IDEAlogue for Innovation: A Conversation with Italy's Fabio Pammolli

October 6, 2014

Fabio Pammolli, selected by the European Commission to author a set of critical overviews on the pharma sector, talks about the need for a dramatic change in industrial strategy.

Documenting the trials, tribulations—and occasional successes—of Europe’s biopharmaceutical sector has become a full-time occupation for scores of consultants, policy advocates, investment analysts and academics. One of the most prominent of the latter is Fabio Pammolli, a 48-year-old Italian economist selected by the European Commission as the first author/convener of a set of critical overviews on the state of the industry, from a national, regional and global perspective. Pharm Exec recently sat down with Pammolli, who went on to found the IMT Institute of Advanced Studies, whose cross-disciplinary research approach and diverse global faculty is unique in Europe, to get his perspective on the state of drug innovation within European industry—and how government is measuring up to his recommendations for a dramatic change in industrial strategy to accommodate a far more competitive marketplace.

— William Looney, Editor-in-Chief

PE: You are the recipient and principal author of three major research assignments from the European Commission to evaluate the competitiveness of Europe’s biopharmaceutical sector. What were the principal recommendations of this work? How much progress has been made in making the necessary policy changes to help local industry succeed in what is now a global marketplace for medicines?

Pammolli: Beginning in 2000, my research team took responsibility for what was at the time a very novel experiment for the European Commission. This was to critically examine the full range of government policy interventions being pursued at the regional and national level and determine their impact on the capacity of the European pharmaceutical industry to maintain its long record of leadership in inventing and marketing innovative drug treatments for the world market. Up until the 1990s, the majority of new patented medicines originated in Europe, but performance on this essential scorecard of industrial innovation had begun to turn toward the US. The Commission cared enough about this slow reversal in fortune to risk criticism from the member states for an unwarranted intrusion into their own national prerogatives on industrial policy. Under the stewardship of DG-Enterprise, we produced three analyses covering pharmaceuticals (2000 and 2006), biotech products (2002) and medical devices and diagnostics (2005).

Each report came to the same overarching conclusion: market-based competition should be a key unifying principle of government policy in its interactions with the entire industry, from originator drugs to generics. In a general sense, our recommendation has taken root. The intensity of competition after patent expiry is much stronger today than it was when we wrote the reports. In most EU countries today, generic medicines are forced to compete on price rather than being tagged to a fixed minimum set by regulators. Likewise, the concept of “headroom for innovation,” in which savings from generic competition are applied to pay for higher-priced patent medicines, is recognized throughout Europe as a useful instrument of policy. However, this headroom has not been applied consistently in a manner that gives the industry confidence that its long-term financial commitments will be fully rewarded after registration is obtained.

Our proposals to build stronger economies of scale and mission-oriented programs within the public research system to facilitate R&D investment have had even less traction. The reports criticized the lack of a region-wide “innovation ecosystem” that would allow multinationals to develop and commercialize ideas seamlessly, across markets. In a paper we recently published in the journal Science, we show that 14 years later, despite multiple, Commission-sponsored “framework programs” for R&D, we do not have a European research area; the picture is still one of a disaggregated network of national research systems and separated approaches to promote medicines innovation. I continue to believe this approach prevents the European industry from maximizing its potential in drug development.

PE: Isn’t this perspective a bit academic? Could it be true that successful innovation does not automatically conform to the size and scale of the institutional effort?

Pammolli: We have been looking at far more than that. From the beginning, we sought to emphasize something fundamental: the mobility of ideas across Europe. Our conclusions were that for ideas to evolve into medicines that treat and cure disease, you must allow inventors and researchers to access and share what is locked in their own heads, or in the files of their laboratories, or buried among the forgotten experiments of the public institutions that conduct basic research. To do that, you must introduce mobility to bridge boundaries, regardless of whether such boundaries are geographic, cultural, institutional or functional. It is a question of complementarity; the synergies that derive from different skills and perspectives coming together. Our point is that Europe was not benefiting enough from being Europe. It was true then and it is still true today.

Another factor in Europe is the politicization of the innovation agenda. Our system promotes a proliferation of national programs—each member state deserves a portion of budgeted spending on medicines R&D. Too many of these innovation “clusters” raises the probability that none of them will attain the critical mass required to succeed. In the US, such clusters developed naturally. Hence you have a scalable grid comprised of the major universities and teaching hospitals around Cambridge and Philadelphia, the National Institutes of Health (NIH) complex in Washington, and the moneyed high-technology players in California’s Silicon Valley. In Europe, there are a few examples like Cambridge-Oxford, the Paris region, and Germany’s BioRegio state network, but in most cases national governments have put their own money as well as huge subsidies from Brussels into local initiatives that have yet to yield any tangible results. That’s a squandered opportunity.

Likewise, we drew attention to the way scientific education in Europe is organized—not very well. Although exceptions exist like the European Research Council programs that publicize the work of talented scientists regardless of affiliation, most scientists in Europe tend to be wards of the state and work in compartmentalized isolation from their peers. There is significant rigidity due to cartel-like professional credentialing designed to perpetuate boundaries between the academic disciplines. It’s amazing how the academic status quo is precisely the opposite of what is taking place in private-sector pharmaceutical research, where silos are being abandoned at breakneck speed. It is an absolute rejection of the division between academic disciplines.

The antithesis of European academe is the Cambridge, MA innovation cluster, where you have private-profit and non-profit organizations like the Eli Broad Institute working with Harvard and MIT to coordinate competencies in the fight against cancer, ranging from nano-materials reliant on physics and engineering to molecular biology and chemistry. In Europe, this kind of cross-disciplinary cooperation is inordinately harder to achieve. Why it occurs in the US is due to a number of factors, the most important of which is the federal government’s early adoption of a mission-driven approach that put its money and convening power behind a specific target of theoretical and societal relevance. NIH and other federal agencies did not hesitate to violate the scholarly guilds in pursuit of excellence in executing against target—they mobilized support wherever they found it.

The result is what we see in Cambridge’s Kendall Square today. Within radius of MIT and Harvard, the number of labs and offices for the major global pharma players based in Europe, like Novartis and Sanofi, as well as start-up biotechs—has more than doubled in the last three years. The reason is based on this legacy of mission-driven government research as well as the human capital and integrative capabilities that the private sector requires to solve those scientific challenges that are distinctly relevant to drug development. I emphasize that this is not simply a matter of a divide between Europe and the US—new R&D investment is not going to the distant New Jersey suburbs either.

PE: Your analysis flags the importance of appropriate government intervention as a means to incentivize private sector initiative. Does it surprise you that Europe lags the US, where hostility to the public sector is more ingrained? Aren’t there some well-framed new initiatives in Europe like Horizon 2020 and the Innovative Medicines Initiative that promise to breach the divide between government and industry?

Pammolli: Public scientific enterprise in the US has always been shaped by the combination of solid theoretical research and a practical, problem-solving orientation. This has trickled back to academia, which looks at its own research mission as a source of profits. The health system itself is more reliant on private choice and free market financing. This integration among public support for fundamental science, based on specific technology-changing targets, and entrepreneurial initiative in academia and of course private enterprise, is what makes the US innovation ecosystem unique.

The new initiatives under the stewardship of the EU are certainly well funded, and incorporate support from private industry, but the incentives present once that funding is complete tend to prevent even the best new ideas from being seeded in a way that yields a long-term commercial dividend. Inherent in these grand projects is a bias toward bigness that perpetuates neglect of smaller start-up enterprises, which are becoming the launch point for innovations in the US. In fact, our research shows that this is not a coincidence. In the US, with its multiple points of collaboration, inventors can obtain rapid feedback on a research project. This benefits smaller firms because it amplifies a good idea, allows for mid-course corrections, and, most important, generates outside interest in scaling up the work, through additional venture capital funding.

The decision by the Commission to relocate responsibility for pharma from DG-Sanco back to DG-Enterprise seems to recognize the key role of innovation in pharmaceuticals, not only to generate new therapeutic solutions but also as a driver of industrial competitiveness. It will be important to see how this decision will affect the quality of the regulatory environment in Europe, on key themes like pricing and reimbursement, towards a wider diffusion of value based solutions.

PE: What about the attitude toward research failures? Is there a difference between Europe and the US?

Pammolli: Europeans are less accepting of this concept, culturally. This is particularly true when a national agency or the European Commission puts public money into a project. In that case, failure is unthinkable. It influences the perception of uncertainty and risk, where the US manages this prospect much better through a no-fault calculation that equates high risk with high reward. There is a greater propensity to explore. In Europe, the natural inclination is to be risk averse, which leads in turn to a focus on those research areas not necessarily associated with breakthroughs.

PE: Your macroeconomic work also suggests a major disincentive in Europe toward private investment in innovation—an increasingly uncompetitive and non-sustainable structure of fixed costs.

Pammolli: The region is in a negative spiral. For decades, most European countries have been relying on a false premise, touting universal pension and health insurance schemes as a free benefit when in fact it is structured as a contribution—one that depends heavily on taxation and high social charges. At one time, the burden was manageable because of strong underlying economic growth as well as a youthful population who helped fund the system through their wages. Today, both conditions are reversed: there are far fewer people active in productive work, and real growth is stagnant. The tax on labor to fund the so-called “pay-as-you-go” benefits is now so high that the response in many cases is to disengage from the labor market or to seek better income opportunities in other countries. Of course, this has a serious spillover effect. While the big companies can manage the overhead, innovative start-up operations cannot. They face social charges that are too high and a shortage of talent willing to work hard for incomes that are not competitive internationally. If Europe cannot resolve this tension, by making pension and health carrying charges more reflective of the private-sector’s capacity to fund these charges, there will be two consequences: the burden of labor will make the region uncompetitive in the global race for talent, while the high cost of funding social programs will put more pressure on the demand side for pharmaceuticals, leading to more government actions to cut the price of medicines. Either way, investment in Europe is the loser.

PE: Are you saying that a “pay-as-you-go” system of financing social programs—which has been the norm in Europe for 45 years—is a subversive risk against innovators? That it fosters investment uncertainty because those who are working at a given time do not know if in the future there will be a cohort of wage earners sufficiently numerous to fund their pensions?

Pammolli: Uncertainty is not only fiscally unsustainable, it inhibits the supply of jobs—it severs the social contract. The probability of an able-bodied young person actually getting a job is reduced; employers don’t want to bear the high tax burden. In the life sciences, it means that companies in the US can attract researchers by paying much higher salaries. Talent retention among scientists is a problem in Europe, which is one reason why all the major pharmaceutical companies based in Europe have moved the bulk of their R&D operations across the Atlantic.

PE: Voters throughout Europe seem to have tired of the integration and cohesion symbolized by the European Union. How is the declining support for the “European Project” affecting the competitiveness of the region in life sciences?

Pammolli: The results of the May 2014 elections for the European Parliament were not good for the innovation and competitiveness program, or science in general. The potential for improving the knowledge base and making life science products more internationally competitive depends on more integration built around the organizing premise of open markets, not a return to nationalist agendas where every member state pursues its own interventionist strategy, with the government in the lead. It’s not voter apathy that’s fueling it: Brussels tends be tone deaf in handling all the diversity that exists among 28 countries.

The adoption of the euro currency creates even less flexibility. You need to have acceptance of differences in capabilities and potential among countries, allowing for specialization to take place and even accepting competition between countries, rather than insisting on cooperation through bureaucratic mandates. One way such competition takes place is over what national governments are willing to do on business incentives to attract more investment and jobs. The reality is most people see the European institutions as process-driven and unrepresentative. The bureaucracies in Brussels don’t project positive values, like creating job opportunities for young people or promoting mobility among scientists against the will of the national professional academies.

PE: How does this tension affect the business climate for pharmaceuticals?

Pammolli: The mandates end up working against each other. You have the idealized single market for medicines, promoted as a way to expand access to therapies, by giving producers the economies of scale to make large investments in R&D worthwhile, while at the same time extracting the savings from generic competition after patents expired. The creation of the European Medicines Agency (EMA) was designed to create an institutional process to make all this happen.

However, nothing has changed on the demand side, with the tacit acceptance of parallel importing as well as national requirements on how medicines are priced and launched. These impose considerable transactional costs for companies and tend to produce a downward price convergence across Europe, which diminishes the advantage of scale represented in the single market. Our most recent research shows that price convergence has actually delayed access to medicines, because companies introducing a new medicine are likely to forgo launch in some countries due to the potential impact from cross-border reference pricing rules, where the lowest-price countries serve as the benchmark for countries with higher incomes. One way to manage this factor is by staking pricing on per capita income. Countries with the highest per capita incomes should not fix their P&R policies on prices in countries with the lowest incomes.

If you impose an overlay of homogenous rules in a system that relies on separate institutional infrastructures and on top of that each member state can introduce its own diverse incentives to attract investment, then what comes out of this is not what you might expect. We know the scale economies derived from being part of the world’s largest regional market for medicines is diminished.

PE: What should the industry be doing to tackle these challenges and enhance its “license to operate” in Europe?

Pammolli: First, in my view, the industry needs to document the positive elements of the European environment, led by the relative sophistication of the regulatory infrastructure, a highly skilled work force and the presence of many world-class businesses—if you include Switzerland, five of the top 10 pharmaceutical companies by revenues are located here. Second, it is vital industry advocates for improvements in the region’s human capital base, with concrete proposals on creating a truly integrated labor market for scientists and researchers and injecting more competition into the university research establishments, so that the possibility of a having a professor from Germany filling a chair in Italy—virtually unheard of today—becomes reality. The current system for recruiting and retaining scientists is moribund, and it is having a particularly damaging impact on young professionals, who are placed in a kind of indentured servitude for years. Third, companies have no choice but to participate in the debate on the future of European social welfare systems, from pensions to health insurance to long-term care.

It’s time to abandon the caution based on the notion that since companies are motivated by profit, they have no right to offer opinions on public support for research, education or the safety net. I emphasize as well that these are all areas where the industry has positive things to contribute.

PE: Do you have specific ideas on how the industry might pursue such an activist agenda?

Pammolli: I can provide an example from my own experience. When I was 34 and a lowly assistant professor in Italy without funding, I answered an advertisement in The Economist from the Merck Foundation seeking applicants for an unrestricted, zero overhead grant covering research on policy issues impacting the pharmaceutical industry. I sat down and developed a proposal, which I then sent off to the Merck Foundation HQ in New Jersey, but never expecting to hear anything further. Several months later, I received a phone call telling me I had won, along with two well-known economists from the Wharton School and MIT. The grant provided $200,000 a year, renewable up to nine years. That grant truly changed my life and the academic circles I moved in, sustaining my collaboration with Boston University physics professor Gene Stanley on development of new technologies to investigate large database in economics. The Foundation program had an advisory board of international experts to evaluate my work. This led to fruitful research synergies, which, in turn, generated numerous points of influence in which my research would not simply be seen but embedded in policies that shaped the lives of real people. It is policy reinforced at the political level.

The example demonstrates how industry can have an impact beyond public relations or reputation management. I also emphasize the freedom associated with the funding I received. I never had such autonomy from other organizations, particularly in the public sector, which sometimes, unlike Merck, preferred not to be challenged intellectually on their own turf. It’s a wonderful thing, demonstrating that the private sector is willing to help foster competition in the life sciences, break up academic silos in favor of cross-disciplinary collaboration, and promote more diversity by recognizing unknown scientists and researchers, particularly those who are young. It’s a symbol of what can be done when the status quo is put aside and big institutions are challenged. Based on my experience, such support is the most impactful thing that pharmaceutical companies can do—yet it’s still rare to see it.

PE: Looking ahead, how do you see the state of European pharmaceutical competitiveness in 2020?

Pammolli: If we fail to redesign the architecture of funding for pensions and health, then pricing pressures will accelerate and the range and quality of new medicines available to patients will diminish—a gradual but inevitable result. Our research indicates that the incentives right now in Europe are forcing companies to focus on those therapeutic areas with high attrition rates. This is because investment in more plausible drug candidates, representing incremental advances rather than radical breakthroughs, are not going to be sufficiently rewarded when they reach the market.

In a larger sense, what is occurring is that science is more complex, there is greater articulation of unmet medical needs, and attrition rates are rising— yet the demand side has not evolved to adjust the risk-reward calculation that companies rely on to set priorities and allocate their R&D budgets. In fact, our studies, as published in Nature Review, conclude that the argument about a “failure” of the private R&D business model is wrong. The real culprit is the lack of payer support for the diverse pressures on companies to address the most difficult diseases.

In addition, there is less of a countervailing message from industry to prove its value to society. I am worried about an industry with tunnel vision, lacking much awareness of the function it should play in interacting with governments and the public. Consider the lower profile of industry today compared to the era of AIDS in the 1990s, when companies first became aware of the existence of a pharmaceutical market that was truly worldwide—one that had to be managed from many different angles, from pricing to access to intellectual property. Tensions were high, reputations were on the line, and there was a need to respond. Today, we seem to have returned to a day when only obligations to the shareholder are cited by management. That may seem to be evidence of success, but there are dangers in being complacent and presenting yourself as just another retail sector. Widespread adoption of a product-centric organization structure sows confusion at the country level, where representation to governments is divided among division heads rather than the traditional “country manager.” I sense there are so many more internal silos. We see a lot of this in Italy, particularly in dealing on the coordination of regulatory matters between local management and HQ.

PE: You were a member of the emblematic World Health Organization (WHO) Commission on IP. Are you seeing any reputational improvement around this traditional sore point?

Pammolli: IP is fueled by economic development. As economic growth increases, we are seeing more countries that once challenged the concept begin to embrace it. Why? Because they start to invent and carry a self-interest in protecting IP as an intangible asset. In addition, strong arguments have been made by companies documenting the relationship between the inventive disclosure that accompanies the grant of a patent and improved medicines access. Hence, the viewpoint about IP is becoming more balanced; I anticipate less political confrontation, at least in regard to the global interrelationships between development, trade and access, in the years ahead.

PE: What lessons have you derived from your leadership role in founding the Institute for Advanced Studies (IMT) in Lucca, especially as a laboratory for the policy arguments you pursued in your work at the European institutional level?

Pammolli: This has been a great adventure for me, as the IMT Institute (http://www.imtlucca.it) represents a challenge to all that is rigid and self-referential about the Italian academy. We began small, but have achieved substantive critical mass in working toward the goal of creating one of Europe’s truly multi-disciplinary learning institutions, with a practical orientation toward getting industrial policy right. We now have economists, physicists, computer scientists, applied mathematicians, engineers and chemists all working to address hard problems. But our greatest success is in overcoming the constraints of geography. In a country where foreigners still, in the 21st century, account for less than one per cent of the national researcher network, I am proud to say that—thanks to the commitment of a talented young woman, Mahee Ferlini, who from scratch designed open and innovative procedures for our hiring and management—we have persuaded many young US scholars to conduct their research here in Italy. My conclusion: it can be done!

PE: What’s next on your research agenda?

Pammolli: At CERM (http://www.cermlab.it/cerm), an independent research foundation, which relies on unrestricted grants from both industry and non-industrial sources, we have started a new project we call Switch. Switch (http://theswitchproject.eu/who-we-are) aims to analyze the evolution of the European regulatory system and innovation in healthcare and pharmaceuticals. It relies on investigation of large multiple and complementary data sets that we have been creating and updating over the past 15 years. The objective is two-fold: First, to introduce a new generation of analytical tools to understand the technological progress in biopharmaceuticals, building on recent papers we have produced on the determinants of R&D productivity and on the location of inventive activities. Second, we want to contribute to the establishment, here in Europe, of a systematic method to analyze the impact of different regulatory measures, under carefully designed experimental research settings. We think this will yield some verifiable tools by which politicians and regulators can decide on appropriate actions to guide industrial and health policy. What governments in Europe do in the next several years is going to be determinative of this industry’s future.

William Looney is Pharmaceutical Executive’s Editor-in-Chief. He can be reached at wlooney@ advanstar.com.

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