The Pharmaceutical Price Regulation Scheme - Office of Fair Trading

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The Pharmaceutical Price Regulation SchemeIncentives to locate investment in the UK3.26 Internationally mobile investments such as R&D and some manufacturing investments arealso important from an ‘industrial policy’ perspective. For a variety of reasons – such as thespillover effects R&D may have on other sectors and its consequent contribution toeconomic growth – many governments seek to encourage companies to locate theseinvestments within their national boundaries, and use a range of industrial policy instrumentsin an attempt to do so.3.27 Some stakeholders regard the PPRS as an important component of the UK Government’sindustrial policy towards the pharmaceutical industry – that is, as a means of attracting andretaining pharmaceutical R&D and other internationally mobile investments within the UK.While major stakeholders disagree over whether this is one of the scheme’s aims, it isimportant to assess whether the PPRS does achieve such objectives in practice.Rationale for attracting pharmaceutical investment in the UK3.28 The industrial policy of the UK Government (and indeed other governments) focusses onattracting and retaining investment in the international (and therefore ‘footloose’) componentof the supply chain. This was part of the rationale behind the creation of the PharmaceuticalIndustry Competitiveness Taskforce (PICTF), which is now known as the Ministerial IndustryStrategy Group (MISG).3.29 Consistent with this goal, the UK Government announced in 2004 that it was setting a newtarget for attracting R&D into the UK across the whole economy"… because we want Britain to be the most attractive location in the world for science andinnovation, we are setting a new and ambitious target of increasing UK R&D investment asa proportion of national income from its current level of 1.9 per cent to 2.5 per cent by2014 over the next decade." 273.30 Of the various potential economic rationales for attracting R&D in the UK, the most plausibleare those that are based on geographical spillovers – that is, benefits from R&D that accrue toother companies located near the investment in question. Other potential justifications are lesscompelling and, in some cases, are based on a conflation of the aim of attracting investmentin the UK with that of supporting UK-owned firms, whether located in the UK or not. 283.31 A previous attempt to quantify these benefits – conducted for PICTF in 2000 – suggestedR&D spillovers and labour rents could reach up to £520m. It also suggested that there is apotential terms of trade effect of between £1 and £2bn, although this figure is a significantoverestimate as it takes no account of offsetting effects – namely the fact that resourcescurrently allocated to the pharmaceutical sector would be used elsewhere to produceexportable goods or to replace imported goods. We think there would be merit in revisitingsome of the calculations in light of more recent data and the considerations set out in thepresent report.27 Source: The UK Government’s Science and Innovation Investment Framework 2004-2014, published in July 2004.28 Such a goal is not, to our knowledge, consistent with current Government policy. Further, the global nature of shareownership means that it would be unclear to what extent any individual firm is solely or even mainly owned by UKcitizens.44
February 2007UK success in attracting pharmaceutical R&D investment3.32 The figure below shows total Business Expenditure on R&D (BERD) as a percentage of GDPacross several countries for 2002 and 2003 (the most recent years for which data wereavailable). Against this measure, the UK was the fourth most successful country in attractingpharmaceutical R&D investment in the world.3.33 In 2002 pharmaceutical industry business expenditure on R&D accounted for 0.33 per cent ofGDP in the UK. This compares with Sweden (0.61 per cent), Denmark (0.4 per cent) andBelgium (0.39 per cent). Notably, the UK is the highest performing of the larger economies,ahead of France and Japan (both 0.19 per cent), the US (0.14 per cent) and Germany (0.13per cent).3.34 The important question from a policy perspective is which factors help to explain the ability ofthe UK to attract and retain investment.Figure 3.5: Pharmaceutical BERD as a percentage of GDP, 2002/20033.253.002.752.50Pharma BERD (% GDP)Other BERD (% GDP)2.252.001.751.501.251.000.750.500.250.00BelgiumCanada (2003)DenmarkFinland (2003)FranceGermany (2003)Italy (2003)JapanNetherlandsSpainSweden (2003)United KingdomUnited StatesSource: OECD (Figures relate to 2002 unless otherwise stated)Does PPRS attract investment into the UK?3.35 Our analysis of the workings of the profit cap element of the PPRS has shown that, contraryto widespread perceptions, the scheme does not contain any systematic incentives tolocate investments within the UK.3.36 The R&D allowances provided for under the scheme can, in principle, relate to R&Dinvestment anywhere in the world. The allowances, therefore, provide no incentive to locateR&D investments in the UK. Strikingly, in discussions with the OFT, some scheme membersseemed to believe that R&D allowances were only available for R&D undertaken in the UK.These tended, however, to be large firms for whom R&D investment in the UK alone45
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