The UK Innovation Report 2022

The Pharmaceutical Manufacturing Sector

The Pharmaceutical Manufacturing Sector

Key UK pharmaceutical manufacturing trends in the last decade

The value added and productivity of the UK pharmaceutical manufacturing sector have declined significantly in the last decade

• Of the top 13 countries by pharmaceutical value added in 2018, the UK is the only one to have experienced a significant productivity decline, at a rate of -7.9% per year between 2008 and 2018.

The UK trade balance in pharmaceuticals has deteriorated significantly since 2014

• The UK recorded deficits in pharmaceutical product trade in all years between 2014 and 2020, except in 2015.
• The UK’s pharma trade balance went from a $9.6 billion surplus in 2010 to a deficit of over $1 billion in 2020.

Pharma business R&D expenditure in the UK has remained stagnant in the last decade and remains significantly lower than comparator countries

• The business expenditure on R&D has only grown marginally in the last decade, both in manufacturing and non-manufacturing activities. Adjusting for inflation, R&D in the Pharmaceutical Product Group in 2020 was still only 83% of its peak in 2011. The sector spent only 6% more in 2018 than it did in 2008, compared to increases of around 30% in the US and Germany, and over 100% in Korea.
• On average, between 2014 and 2020, 50% of the pharmaceutical R&D performed in the UK was conducted by foreign-owned businesses.

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Drivers identified in literature review and sector expert consultations:

• Company restructuring and site closures, including those by major sector employers;
• Increased offshoring of pharmaceutical manufacturing, including a large share of APIs;
• The UK’s inability to capture the “second wave” of international manufacturing investments;
• Greater incentives (e.g. tax) offered by other countries to attract manufacturing;
• New entrants focusing on early-stage drug discovery and non-manufacturing activities;
• An inability to commercialise and scale up the manufacture of technologies developed in the UK;
• Caps on drug spending having an impact on the perception of the UK by investors;
• Increased use of generics pushing prices downwards and driving imports upwards;
• The 2016 EU membership referendum adding uncertainty to investment decisions;
• The large share of domestic business R&D expenditure decisions taken abroad;
• Competitor countries having greater incentives to attract R&D investment;
• Difficulties accessing scale-up funding locally, leading to firm decisions to migrate; and
• UK companies reducing in-house R&D investment in favour of acquiring small firms.

Pharmaceutical manufacturing - value added and employment

Note: Last available value-added (VA) data for Ireland from 2014, used and indicated in table above. Because of data unavailability, 2017 values for VA and Employment are used instead of 2018 values for India and Korea; 2017 values for Employment are used instead of 2018 values for France; 2009 values for VA and Employment are used instead of 2008 values for Belgium and Switzerland; and 2011 value for VA and 2007 value for Employees used instead of 2008 value for Korea. CAGR (Compound Annual Growth Rate) ca

• The UK was ranked twelfth in the world in the production of pharmaceuticals in 2018 by value added in current US$. The value added per employee metric showed that UK productivity within the pharmaceutical sector declined between 2008 and 2018 at a rate of 7.9% per year (CAGR), as a result of both decreases in value added and increases in employment over this period.
• Unlike top-performing countries, the UK has recorded negative growth rates in value added and value added per employee over the past decade.
• At ~$157 in 2018, UK value added per employee was at a similar level to Germany, Italy and France but lower than the productivity levels of most comparators, except India and Brazil.
• Singapore has the highest value added per employee of comparator countries. Belgium, Denmark and Switzerland are countries with high growth in value added per employee over the decade.

Pharmaceutical manufacturing - productivity growth

Note: See previous slide. Sector definition: “Manufacture of basic pharmaceutical products and pharmaceutical preparations”. As per the International Standard Industrial Classification (SIC) of All Economic Activities, Revision 4, SIC Code 21. Source: UNIDO, INDSTAT 4, ISIC Revision 4.

• Of the top 13 countries by value add in 2018, in billions of US dollars, the UK is the only one to have experienced a significant productivity decline between 2008 and 2018.
• Other countries, including Belgium, Denmark, Switzerland and the United States, saw productivity growth between 2008 and 2018, measured as growth per year in value added per employee.
• France and Germany, which have similar productivity to the United Kingdom, also experienced smaller declines in productivity during this time period; however, the decline in productivity in the UK was 4–8 times larger than these comparable nations.

Pharmaceuticals - trade balance (a)

Note: Trade balance is based on gross exports and gross imports of goods at HS 2-Digit level for HS 30 – Pharmaceutical Products. *Global ranking excludes countries for whom data for the year in question is not available. Source: UN Comtrade, Accessed Jan 2022

• The UK has suffered from a rapid loss in trade competitiveness in pharmaceutical products from the perspective of trade balance over the past decade.
• The UK was the fourth largest net exporter of pharmaceutical products in 2010, with a surplus of ~$10 billion.
• Since 2014 the UK has recorded deficits in pharmaceutical product trade in all years except 2015. Its trade deficit widened to ~$1 billion in 2020, placing it among the third quartile of countries according to trade balance.

Pharmaceuticals - trade balance (b)

• This loss in trade competitiveness for the UK over the past decade, leading to a ~$1 billion trade deficit in 2020, is the result of an annual 1% increase in imports (CAGR) and an annual 2.8% CAGR decline in exports (CAGR) between 2010 and 2020.
• Of the comparator countries, the UK is the only country where exports were smaller in 2020 than they were in 2010.

Note: Trade balance is based on gross exports and gross imports of goods at HS 2-Digit level for HS 30 – Pharmaceutical Products.

*Global ranking excludes countries for whom data for the year in question is not available.

Pharmaceuticals - UK top trade partners

Source: ONS Trade in goods: country-by-commodity exports (Jan 2022 and historical data); ONS Trade in goods: country-by-commodity imports (Jan 2022 and historical data); Code 54: Medicinal & pharmaceutical products.

• There have been some successes in the UK pharmaceutical trade over the past decade. The UK has exported more medicinal and pharmaceutical products to China and Belgium, with a 13% CAGR between 2010 and 2020, bringing in £1 billion more in exports in 2020 than 2010 from each country.
• Imports from Italy rose, while exports to this nation declined (5.8% rise in imports, -9.7% decline in exports), with a similar but smaller picture occurring with France (2.7% rise in imports, -6.3% decline in exports). This resulted in a net reduction of just over £1 billion in trade for the UK in 2020 than 2010 from Italy and France.
• The rise in imports outstripped the growth in exports from countries, including the Netherlands (14.4% vs 1.5%), to the tune of a £3.2 billion lower trade balance in 2020 compared to 2010, and to a lesser extent in Germany (4.4% vs 0.9%, with a £700 million difference between 2020 and 2010).
• This analysis identifies that, although some traditional markets for UK pharmaceuticals in the EU may be declining, new export markets with growth potential are also opening up (e.g. China).

Pharmaceuticals - business spending on R&D (a)

Note: Current prices adjusted using GDP deflator to 2020 prices. Source: ONS BERD Statistics, 2021

• Developed by the ONS, the term “product group” refers to business R&D expenditure allocated to the product group that best describes the subject type of R&D activities carried out by firms.
• This is in contrast to the “industry classification”, where SIC codes are allocated based on the main activity of the business – in this instance, companies whose main activity is pharmaceutical manufacturing. These are more often used for international comparisons.
• The difference between these two measures indicates that only a fraction of all R&D in the pharmaceutical industry is conducted by businesses whose main activity is pharmaceutical manufacture. Companies that may account for the difference include contract R&D organisations and pre-commercial SMEs.
• Adjusting for inflation, R&D in the Pharmaceutical Product Group in 2020 was still only 83% of its peak in 2011.
• While R&D in pharmaceutical manufacturing (SIC Code 21) dipped to just 39% of its 2011 value in 2020, it had been relatively stable throughout the decade.

Pharmaceuticals - business spending on R&D (b)

Note: Compound annual growth rates for countries are based on data for the first and last available years within the 2008–2016 range. Data from Industry: Manufacture of basic pharmaceutical products and pharmaceutical preparations (SIC Code 21) Source: OECD Research and Development Statistics, 2021.

• Comparing pharmaceutical manufacturing, the decline experienced by the sector in terms of GVA and productivity may have affected business R&D expenditure.
• The sector spent only 6% more in 2018 than it did in 2008, compared to increases of around 30% in the US and Germany and over 100% in Korea.
• In absolute terms, however, business enterprise R&D expenditure in the UK remains comparatively lower than that of Korea, Germany and the US.

Pharmaceuticals - foreign R&D in the UK

Note: Current prices adjusted using GDP deflator to 2020 prices. ONS defined product grouping. Source: ONS BERD Statistics, 2021

• Most pharmaceutical R&D conducted by businesses in the UK is funded by the companies themselves (~70%).
• Around 25% of pharmaceutical R&D performed by businesses in the UK is funded by overseas organisations. While overseas investment in R&D makes up a substantial portion of the total R&D, this has not been increasing.
• Only a small fraction of R&D performed by business is funded by the government (~£12 million in 2020).
• The graph on the right shows that, on average, 50% of the pharmaceutical R&D performed in the UK was conducted by businesses owned overseas.

What is driving value added, productivity and trade trends in pharmaceutical manufacturing?

• The value added and productivity of the UK pharmaceutical manufacturing sector have declined significantly in the last decade 
• The UK trade balance in pharmaceuticals has deteriorated significantly since 2014

Potential drivers identified from literature review and consultations with sector experts (see Appendix 3.1 for details):

Company restructuring and site closures, including those by major sector employers

• Some top companies (e.g. Pfizer, GSK), who are major employers in the industry, completed reorganisations over the last decade, resulting in site closures [Bioscience and Health Technology Sector Statistics, 2019].

Increased offshoring of pharmaceutical manufacturing

• The consulted stakeholders highlighted that the last decade saw a move by UK pharmaceutical manufacturers towards the outsourcing of some manufacturing activities.
• There seems to be a greater degree of firm mobility in the pharmaceutical sector than in other industries as a result of shorter factory life cycles, lower-scale operations and lower capital embedded in facilities and the supply chain.
• Together with superior incentives from overseas markets, these traits may help to explain the closure and/or migration of some key operations outside the UK.
• Both the literature and interviewees suggest that a large share of advanced pharmaceutical ingredient (API) chemicals and materials production has moved offshore over the last 10–15 years, mostly driven by cost considerations [Medicines Manufacturing Industry Partnership, 2017].
• The stakeholders consulted also highlighted that contract development and manufacturing companies (CDMOs) owned and located abroad, taking on tasks such as drug development and manufacturing, have become more common.

The UK’s inability to capture the “second wave” of manufacturing investments

• The second wave of manufacturing investments on new plant and equipment for the manufacture of biologics and other novel medicines has largely gone to Ireland, Singapore, Germany and the US, which together have attracted the bulk of US$ 125 billion investment between 2011 and 2017 [LSIS, 2017].
• The 2017 Life Sciences Industrial Strategy therefore suggested that the UK should not miss the next wave of manufacturing opportunities in the sector in order to close the export gap and boost productivity [LSIS, 2017].
• The 2021 Life Sciences Vision identifies areas in which the UK has, or could develop, a meaningful competitive advantage, including: cell and gene therapies, oligonucleotides, viral vectors, advanced diagnostics or wound care [HMG, 2021].

Other countries provide greater incentives – particularly tax – to attract manufacturing investment

• The 2021 Life Sciences Vision recognises that it is essential to provide incentives to support company growth, innovation and investment and to help new companies develop products and sales based in the UK [HMG, 2021].
• Key competitors such as Germany, the US, Switzerland, Ireland and Singapore have all prioritised life sciences manufacturing, with Ireland landing manufacturing investments from 9 out of 10 top pharmaceutical companies and Singapore having 30 of the world’s leading biopharmaceutical companies’ HQs [LSIS, 2017].
• The consulted stakeholders highlighted that lower business tax rates, including incentives for companies to locate headquarters and R&D facilities within countries, may out-compete the UK offering regarding international investment. This is seen particularly in the cases of Ireland and Singapore, which have highly attractive business tax structures, better rates of return of investment, access to capital and other financial incentives.
• There was a perception among the consulted experts that, although the UK has started to offer R&D grants and other innovation incentives, the total UK budget for R&D grants remains lower than that of competitor countries.
• There is also a concern that, although the UK has traditionally offered some advantages for R&D-intensive pharmaceutical companies to operate in the country, such as good access to skills and the presence of a vibrant innovation ecosystem, these might have eroded over time.
• Both the literature and interviewees identified difficulties in recruiting highly qualified workers in categories such as the core scientific disciplines of biological and chemical sciences; a wide range of computational disciplines; and clinical pharmacology [ABPI, 2019]. The consultees also mentioned that the UK has lower proportions of skilled technicians with specific knowledge of the sector than other competitor countries.

New UK sector entrants focused on early-stage drug discovery and other activities outside manufacturing

• While the sector has historically been dominated by a small number of large players (e.g. AstraZeneca and GSK), ONS data suggests that 65% of 610 companies registered as pharmaceutical manufacturing enterprises at the start of 2018 were micro-firms with fewer than 5 employees [Make UK, 2018].
• The interviewees suggested that the UK has developed a strong presence of start-ups in the last decade, many of which focus on new discoveries and operate on loss-making models while these developments get to market.
• From the perspective of some interviewees, trade deficits could be a symptom of the UK focus on basic R&D but not commercialisation in recent years, which could be leading to UK innovation being exploited abroad and therefore lower exports.

Inability to commercialise and scale up the manufacture of technologies and products developed in the UK

• Technologies and products that were originally developed in the UK have not been commercialised or manufactured in the UK, and globally mobile inward investments have tended to go to competitor countries [HMG, 2021].
• For example, there is concern that, despite the discovery of monoclonal antibodies in the UK, the country has failed to capitalise on this by securing commercial manufacturing of these products [LSIS, 2017].
• The UK government’s recognition that the high costs of developing a drug and getting it to market are prohibitive factors for many manufacturers has resulted in attempts to develop a streamlined pathway to bring products to market through programmes such as the Accelerated Access Collaborative [Make UK, 2018].

Caps on drug spending may have an impact on the perception of the UK by investors

• An opinion found in the literature and expressed by various interviewees is that, although drug spending decisions do not directly influence investments because companies operate in a global market, they might affect the perception that global companies have of the UK’s commitment to the sector [Make UK, 2018].
• In this regard, the Association of the British Pharmaceutical Industry [ABPI, 2020] suggests that the drive by the NHS to purchase the lowest-price product and single-supplier contracts has resulted in manufacturing being driven to low-cost labour markets, thereby weakening the resilience of UK supply.

Increased use of generics could be pushing prices downwards and driving imports upwards

• The UK pharmaceutical industry has seen increased price pressures, both nationally and globally, from generics [Enterprise Ireland, 2020].
• The consulted stakeholders highlighted that, in terms of generics manufacturing, other countries such as India and China are the preferred options to manufacture basic chemistry at a lower price. Increased generic use by the NHS may be driving imports upwards.

The 2016 EU membership referendum added uncertainty to investment decisions in the sector

• There was a common perception among the stakeholders consulted that the 2016 EU membership referendum resulted in pharmaceutical companies becoming more cautious in their spending and putting larger capex on hold.
• In the view of some interviewees, the referendum decision created a perception that the UK could become a smaller domestic market, which reduced some of its attractiveness. IP protection considerations added to these concerns, as it became unclear whether the UK would remain part of the EU Unitary Patent Initiative and the European Patent with Unitary Effect (EPUE) scheme.
• There is also a perception that the UK’s new trade relationship with the EU has reduced the attractiveness of producing final products in the country, as these would need to be re-released and approved in other markets.
• Both interviewees and literature sources suggest that longer lead times and increased paperwork caused by border and custom checks affect profit margins, particularly for products with a short shelf life, leading to companies transferring specific production lines outside the UK [Make UK, 2018].

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What is driving business R&D expenditure trends in pharmaceutical manufacturing?

• Pharma R&D expenditure in the UK has remained stagnant in the last decade and remains significantly lower than comparator countries

Potential drivers identified from literature review and consultations with sector experts (see Appendix 3.1 for details):

A large share of domestic business R&D expenditure relies on decisions taken abroad

• Around half of the UK’s pharmaceutical R&D expenditure was performed in businesses owned by overseas companies in 2020. As a result, the investment decisions of multinational companies located in the UK may be made by headquarters located elsewhere.
• In the view of some interviewees, this may have impacted R&D expenditure decisions and has potentially lessened the UK’s speed of innovation, particularly for technologies where the development process is highly iterative and requires proximity to the manufacturing base [HMG, 2021].

Competitor countries offer greater incentives to attract R&D investment

• There was a perception among the consulted stakeholders that firms receive more favourable grants and tax credits in other countries.
  §Capital allowance regimes in the UK may be particularly disadvantageous for the pharmaceutical sector because of its high R&D intensity, making it relatively less attractive to invest in pilot and full-scale manufacturing facilities in comparison to other countries [LSIS, 2017].
• For example, France and Canada offer capital allowance rates of 28% and 50%, respectively, in comparison with an annual rate of 18% on a reducing balance basis in the UK [LSIS, 2017].
• Although the UK’s current corporation tax is the lowest in the G20, the UK government recently announced significant rises from 19% to 25%, with effect from 1 April 2023.

UK companies may struggle to access scale-up funding locally and decide to migrate, impacting R&D expenditure

• The access to scale-up funding in the UK has been identified as a constraint despite a strong performance in research and innovation, across a number of fields. The ease of accessing funding in the US is seen as greater than in the UK.

Decision of UK companies to reduce high-risk in-house R&D investment in favour of acquiring small companies

• According to the consulted experts, large pharmaceutical companies are preferentially providing seed funding for small companies conducting R&D and then acquiring these companies if successful. This may be reducing the overall business R&D expenditure in the UK.
• The long lag times and costs between the research beginning and a drug being patented can be prohibitive for firms, leading to mergers and acquisitions across the industry in order to gain the economies of scale and financial capability to manufacture pharmaceuticals [Make UK, 2018].

Smaller innovative companies tend to outsource R&D

• As suggested by the UK Bioindustry Association, smaller innovative companies often operate on an outsourcing model, whereby they rely on universities and other companies to conduct R&D on their behalf [BIA, 2022].
• In the view of some interviewees, this sectoral trait may be reducing the R&D identified as being done by manufacturing firms, while not necessarily reducing total R&D.
• Similarly, there was a view among the consulted stakeholders that foreign contract research organisations (CROs) servicing the pharmaceutical and biotechnology industries may be affecting domestic R&D expenditure statistics.