The pharmaceutical industry in Switzerland

Table of content

List of tables

List of figures

List of graphs

1. Introduction

2. The pharmaceutical industry in Switzerland

3. Conclusion

4. List of References

5. Appendices

List of Tables

Table 1: Export surplus from pharmaceuticals

Table 2: Shares of US patenting of the largest nationally owned industrial

firms due to research located abroad

List of Figures

Figure 1: The pharmaceutical market worldwide

Figure 2: Pharmaceutical market share, 2005

Figure 3: Pharmaceutical market share: Switzerland compared to other countries

Figure 4: R&D expenditure in Switzerland as a percentage of sales

Figure 5: R&D expenditure worldwide as a percentage of sales

Figure 6: Export surpluses in pharmaceuticals, 2004

Figure 7: International Product Life Cycle

List of Graphs

Graph 1: Innovation Index, 2005

Graph 2: Patents granted by 100 000 habitants, 2004

Graph 3: R&D expenditure as a percentage of GDP

Graph 4: R&D investment within Switzerland by sector

Graph 5: R&D investment of Swiss companies abroad by sector

Graph 6: Development of the Swiss pharmaceutical balance of trade

Graph 7: Switzerland’s foreign trade since 1989

Graph 8: GDP per capita

1. Introduction

International trade can to some extent be explained by the theory of absolute and comparative advantage. By nature, countries have distinctive immobile production factors and hence different relative production costs for the same good/service (Lawler and Seddighi, 2001). The theory of the absolute advantage by Adam Smith is that a country should specialise on the product/service where it has an absolute advantage over any other country in order to increase productivity and output.

Ricardo’s theory of the comparative advantage says a country should export products where it has the greatest comparative advantage or where the comparative disadvantage is smallest and should import goods in which its comparative disadvantage is greatest (Trebilcock and Howse, 2005). This model still represents the basis for international trade theory, but it was further modified and reformulated which will be discussed later on.

In the following I am analyzing the pharmaceutical industry in Switzerland by looking at innovation, R&D expenditure, export figures and the growth level. All this is interrelated to theoretical background of newer trade theories of Vernon, Krugman and Cantwell.

2. The pharmaceutical industry in Switzerland

This industry is characterized as a technology and science-driven sector because of their exceptionally high R&D to sales ratio (Becker and Lilemark, 2006). Since the 18th century technologies originated mainly in the highly-industrialized countries. Within the pharmaceutical industry the USA, Switzerland, Germany, Britain and France contributed more than 80% of all innovations, and their exports exceeded 60% of worldwide trade (Achilladelis and Antonakis, 2001). Achilladelis and Antonakis (2001) attributed the competitive advantage in these nations by strong higher education systems, technically well-trained workforce, presence of specialized research-intensive companies and a strong home market demand. Switzerland in particular started early to rely on education, engineering and innovation for its economic development to counteract a lack of natural resources (OECD, 2006). It strengths lie now in knowledge-driven, patent rich industries such as pharmaceuticals where it is specialised now to reinforce its comparative advantage (Guellec, 2005).

The pharmaceutical market worldwide is illustrated by the next figures.

Figure 1: The pharmaceutical market worldwide

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Source: www.vfa.de

As can be seen global pharmaceutical sales is dominated by Europe, USA and Japan, whereas the US market is the leader, concerning size and dynamics (www.vfa.de).

The next two figures show the market share of the largest pharmaceutical industries worldwide as well as market share of Swiss companies in international comparison.

Figure 2: Pharmaceutical market share, 2005

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Source: www.rbd.doingbusiness.ro

Figure3: Pharmaceutical market share: Switzerland compared to other countries

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Source: http://www.interpharma.ch

Again these figures show the dominance of highly-industrialised countries in this sector. In relation to the market share the Swiss industry ranked second (27.3%) after the US industry (28.2%).

Before having a closer look at Switzerland the importance of patents for this industry will be examined.

In order to give incentive for research and development and to offer a crucial precondition for science and technology in progress patents are needed, they are of assistance to economic progress (Thumm, 2005). However, there are concerns that patents may hinder technological advance by building barriers to follow-up research (Thumm, 2005). Especially in the pharmaceutical sector, patent protection is critical to profitability, renewal and continued growth (Pearce, 2006). One has to consider that it takes around 10 to 15 years to develop and introduce a new product, resulting in costs of roughly 1 billion USD for every product (Humer, 2005). The high costs have led to a strong consolidation of the market in the 1990s by mergers and acquisitions in the hope to boost innovation (Jack, 2006). Fifteen years ago, the 10 largest companies commanded 25% of the global market, today their market share is over 50% (Humer, 2005). Companies would not be willing to invest money and time into R&D if there wouldn’t be a system that grants them exclusive rights over the product (Morrison, 2006). However, patents only exist for a certain time (mainly 20 years), after that generics (often produced by developing countries) quickly enter the market and gain market share at the expense of the original product as they are often 25-70 percent cheaper than the original one (Pearce, 2006).

However, patenting remains highly controversial, although at the moment it is the key to pharmaceutical companies.

The next two graphs give an overview of Swiss’s innovation performance (graph 1), which is closely related to patent activities (graph 2).

Graph 1: Innovation index 2005

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Source: European Innovation Scoreboard, 2005.

Switzerland occupies a top position in an overall ranking of innovation performance (second place after Sweden and before Finland). Most indicators are above the EU average. It ranks first for the number of innovating firms, second for innovation expenditures and fifth for number of innovators basing their new products and processes on R&D (OECD, 2006).

Innovation performance needs to be maintained at this high level in order to preserve the competitiveness and the high living standard of Switzerland (OECD, 2006a)

Graph 2: Patents granted by 100 000 habitants 2004

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Source: Department of Labour, Economy and Foreign Affairs, 2005

Switzerland ranked high on both measurements. Its industry is dominated by the pharmaceutical industry (Appendix 3) which explains the first rank in patents granted.

Patents and Innovations are generally used as indicators to measure output, whereas input in R&D is measured via statistics on R&D expenditure (Jungmittag, Reger, Reiss, 2000).

The annual scoreboard, the world’s most comprehensive R&D ranking, revealed companies that spend more on R&D tend to perform better than their competitors in sales and profit growth (Cookson, 2006). The pharmaceutical industry showed the most remarkable change in the scoreboard since its beginning in 1992. In 1992 no pharmaceutical company was listed in the top 50, now 6 are in the top 20, where two of them are Swiss companies (Appendix 1). Switzerland is among the top 10 countries by R&D intensity (Appendix 2). Also a trend towards an “open innovation” becomes obvious, i.e. worldwide cooperation of scientists (Cookson, 2006). This goes along with the theory of Cantwell (1979) to whom I refer later.

Switzerland is in the top region of OECD countries on R&D expenditure with 2.9% in 2004; however the goal for it should be to reach 3% (Lisbon objective until 2010).

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