Closure of Pfizer Sandwich: Loss of Confidence in UK Science or Dawn of New Era?

The announcement in February 2011 that Pfizer will close its global research center based at Sandwich, UK over the next two years, with the resultant loss of 2,400 jobs, has sent shockwaves through the UK’s science community and its policy makers. Is this really an indication that, in the words of Professor Blakemore of Oxford University, “industry no longer has confidence in the future of British science” or as Richard Blackburn, Managing Director, Pfizer UK, insisted to the Commons Science and Technology Select Committee, “[there] was no aspect of government policy or operating environment in the UK that was relevant to this decision.”

Let’s look at some of the facts of pharmaceutical R&D in the United Kingdom. Firstly on the positive side;   80% of all expenditure by companies occurs in just five countries; United States, Japan, Germany, France and United Kingdom,  in 2008 the top 1,000 UK companies spent around £30bn in R&D, of which the pharmaceutical and biotechnology sector dominated spending over £10bn (the next biggest spender, Aerospace and Defence, spent only £2bn), the expenditure by all companies in the United Kingdom on R&D had increased by 9.2% from 2007 and 2008, and for pharmaceutical it increased from $7bn to $10bn from 2004-2008,  United Kingdom attracts 9% of the world’s pharmaceutical R&D expenditure, ranking it third behind the United States, at 49%, and Japan, at 15%,

However on the negative side; With the cost of drug development continually to spiral upwards and with key patents worth a projected $30 billion in revenue expiring between 2010 and 2013, pharmaceutical companies are being forced to trim overcapacity; the UK Royal Society of Chemistry estimates that nearly 6,000 jobs have been cut in the past year from UK pharmaceutical and science companies, the closure of Sandwich comes rapidly on back of the closure or reduction of other major long established UK R&D sites such as Merck’s research laboratory at Newhouse Scotland and Astra Zeneca’s site at Charnwood.

The truth is the loss of any—let alone 2,400—knowledge intensive R&D jobs is a serious issue. It not only affects those individuals who have lost their job, but has much wider implications for the local area and the wider UK environment for pharmaceutical research. However it needs to be seen as part of a much larger longer term trend; that is the re-structuring of pharmaceutical research where companies obtain a larger percentage of R&D from outside the organizations. This is not predominantly driven by cost savings but by a realization that “Not all the smart people work for us. We need to work with smart people inside and outside our company (Chesbrough, 2003).” This trend to outsource R&D and shift from purely internal R&D activities to external sources has been termed by Professor Henry Chesborough of Haas Business School, as Open Innovation  “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.”

As a consequence, many companies with significant R&D budgets now require their own laboratories to justify their existence by competing internal and externally to sell their services to the business units within the company or even to other, non-competing companies. For some companies this has meant they now undertake less than 10% of their R&D at their own R&D centers or in some extreme cases the companies may out-source all of their R&D, retaining only the ability to specify,  identify, and source what R&D they need. Partnering, strategic alliances, collaboration, and cooperation are more and more used to produce, access, and acquire new technology. Corporate researchers are becoming “technology scouts” of technology rather than technology originators. One major US pharmaceutical company has defined R&D as S&D; search and development.

How much R&D is currently outsourced? Hard figures are difficult to obtain. Work by the European Union showed that in France in the decade from 1982-1993 R&D expenditure increased 250% while over the same period the value of externally placed R&D contracts increased 600%. A similar trend was observed in Germany, Italy, and Holland.  While a study by the Enkel and Gassmann in 2008 found that in high tech industries almost 50% of all R&D projects comprised an external partner. Of these external partners, 79% of companies choose to partner with a world-class university.

So the question for governments comes down not to what can they do to turn the tide back on the closure of large corporate R&D centers but how can they ensure that their country captures as much as possible of this growing outsourced R&D “cake”. Research indicates that the key drivers in determining where a company decides to locate its external R&D investment are (in order); the availability of skilled employees; the quality of public research centres and technology parks; the willingness of the public funded R&D infrastructures to collaborate; and an efficient intellectual property rights regime. Interestingly public incentives for business R&D (such as R&D tax credits, grants, loans, or equity stakes) are probably not a significant driver of the location of external R&D although they can influence the final decision between competing locations.

In addition to the innovation/R&D policy the ability of a country to attract external R&D also needs the targeted promotion of that location as an attractive place to “do R&D” often through the countries inward investment agency (for example UK Trade & Investment, Enterprise Ireland, Invest in America). The aim of these agencies is to promote the R&D capabilities of that country to potential internal and external investors and to efficiently facilitate the investment process.

On these measures the United Kingdom is doing quite well. For a relatively small country the United Kingdom has the world’s third highest share of scientific publications after the United States and China, while in terms of output per researcher and per million dollars of research spend the United Kingdom is the highest in the world; it is home to eight of the world’s top 50 universities. Cambridge, Oxford, Imperial College, and University College London are the only European Universities in the top 10. It has a world-class network of over 100 science parks with approximately 3,000 tenant companies and 325 business incubators supporting companies to develop and commercialise IP, and historically has accounted for nearly 50% of total European Venture Capitalist investment, total investment is 2nd only to the USA. Its inward investment agency (UK Trade and Investment) is highly regarded and employs a dedicated team of R&D specialists whose role it is to identify and facilitate new R&D investment opportunities in the United Kingdom.

Clearly this is little short term compensation for those who have lost their jobs at Sandwich. However with continued investment in high class science, a growing desire, and incentives for universities to increase collaboration with companies (the UK government has just announced £140m of investment in universities to promote commercial interaction and knowledge transfer) and re-doubling efforts to encourage companies to outsource their R&D to the United Kingdom there is still much hope for the United Kingdom to maintain and grow the amount of pharmaceutical R&D undertaken here. Maybe that is why , contrary to much political hype, Pfizer is far from pulling out of the United Kingdom based R&D, its innovative global regenerative medicine R&D center at Cambridge, UK will be strengthened and all-in-all, following the closure of Sandwich, Pfizer will still have over 1,000s R&D personnel based in the United Kingdom.

This is definitely not the beginning of the end for pharmaceutical R&D in the United Kingdom, but maybe the end of the beginning of this brave new world of outsourced R&D.

Claude Kaplan is the Managing Director, Consulting, and Principal Consultant at IP Pragmatics in London.