The Pharmaceutical Price Regulation Scheme - Office of Fair Trading

February 2007
3.43 Financial factors, such as labour costs, taxation rates and tax credits, also have an impact
but are generally held by industry to be of secondary importance to the ‘quality’ of the
investment environment (that is, to be determinative only when countries are equally
attractive on quality grounds).
3.44 The UK performs particularly well against many factors relating to the quality of the
investment environment, enjoying large numbers of highly qualified scientists and, perhaps
most importantly, highly regarded experts in the medical or pharmaceutical fields – or ‘opinion
leaders’ – who are key to encouraging companies to conduct clinical trials in the UK. Through
spillover effects, public expenditure on R&D can also help attract private investment. Here
again, the UK performs impressively: the proportion of GDP spent on public health R&D in
the UK is the second highest in the world (after the US). The recent Cooksey Review 30 has
made recommendations for how a new single fund for health research – worth an estimated
£1bn – might be operated in the future.
3.45 These and other factors discussed in Annexe E help explain the UK’s success to date in
attracting private sector R&D expenditure. Some companies also suggested to us that
‘market conditions’ were important in determining where investments will take place.
However, it is not clear to us how there can be an explicit link. By definition, the revenues
companies receive from the sales of products in a particular market are not a driver of
internationally mobile investments – only of market specific expenditure such as marketing –
since companies are not required to invest in a particular country to receive revenues from
selling a particular product. 31
3.46 In response, it has been suggested to us that there is an indirect link between price and the
location of investment, since companies will use the threat of withdrawing investments as a
means of persuading governments to maintain high prices. It is rational for companies to
make such threats in an attempt to make features of the policy environment – such as pricing
and reimbursement decisions – more favourable. It is not clear, however, that these threats
are always credible, particularly if the country in question performs strongly in relation to the
drivers identified above. We could find no clear relationship between price level and success
in attracting R&D investment.
3.47 Overall, our findings are consistent with the high level conclusions of a forthcoming report
jointly commissioned by UKTI and ABPI under the auspices of the Ministerial Industry
Strategy Group (MISG) 32 which reported:
“In general, we did not find credible economic mechanisms to suggest that product
market characteristics were of over-riding importance when making investment decisions.
Firms should locate research and manufacturing in the best and most cost-efficient
locations, then market their products globally.
3.48 The NERA report went on to say,
“However, we found that firms often have a number of alternative locations for investment
assets that are broadly equal in other dimensions, and in these situations market
conditions can be an influence on the ultimate choice.”
We are not convinced of this argument but consider its implications at the end of this chapter.
30 A Review of UK Health Research Funding (2006), Sir David Cooksey December 2006.
31 There is one component of R&D for which it could be argued that decisions over where to locate are related in part to
market conditions. The location of clinical trials may in part be driven by a desire to market a product to clinicians in a
particular country so as to improve subsequent uptake.
32 NERA (Forthcoming 2007), ‘Key Factors in Attracting Internationally Mobile Investments by the Research-Based
Pharmaceutical Industry’, a report commissioned by UKTI and ABPI and presented to the MISG. Henceforth referred to as
‘the NERA report’.
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