Pocket guide to Investing in European health R&D

Pocket guide to Investing in European health R&D Based on key research delivered by The Deloitte Health Economics Group 1 Commissioned by Janssen Pharmaceutica NV www.janssenhealthpolicycentre.com

Confronting an unavoidable rise in healthcare expenditure Healthcare spending has increased substantially over the last three decades. In European countries, healthcare expenditure has risen faster than economic growth. Health R&D is the key to being able to respond to the unavoidable rise in healthcare expenditure. Increased investment in R&D has a fundamental role to play in improved patient care and economic growth in Europe. 1980 1995 2011 20 18 16 14 12 10 8 6 4 2 Switzerland Netherlands Spain France Belgium* Portugal United States Total healthcare expenditure (% GDP; 1980-2010) Italy Norway Finland Germany Denmark Iceland Austria Greece United Kingdom * Excluding investments Sweden Hungary Czech Republic Poland Slovenia Luxembourg Figure 1: Annual healthcare expenditure (Source: OECD 2012) 2 By 2030, healthcare expenditure is expected to rise an estimated 5 percentage points to 12%-15% of Europe s GDP. 2 The potential of R&D investment to increase the health of European populations and positively impact Europe s economies makes it crucial that government s adopt policies that will encourage the growth and success of health R&D. Scenarios 2% of GPD growth 30% 25% 20% 15% 10% 5% Italy Sweden Norway Denmark Netherlands Iceland Greece Portugal Austria Belgium Germany France Switzerland United States EU Poland Slovak Republic Czech Republic Ireland Finland Hungary Spain United Kingdom 2 www.janssenhealthpolicycentre.com www.janssenhealthpolicycentre.com 3 1% of GPD growth 2010 2030 Total healthcare expenditure (% GDP; 2010-2030) Figure 2: Future annual healthcare expenditure (Source: OECD)

Why healthcare is costing us more Need for renewed focus on specific disease areas The trends that pushed up healthcare expenditure in the past will become even more intense in the coming decades. The key factors understood to be responsible for the increase in demand for healthcare services and the rise in healthcare spend in Europe. Figure 3: - Ageing populations - Technical advancements & medical innovation powered by rising levels of national income - The changing nature of healthcare provision 15% % European population aged 60 and older 20% 26% 34% Projection 1950 1960 1970 1980 1990 2000 2010 2020 2030 Most of the burden of illness and mortality arises from non-communicable, often chronic, diseases (NCDs). Worldwide, NCD s led to 63% 3 of deaths and in Europe an estimated 70% 2 of total healthcare costs related to chronic diseases: Healthcare spending per disease area (% of healthcare spending average UK, GE, FR, 2009) Figure 4: The impact of growing incidence/prevalence of chronic diseases (Source: Calculations based on sources mentioned in the text) 4 www.janssenhealthpolicycentre.com www.janssenhealthpolicycentre.com 5 Non-chronic diseases Other chronic diseases 30% 40% 4% 6% 8% 12% In order to avoid a deterioration of care to these patients, healthcare budgets will have to increase by 1% per year 4 just to cover the growth in patient numbers and hence by 23% by 2030. 5 Diabetes Cardiovascular Diseases Dementia Cancer Ratio of incidence/prevalence by 2030 15.2% 9.8% 47.6% 31.9% Total 22.56%

Why Europe s health sector must continue to innovate A catalyst for sustained economic growth In Western Europe, life expectancy at birth has increased from 67 years in the 1950s to 74 in the 1980s and reached 80 in 2010. 6 This means that every five years, one extra life year is being added. 7 R&D in the area of healthcare has the potential to render a particularly valuable outcome as it improves life expectancy and the qualify of life drastically. Effective technological innovations from biopharmaceutical R&D have made a huge contribution to this improved level of health and longevity. The introduction of new medicines is estimated 40% to have accounted for of the increase in life expectancy between 1986 and 2000 alone 8 The European Commission estimates that of all industries, pharmaceuticals is the most R&D intensive (R&D investment as a percentage of turnover) and the second largest R&D sector in Europe. 9 R&D shares of sectors (2012) 9 Automobile & parts Pharmaceuticals & biotechnology Technology hardware & equipment Aerospace & defence Industrial engineering Chemicals Leisure goods General industrials Figure 5: R&D Distribution and intensity by sector (Source: European Commission EU R&D Scorecard 2012) Software & computer services Electronic & electrical equipment R&D investment (million Euro) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 With Europe s historic strength in this sector, investing in health R&D will provide significant benefit and opportunities for the European economy and patient outcomes. 0% 2% 4% 6% 8% 10% 12% 14% 16% R&D intensity 6 www.janssenhealthpolicycentre.com www.janssenhealthpolicycentre.com 7

Reversing the slowdown in health R&D investment Total European health R&D investments are dwarfed by total healthcare expenditures. Only 3% or 47 billion of total expenditure on health is on health R&D while the remaining 97% or 1.4 trillion is spent on healthcare. 10 Health expenditure in Europe (2011; total = 1.4 Trillion) Healthcare Health R&D 97% Since 2008, the growth in health R&D investment has slowed, with even an absolute decline in public health R&D for the first time in 2011. There remains a significant gap between total spending on health R&D in Europe and the US. There remains a significant gap between total spending on health R&D in Europe and the US. At the height of the recent financial crisis, the US actually increased its public health budgets by $10.4 billion over the period of 2009 2010. 12 In absolute terms, total health R&D spending in Europe is mainly driven by private sector funds. At a total of 29 billion, investments from pharmaceutical companies accounted for almost two-thirds of total R&D investments in 2011. 11 Greater synergy between private and public health R&D investment is essential to obtain substantial patient outcomes. Total health-related R&D in Europe (2011; total = 47 Bn) Private R&D Public R&D* EU PF7 Figure 6: Total health-related R&D in Europe in 2011 (Euros) Note: private R&D only includes biopharmaceutical companies (Source: EFPIA; EurostatGERD; European Commission; WHO National health account database) 29 60% 1 2% 3% 18 38% *2010 data Private and Public Health-related R&D (2004-2011; billion euro) Figure 7: Total health-related R&D 2004-2011 ( billion) (Source: EFPIA; Eurostat GERD; GBAORD; European Commission, Research America) Public health investments at European level are not likely to make up for the contraction at the national level. 8 www.janssenhealthpolicycentre.com www.janssenhealthpolicycentre.com 9 FP7 * estimate US private US public EU private EU public

Reversing the slowdown in health R&D investment 831 EU private EU public A closer look at total R&D investments per European country highlight the UK, France, Germany and Switzerland with the highest levels of investments. Smaller countries such as Belgium have high levels of private R&D investments whereas others such as the Netherlands place a greater emphasis on public R&D activities. * estimate 5,000 4,000 3,000 2,000 1,000 0 5,588 5,318 4,972 4,787 4,109 3,520 1,907 1,821 Germany United Kingdom Italy Belgium France Switzerland 372 1,250 1,211 1,102 670 496 1,545 980 988 860 642 Sweden Spain Denmark 1,497 Romania Poland Finland Netherlands Ireland 264 400 223 212 218 26 194 181 193 648 676 149 55 141 Hungary Austria Norway 91 21 84 Slovenia - Greece Portugal Czech Republic Croatia Cyprus Bulgaria Malta Latvia Iceland Slovakia Estonia Lithuania 78 179 49 119 40 18 14 1 1 6 NA 3 NA 5 NA 7 NA 25 NA 21 NA 21 NA 37 - Luxembourg Figure 8: Private and public R&D per country (Source: EFPIA; Eurostat GERD; European Commission; Local Sources for UK and France (Public R&D)) FP7 10 www.janssenhealthpolicycentre.com www.janssenhealthpolicycentre.com 11

Breaking down barriers to innovation and market access Delivering on the promise of innovation and R&D Biopharmaceutical countries have been facing an increasing number of obstacles in getting innovative products to the European markets. Recent austerity measures throughout Europe, such as price cuts, clawback systems, rebates and delays in market entry for new therapies, are causing a decline in the financial returns from innovative pharmaceutical products. Stricter market access leads to lower returns on development, so other decisions are made Prof. Koen Debackere, Managing Director, Leuven University, Belgium 13 Some research has even suggested an estimated average of $4.2 bn in research dollars spent for every drug that is approved, taking into account the cost of drug failures 14 12.5 bn Debt owed to Pharma companies by Greece, Italy, Portugal and Spain at end of 2011 16 9.45 % Estimated average annual increase in clinical trial costs between 1999 2011 15 4years One example of period which a reimbursement decision has been pending approval 13 The European Union recognises the importance of innovation and R&D in healthcare. To set the conditions right for a creative and innovative Europe is a must in order to preserve our standard of living as well as to cope with the challenges of the future. The ramifications of ageing societies, the emergence of new public health challenges and the internationaliation of the value chain for healthcare products are just a few examples of issues the EU has to face. European Commission s Directorate General for Enterprise and Industry 17 It is crucial for all stakeholders to work together to adopt policies that will encourage continued health R&D growth and success. This can only be ensured by: PROMOTING PUBLIC-PRIVATE INVESTMENTS ACCELERATING MARKET ACCESS REWARDING INNOVATION STRENGTHENING REGULATORY CERTAINTY 12 www.janssenhealthpolicycentre.com www.janssenhealthpolicycentre.com 13

References Notes 1. Full report Investing in European health R&D commissioned by Janssen Pharmaceutica NV and the research conducted by Deloitte Health Economics group available at: http://www.janssen-emea.com/sites/default/ files/janssen_rnd_study_report.pdf. 2. OECD Policy Implications of the New Economy 2000 2050. Global Insight WMM 2000 2037. 2001. 3. As quoted in article Healthcare Spending in International Context: U.-G.Gerdtham and B. Jönsson, International Comparisons of Health Expenditure, in Handbook of Health Economics, vol. 1A, ed A.J. Culyer and J.P. Newhouse (New York: Elsevier, 2000), 11 53. 4. Bloom E, Cafiero ET, Jané-Llopis E, Abrahams-Gessel S, Bloom LR, Fathima S, Feigl AB, Gaziano T, Mowafi M, Pandya A, Prettner K, Rosenberg L, Seligman B, Stein AZ, Weinstein C. The Global Economic Burden of Noncommunicable Diseases. Geneva: World Economic Forum. 2011. 5. The Economist Intelligence Unit. Never too early Tackling chronic disease to extend healthy life years. 2012. 6. United Nations, Department of Economic and Social Affairs, Population Division. World Population Prospects: The 2010 Revision, CD-ROM Edition. 2011. 7. Oeppen J, Vaupel JW. Broken limits to life expectancy. Science, 2002, vol. 296, no 5570, p. 1029-1031. 8. Lichtenberg FR. Pharmaceutical Innovation and Longevity Growth in 30 Developing and High-income Countries, 2000-2009 (No. w18235). National Bureau of Economic Research. 2012. 9. Hernandez H, Tubke A, Hervas-Soriano F, Vezzani A, Christensen J. The 2012 EU Industrial R&D Investment Scoreboard. European Commission, JRC/DG RTD. 2013,doi:10.2791/30423. 10. Total health-related R&D in Europe in 2011 (Euros) Note: private R&D only includes biopharmaceutical companies (Source: EFPIA; EurostatGERD; European Commission; WHO National health account database). 11. European Federation of Pharmaceutical Industries Association. The pharmaceutical Industry in numbers. 2013. Available at: http://www.efpia.eu/uploads/figures_key_ Data_2013.pdf. Accessed: 29 August 2013. 12. Research America. 2008 Investment in U.S. Health Research. Available at: http://www.researchamerica. org/uploads/healthdollar08.pdf. Accessed: 17 June 2013 Pharmaceutical and biotech industry s activities. 13. Professor Koen Debackere, Managing Director of Leuven University (Belgium), Telephone interview. 2013. 14. Berndt ER, Cockburn IM. Price Indexes for Clinical Trial Research: A Feasibility Study (No. w18918). National Bureau of Economic Research. 2013. 15. Berndt ER, Cockburn IM. Price Indexes for Clinical Trial Research: A Feasibility Study (No. w18918). National Bureau of Economic Research. 2013. 16. Association. Annual Review of 2011 and Outlook for 2012. European Federation of Pharmaceutical Industries 2012. Available at: http://www.efpia-annualreview.eu/uploads/ efpia.pdf. Accessed: 7 Jan 2013. 17. European Commission. Innovation in Healthcare Industries. 2013. Available at: http://ec.europa.eu/ enterprise/sectors/ healthcare/competitiveness/innovation/index_en.htm Accessed: 16 Apr 2013. 14 www.janssenhealthpolicycentre.com www.janssenhealthpolicycentre.com 15

16 www.janssenhealthpolicycentre.com