiatives such as Factor (f), R&D syndication, 150% tax deductions and the GIRD to maximise research-industry interactions:

  • effective partnerships should be encouraged by restoring access of universities and research institutions to R&D syndication i.e. eligibility for syndication schemes should be according to the quality and track record of the researchers and companies involved, not the nature of their organisations;
  • small/medium investors (often the most committed backers of SMEs) and others who don't benefit from the 150% tax deduction should be supported by removing tax from capital gains on R&D investments;
  • small biotechnology and pharmaceutical companies with long-term development strategies should be supported by allowing sequential/multiple IR&D grants.

On the research side, it should be recognised that researchers who commit to working with industry often risk their opportunities for personal advancement/recognition/support within their research organisations. The Australian pharmaceutical industry, including the smaller, wholly owned Australian companies, have yet to develop a commitment to longer term strategic relationships with Australian researchers. A useful government strategy would be to encourage researchers who commit to working with industry by ensuring that they are equitably supported through government research funding initiatives such as the Research Quantum (administrated by DEET).

An example of a successful research-industry link is the Synrad collaboration which was set up as a syndicated R&D program by the CSIRO Division of Chemicals and Polymers, AMRAD Operations Ltd. and the Macquarie Bank. The key point about the provision of syndicated funds to this pharmaceutical program was the opportunity that it provided to assemble all the elements needed to end with a commercially valuable package. A chemistry team, including molecular modelling capability, was linked with pharmacologists and virologists right at the planning stage of the research. The biologists involved thus had input to experimental and compound design, as well as providing a general screening capability. The project was commercially focussed through the involvement of AMRAD, who were very clear that a commercial product was the expected outcome - they planned for success. The financial institution took a very active interest in the project employing a world class medicinal scientist as a consultant and being completely involved in the management of the project.

Management systems were established to ensure the efficient allocation of available money. As compounds were filtered and development candidates identified, the combined experience and contacts, national and international, of the collaborators enabled the best path forward to commercialisation to be chosen. Commercially valuable property has resulted from this research project. Australia does not have a company or institute which can by itself bring together all the elements needed for drug discovery. Australia does have, in different locations, the talent and skill to discover new pharmaceutical products. The provision of the syndicated funds allowed the drawing together of this Australian talent to given an Australian, innovative research based industry the chance to develop.

3 (g) Useful measures

Some of these are itemised under sections 3(c) and 3(f) above.

We should also be implementing policies which recognise the need to balance competition with cooperation in our relationships with each other and with the international pharmaceutical industry. In particular, we should recognise that joint venturing with the international industry offers us the opportunity to access vital market know-how before we commit major research and development resources, and to share the risks and rewards of research commercialisation with companies whose development and marketing experience match our human and natural resources.

3 (h) Long term policies

  • funding for joint chemistry-pharmacology degree programs;
  • declaring pharmacological chemistry as a national priority area;
  • joint funding schemes that encourage industry to share funding of peer-reviewed grant proposals with ARC and NH & MRC in return for tax concessions;
  • promulgation of an effective 15 year patent life for new drugs in line with proposals for Europe and North America;
  • extending the Factor (f) beyond 1999.

The Factor (f) scheme has been a great success in stimulating R&D expenditure in Australia and ensuring Australia becomes a net exporter of pharmaceutical products. However, in the last round of applications for this scheme, not all eligible applications were funded due to a lack of funds. It is probable that this led to a loss of R&D projects from Australia and thus there is a case for allowing more projects to be funded under this scheme. Current funding commitments under the Factor (f) scheme finish in 1999. As the pharmaceutical industry has long lead times for drug development, it is important that the government now addresses the issue of its pharmaceutical pricing policy. A political, bipartisan policy would also give confidence to the pharmaceutical industry for long-term planning.

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