by Giuliana Miglierini
The report on the Future of European competitiveness was presented by Mario Draghi on 17 September 2024 at the European Parliament. In his address, Mr. Draghi recalled Europe is the geographical area most exposed to the undergoing change of traditional business models.
The EU’s trade-to-GDP ratio exceeding 50% (vs. 37% in China and 27% in the US) is one among the many challenging factors to be faced in this transition, together with high dependencies for supplies of critical raw materials and digital technologies, a lower number of innovative tech companies vs competitors, and highest energy prices. “The purpose of this report is to lay out a strategy for Europe to change course: pinpointing the priorities we should focus on, explaining the trade-offs we face, and offering pragmatic solutions to resolve them”, said Mr. Draghi in his address to the European Parliament.
Three main areas of action
The report identifies three main areas for action, starting from the closure of the innovation gap with the US and China to be achieved through reforming the European innovation ecosystem.
According to Mario Draghi, the gap is due to the static industrial structure typical of the EU, coupled with lower R&D expenditure vs competitors. The difficulty, the new and innovative companies often experience in access to capital was also mentioned, due to the lack of a Single Market and an integrated capital market: a dynamic that would represent the root cause for the relocation of many innovative startups that originated in the EU to the US or other countries, and which is paralleled by a similar transfer of European talents.
The second area for action identified by Draghi’s report is a joint plan for decarbonisation and competitiveness, aimed to achieve the complex climate targets of the European Commission. An opportunity, but also a possible risk should it not be achieved, said Mr. Draghi. In this instance, the priority is to lower energy prices. This process might require several years to transition to low-cost and cleaner energy sources and should be paralleled by clean energy installation in a technological-neutral way (not only renewables but also hydrogen, nuclear, bioenergy and carbon capture). Despite being a world leader in clean technologies, to take advantage of this opportunity Europe has to face the strong competition of China. A challenge that should be tackled using differentiated approaches for different sectors and technologies, states the report.
The third area for action, focuses on increasing security and reducing dependencies. Proposed targets include more secure supply chains for critical raw materials and technologies and improved domestic production capacity in strategic sectors. Diversification might lead to increased costs of supplies, said Mr. Draghi, also suggesting the development of an EU “foreign economic policy” based on preferential trade agreements and direct investment with resource-rich nations, stockpiling in selected critical areas, and industrial partnerships.
The estimated investment needed to achieve the objectives covered by Draghi’s report is approx. € 750-800 billion/year.
The current situation in the pharmaceutical sector
Sectoral policies and recommendations and horizontal policies are illustrated in Part B of Draghi’s report. Chapter 9 is dedicated to the in-depth analysis of the current situation of the pharma sector and resulting recommendations.
The pharmaceutical sector has historically represented a key contributor to the European economy, and it currently accounts for 5% of value added from all manufacturing and almost 11% of EU exports. The European pharma sector still covers a leading position in the international scenario, with exports growing approx. 10% from 2022 to 2023 and an EU trade balance for pharmaceuticals registering a surplus of €53 billion in 2022 and €45 billion in 2023 compared to the US. In Q4 2023 the sector directly employed 937,000 people, and more than double considering also the indirect jobs. People working in the pharmaceutical industry often present high-level competencies and skills fundamental to sustaining innovation. This is also acknowledged by the leading EU’s position in the volume of scientific publications (while the US has a higher impact in citations) and the strong EU manufacturing capacity for on-patent medicinal products. The majority (77%) of active pharmaceutical ingredients for innovative medicines are also manufactured in Europe.
Despite this, according to Draghi’s report, the EU has not kept pace with other markets in recent years, especially concerning the internal production of more innovative medicines, i.e. biologicals, advanced therapy products (ATMPs) and orphan medicines. As an example, the report mentions that only two out of the 10 top best-selling biologicals in Europe in 2022 were marketed by EU companies, while six (including the top 4) were commercialised by US-based companies, and none of the 10 top-selling orphan medicines in the EU/EEA were marketed by EU-based companies. Similar dynamics applies also to the ATMPs market, those leading companies are mainly based in the US and Switzerland.
The root causes of the competitive gap
Draghi’s report identifies several causes for the observed competitive gap, starting from a still fragmented approach of EU’s member states to public R&D investment. The difference is evident compared to the US, where public funding is centrally managed mainly by the National Institutes of Health (NIH), with a budget of more than $45 billion annually in 2023. Another federal institution deeply involved in financing the development of medical countermeasures for public health emergencies is the Biomedical Advanced Research and Development Authority (BARDA).
The US government also spent $47 billion in 2023 to support R&D activities in universities, research centres and hospitals. China is also increasing public R&D funding, from 0.41% of GDP in 2010 to 0.48% in 2020 (while the EU remained stable at 0.69%, and the US decreased from 0.89% to 0.74%).
In the EU, a role similar to BARDA is covered by the new Directorate-General for Health Emergency Preparedness and Response (HERA), with a total budget of €5.4 billion for 2022-2027.
The current framework programme for research 2021-2027 (Horizon Europe) supports basic and applied health research with a total of € 8.2 billion. Numbers that are greatly lower than those invested in the US; some additional €10 billion (0.06% GDP) were invested in health in 2022 by the EU Government Budget Allocations for Research and Development (GBARD). Member states also provide domestic funds to universities and research institutions.
The investment gap is confirmed for private investments, with US biotech companies receiving $62.5 billion in venture finance in 2021-2022, compared with the $11.2 billion received by European companies. The impact might be particularly relevant for SMEs, which are one of the main drivers of innovation. The European Investment Bank (EIB) is the main venture debt provider to the life sciences sector in the EU (€2.7 billion at the end of 2023).
The critical mass of EU’s R&D hubs is another issue identified by the report, as they are far from the dimensions of US hubs due to fragmented support by member states. Active R&D centres of pharmaceutical companies are usually based in the same country where corporate headquarters are located. According to the report, this choice is often influenced by the more beneficial taxation policies and incentives in the US (where they are harmonised or applied nationwide) compared to the still fragmented system typical of the EU.
Streamline regulatory processes
Regulatory delays in the time needed to reach approval of a new medicinal product can be experienced in the EU (430 days in 2022 median time), compared to Japan (322 days) and the US (334 days). The complexity of the European regulatory system is also reflected by the procedures to access scientific advice and EMA’s multiple committees. Furthermore, national pricing and reimbursement procedures are still highly fragmented (different HTA procedures for each member state), leading to preferential launches of new medicines in the US or Japan. Furthermore, companies often choose to launch their products only in selected European markets, thus limiting access to new treatments.
Last, but not least, another issue identified by Draghi’s report refers to the full implementation of the European Health Data Space (EHDS). Once again, fragmentation of national laws slows the processing of health data for secondary use for providing health or social care, public health and scientific purposes (allowed by the GDPR). A specific EU law to overcome this problem is undergoing development by European institutions.
The proposals for the pharmaceutical sector
Mario Draghi’s report contains 9 different proposals of action to close the above discussed competitive gap. They build upon the reforms and proposals already launched by the past European Commission, among which are, for example, the ongoing review of the pharmaceutical legislation, the entry into force of the Clinical Trial Regulation in January 2022, and the EU Health Technology Assessment (HTA) Regulation that will become effective in 2025. Many initiatives have been undertaken to fully exploit the potential of data, digital technologies and artificial intelligence, including the EHDS Regulation, increasing attention to real-world data for regulatory and policy decisions, etc.
The use of artificial intelligence to simplify and speed up various activities along the entire lifecycle of medicines (from R&D to the support to diagnosis and treatment, to regulatory process etc.) (Proposal 4) would complement Proposals 1 and 2, aimed respectively to reach full implementation of the EHDS and to streamline the set-up and management of multi-country clinical trials in the EU. As for the EHDS, the report suggests improving the possibility of accessing and sharing electronic health records, extending the health system digitalisation under the Recovery and Resilience Facility (RRF) and the EU4Health programme, and leveraging existing health data for regulatory, policy and clinical decision-making through standardisation of existing data sources. Results from the DARWIN EU network may prove useful in generating evidence for innovation in drug development and for policy and clinical decision-making supported by AI. The infrastructure for whole-genome sequencing should also be potentiated, possibly through a public-private partnership built on the European Genomic Data Infrastructure.
In the field of clinical trials, Draghi’s report asks for the establishment of specific rules to manage studies combining medicines and medical devices, the application of AI, and the introduction of a reinforced coordination mechanism between ethics committees at the national and EU level for the authorisation of multinational studies. Model templates for the interaction between sponsors and participating sites should be implemented and incentivised as a prerequisite for public funding. Multi-country, non-commercial clinical trials might receive EU-level support to reduce the risk of market failures. Altogether, Proposals 1, 2 and 4 are deemed useful to support the competitiveness of the European R&D sector.
The issue of R&D funding is further addressed by Proposals 7 and 8. The experience of US hubs of innovation, for example, might inspire the EU funding of a limited number of world-class innovation hubs in life sciences specifically working on ATMPs. Disease registries established under the European Reference Networks (ERNs) should also be consolidated and integrated to facilitate discussions on complex or rare diseases and their treatments. Proposal 8 aims to support private R&D investment in the EU. An increase in the budget of the European Investment Fund (EIF) should better support the EU venture capital ecosystem, while the InvestEU programme could sustain higher risk and more scale-up investment.
According to Proposal 3, faster market access would require the coordinated action of several stakeholders including regulatory agencies, HTA bodies and public payers. New streamlined guidance on unmet medical needs, the design of clinical studies and the use of AI by regulators are among the suggested actions. Adhesion to the already established pricing principles (as set forth by the EURIPID collaboration) and cross-country initiatives for joint negotiations are expected to help solve issues of pricing and reimbursement, together with the expansion of the scope of EU joint procurement to other types of medicines. New criteria for public tenders should also be adopted, for example, referring to the security of supply and production in the EU/EEA or countries having agreements in place in the area of pharmaceuticals.
Proposal 5 is specifically aimed at reaching full implementation of the HTA regulation and to start the joint clinical assessment in 2025, as planned. Nevertheless, this objective would require considerable resources, including expert staff from national HTA bodies and Commission Services.
Improvement of business predictability is the key target of Proposals 6 and 9. The first one suggests making use of the ongoing evidence-based dialogue with stakeholders to help inform EU policymaking on IP protection mechanisms for new medicines. In particular, the report highlights the need for stability of the available incentives, including regulatory protection schemes. Once again, the US experience of the Congressional Budget Office Model of New Drug Development may serve as a source of inspiration for EU institutions to develop and regularly update a standard model for capturing the key impacts of the EU regulatory action in terms of innovation and patient access.
Proposal 9 refers to strategic international partnerships, a key ingredient to ensure the resilience of EU pharmaceutical supply chains and to mitigate shortages of critical medicines. This measure is expected to support competitiveness, especially in EU-based manufacturing of biologicals and biosimilars. The supply chain diversification should also be paralleled with the opening of new manufacturing sites in strategic regions outside the EU and the optimisation of trade agreements.