§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Neil Hamilton.]10.45 pm
§ Mr. Andrew Hunter (Basingstoke)
Humility forces me to concede that other political developments today somewhat overshadow this debate. Nevertheless, I welcome the opportunity to introduce a brief debate on the predicament in which the United Kingdom pharmaceutical industry finds itself, with particular emphasis on its profitability and its importance.
My hon. Friend the Minister needs no reminding of the importance of the pharmaceutical industry. First, it is the source of products which alleviate human suffering. Secondly, in commercial terms it acts as a magnet for inward investment into the United Kingdom. Thirdly, it is a provider of employment. Indeed, in the 1970s and 1980s employment in the industry rose dramatically. Fourthly, the industry is an essential dimension to the scientific infrastructure of the United Kingdom. That is the nub of the matter.
Research is the lifeblood of the pharmaceutical industry, but there can be no research unless there is a sufficient level of profitability. There cannot be a healthy pharmaceutical industry in the United Kingdom unless research is taking place in the United Kingdom. That is why I sought a debate on the profitability of the industry.
I am sure that my hon. Friend will have no doubts about the importance of the industry. Recently, it was described by Lord Walton of Detchant asthe jewel in our industrial crown.I remind my hon. Friend that three of the best-selling medicines in the world, and seven of the top 20, are British in origin and development. The United Kingdom has a better record in pharmaceutical innovation than any other country. The top 50 products in the world represent just under half the total prescription medicines market. Of those, 27.6 per cent. originate from the United Kingdom, which is more than the total figure of 29.8 per cent. for the rest of Europe. The United States figure is also 29.8 per cent. That is a magnificent record.
It is worth stressing that the United Kingdom pharmaceutical industry provides an export surplus of more than £1 billion per year, compared with a projected national deficit of £15 billion this year and £11.5 billion next year.
In a wide range of medical conditions, the discovery of new or improved medicines would alleviate much human misery—not least the two killers in developed countries. I refer to heart disease and cancer, which alone kill more people in the United Kingdom than any other group of ailments—nearly one third of a million people every year.
Advances in research cannot be made without the profitability to finance research. Only more investment in research and development will help to find new and better treatments, but the costs of that investment are escalating and the returns for innovative companies are diminishing.
Most important of all for a thriving United Kingdom pharmaceutical industry is patent term restoration—that is, effective patent protection. The 1989 Touche Ross report concluded that, between 1960 and 1986, effective patent life was eroded from 12 years to around six years. I acknowledge that those are average figures and that there 845 is considerable variation around the mean. Nevertheless, that degree of erosion over 25 years gives great cause for concern.
The ranges for other major European countries are somewhat higher, but the same downward trend is evident, though it is greater in the United Kingdom than elsewhere in Europe. My hon. Friend the Minister will be aware of the European Commission's draft regulation, which proposes an effective patent life of 16 years by the granting of "complementary protection certificates." That term was arrived at after careful consideration, and its authors maintain that it strikes the right balance. There is a great discrepancy between that proposed provision and current United Kingdom practice.
In the case of treatments for medical conditions such as multiple sclerosis, which are characterised by long periods of remission and which would therefore require longer periods of evaluation, there could still be no hope of bringing a product to market while any effective patent protection remained. In meeting that and similar situations, the EC directive is ineffective and United Kingdom practice is even more defective.
In the case of the more complex products of biotechnology, one can foresee a much longer product registration approval process. Where the approval process exceeded the life of the patent, no effective patent life would be left.
It may be argued that the Government, while accepting that some action needs to be taken, seem to believe that a patent term of 13 or 14 years would be appropriate. If I am mistaken, the Government have an opportunity, through my hon. Friend the Minister, to correct a false impression. Meanwhile, France and Italy, for example, are proposing a 17-year period, the United Kingdom 13 or 14 years, and the EC 16 years. While such trends persist, the United Kingdom pharmaceutical industry will continue to be at a disadvantage by comparison with its major competitors.
My hon. Friend the Minister will be aware that Dr. Heinz Redwood, a noted health economist, recently stated:The purpose of patent restoration in the 1990s is not to save a relatively prosperous industry from failure but to underpin its resolve and to take a massive scientific and financial risk, in order to produce new drugs which society needs in order to cope with serious gaps in therapy.With regard to generics and to patent term extension, the profitability of the industry in the United Kingdom has arguably been further threatened by the Government's encouragement of generic prescribing and parallel imports. One reason advanced against supporting the EC regulation is that it would blunt the generic initiative, and prices would rise rapidly. As I shall demonstrate, however, there is little evidence to support that view.
First, let us consider the position in which the pharmaceutical industry now finds itself. On the one hand, it is a research-based industry with an average effective patent life of approximately six years, which is entirely unacceptable. On the other hand, the Government are advocating generic prescribing and the use of the products of the generic industry. The indicative prescribing scheme was the re-writing of working paper IV of the White Paper. There, the Government set out to recommend generic prescribing and to allay any concerns about it. That is a questionable thesis in its own right, but it is profoundly worrying in its implications for the pharmaceutical industry.
846 Dr. Redwood has developed a hypothetical model, which calculates the effects of the EC proposals on the top 100 medicines. Between 1990 and 1996, the annual extra cost would be a mere £.10.2 million at 1988 prices—not a significant debit, other points considered. In any case, the recent NHS reforms, and the pharmaceutical price regulation scheme will control pricing. I hope that my hon. Friend will acknowledge that generic extension is in itself no El Dorado.
With regard to the profitability of the industry, the price control regime has been almost too effective. The return on capital employed on sales to the NHS by the industry has reduced from 16 per cent. in 1986 to about 7 per cent.—an unsatisfactory state of affairs. To take just two comparisons, the return on oil and gas investment has reduced over the same period from 28 per cent. to 16 per cent. while that of food retailing remains at about 22 per cent. My hon. Friend seems to disagree—I look forward to hearing his comments, but I believe that with the NHS as a major consumer, return on investment for the pharmaceutical industry is arguably inadequate.
As a result of the flexible and encouraging policies pursued during the 1970s and 1980s, the United Kingdom is host to the international pharmaceutical industry. It has been encouraging to see United States and European companies expand manufacturing and research facilities in the United Kingdom, providing high quality jobs and supporting an already strong scientific infrastructure.
Parent boards of such foreign multinationals are now beginning to have second thoughts about investment in the 1990s. We have a less favourable attitude to patent term extension. We have a history of adverse legislation—the limited list of 1984, indicative prescribing in 1990, some concern about the workings of pharmaceutical price regulation, and a generics industry endorsed and encouraged by the Government. We have decreasing profitability. Faced with those issues, and the welcome attitude being displayed in France, Germany and Italy, to name but three countries, the future of pharmaceutical industry investment in the United Kingdom must now be in doubt.
If we are to retain our lead in pharmaceutical invention, I urge my hon. Friend to review his position on patent term extension before the European Council of Ministers makes its final decision on the proposals. I urge him to bear in mind the points that I have tried to make. The United Kingdom pharmaceutical industry is not a lame duck but a bird in flight. The question is whether the Government should inadvertently shoot it down.
§ The Parliamentary Under-Secretary of State for Health (Mr. Stephen Dorrell)
I congratulate my hon. Friend the Member for Basingstoke (Mr. Hunter) on having the opportunity to introduce the first Adjournment debate of the new era. It shows his impeccable sense of timing. He has brought to the attention of the House an issue of considerable importance to his constituents and the country. The issue is close to my heart, for in my constituency of Loughborough are based two major British pharmaceutical companies—Fisons and Riker—and I do not need to be reminded of the importance of the industry as a key supplier to the national health service and as a major employer and wealth creator for the British economy.
847 My hon. Friend talked of the "predicament" of the pharmaceutical industry. That is not the word that I would use. As he was at pains to make clear, the British pharmaceutical industry has behind it an almost unrivalled history of success in terms of its capacity to generate new products, wealth and jobs. It was one of the cornerstones of the success of the British economy during the 1980s. My constituency interest in the future of the industry merely adds to my belief and recognition from a Government perspective of the importance of the industry in our total industrial effort.
To illustrate the scale of the industry's success, I can add some statistics to those given by my hon. Friend. The United Kingdom is fifth in the world in terms of the scale of pharmaceutical production. The sales of the British pharmaceutical industry amount to about £5 billion a year, of which £2 billion is exported. The industry employs about 70,000 people directly, never mind those who have jobs as a result of its success. Those employees are substantially better paid than the average employee in British industry. Therefore, it is not merely an employer of labour but an employer of high-paid labour.
As my hon. Friend the Member for Basingstoke was at pains to point out, the industry has a tremendous record in terms of its spend on research and development. A total of 14 per cent. of the entire world spend on pharmaceutical research and development takes place in these islands. My hon. Friend was too modest in his claim that seven of the world's 20 best selling medicines are based on United Kingdom research. I am advised the figure is eight, including the world's No. 1 pharmaceutical product—Zantac—which is a product of Glaxo.
By any definition, the British pharmaceutical industry is not in a "predicament". It is a world-beating industry, setting a pace and performance target that few other industries in this country or elsewhere can match. It is a tremendous success story. As a Minister with a key interest in the industry as a customer and as a representative of a constituency in which it is an important employer, I have asked what circumstances made that success possible. It is clearly in the interests of us all that those circumstances should continue, so that the success story can be maintained.
In considering what made it possible, one thing is clear. That did not happen because of the benign good will of a few civil servants in Whitehall. it is no thanks to the outdated ideas of industrial sponsorship in Whitehall Departments that we have a successful pharmaceutical industry. Its success is based upon high quality management and entrepreneurial decision taking by people in the industry, making the right decisions about the allocation of resources. It is a success story for British management, not a success story for British politicians.
That is the key factor that marked the industry out for success, but the Government cannot close their mind to the fact that the national health service is the largest single customer of the British pharmaceutical industry. As a customer, the Government have an important interest in ensuring its continued strength. Only if the industry continues to be strong can we expect it to continue to undertake the research that is necessary to ensure that British pharmaceutical technology continues to develop and to break new frontiers.
848 The Government are also properly concerned about the wider implications of the success of the industry for employment and wealth creation. As responsible purchasers from the pharmaceutical industry, just as Marks and Spencer is interested to ensure that its suppliers are vigorous, strong and able to continue to supply its needs next year as well as this year, so also are the Government keen to ensure that the right context exists for the continued success of the British pharmaceutical industry, both because we rely on its strength to supply the needs of the national health service and also because we want to ensure that its wealth-creating skills continue to underwrite the success of that part of the British economy.
What are the key ingredients that have made that success possible? A fair slice of my hon. Friend's speech was devoted to the importance of patent protection for new pharmaceutical products, based on investment in research. The Government share my hon. Friend's recognition that proper patent protection is a vital defence for an innovative industry. There are few industries with a record of innovation to match that of the pharmaceutical industry.
I agree with my hon. Friend about the importance of ensuring that there is in place a proper patent protection system that recognises the balance that must be struck between the interests of a pharmaceutical company to protect its right to use the fruits of its own research and the interests of the customer in not having to pay for the same research three, four or five times over.
My hon. Friend will be aware that there have already been changes during the last 15 years to the scale of protection available under patent law. The Patent Act 1977 extended the basic life of a patent under British law from 16 to 20 years. The Copyright, Designs and Patents Act 1988 abolished the concept of product licences as of right. That was an important change in our patent law.
I agree with my hon. Friend that we should recognise the importance of the distinction in patent law between the basic life of a patent from the time that a new compound or new active ingredient is patented—the beginning of the testing process—and the protected market life of the final product, once it is accepted for use as a medicine. That difference arises because of the time that it takes to test and gain approval for a new compound. The amount of patent life that is available to the company during which to exploit the product in the marketplace can be a relatively small proportion of the total length of life of patent protection. That subject was research last year by Touche Ross.
We recognise that that phenomenon exists, and that to talk of a patent life of 20 years does not mean that products are available in the marketplace for 20 years. It is important to assess the protected market life, as well as the total patent life, and to ask whether the protected market life of a new product is becoming shorter. The Touche Ross report, to which my hon. Friend referred, made a contribution to that debate, but our consideration of the issue is continuing and I am not in a position to give him the conclusions that we have drawn.
We must not forget the other side of the coin: just as it is not true to say that, the moment that a patent is taken out, a product is available for use in the marketplace, so it is not true to say that, the moment that a patent runs out, the company can no longer exploit the product in the marketplace. There is a considerable wash-on period 849 beyond the life of patent protection, during which a company can continue commercially to exploit the results of its research.
My hon. Friend the Member for Basingstoke rightly said that those issues must be addressed in the domestic context and particularly in the context of the Commission's proposals. We are still considering exactly what response we should make, and we shall certainly bear in mind the points that he made.
My hon. Friend touched briefly on the operation of the pharmaceutical price regulation scheme, which I know from constituency experience to be of continuing concern to those charged with operating British pharmaceutical companies. My hon. Friend, and most people in the sector, will recognise that some rules on the exploitation of monopoly products are inevitable. The industry recognises that some rules are inevitable and that they work to its advantage, because it has signed the PPRS, which is a voluntary agreement between the industry and the Government, who represent the national health service, the largest single customer of the industry.
The PPRS is based on the proposition that it is not sensible to try to cost each product in each form of delivery, but more sensible to base our agreement on the concept of return on investment achieved by a pharmaceutical company in the supply of goods to the national health service. My hon. Friend quoted a return on investment of 7 per cent., which is not the figure by which we work. The target returns by which we work under the PPRS are between 17 and 21 per cent., which my hon. Friend will not regard as comparing too badly with the other industries that he used by way of comparison.
We recognise that, if we want to maintain a viable, 850 strong and successful industry, we must ensure that those who operate within it can secure a reasonable market rate of return on their investments in the industry, which is why the targets are fixed that level. From my previous experience in industry, I know that they are not unrealistic rates of return to fix in a relatively secure market. One must remember that, over and above those rates is the grey area, whereby a company can keep up to 50 per cent. over its target profit if it can demonstrate that that extra profit was generated as a result of specific and identifiable productivity gains in the supply and production of a range of products.
My hon. Friend, if I may say so, exaggerated the extent to which the PPRS makes the production and sale of pharmaceutical products to the national health service an uneconomic business proposition. I do not doubt for one moment that we apply downward pressure on prices through the PPRS—that is its precise purpose—but it is a realistic scheme that allows a successful industry to make a realistic return on the investment made in the production and sale of pharmaceutical products.
The most important factor is that the Government must recognise that there is potential and limitation in their position. We shall be a responsible, informed purchaser of pharmaceutical products. We want our suppliers of pharmaceutical products to be viable, successful companies tomorrow. We want this vital British industry to continue its record of success into the future. We know that primary responsibility for that must rest with its management. Our role is that of the responsible purchaser, and we shall seek to continue to discharge it.
§ Question put and agreed to.
§ Adjourned accordingly at fifteen minutes past Eleven.