Topics Economic Contribution of the Pharmaceutical Industry: A Consideration from Nominal and Real Gross Value Added

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Masao Yoshida, Senior Researcher, Pharmaceutical and Industrial Policy Research Institute (PIIPRI)

1. background and objectives

The pharmaceutical industry has contributed to people's health and economic activities through prevention, symptom relief, and treatment by meeting the demand for a wide variety of medicines in the face of diverse diseases, including cancer, heart disease, stroke, hypertension, hyperlipidemia, diabetes, dementia, intractable diseases, rare diseases, and infectious ^diseases1). The new medicines created through research and development by the pharmaceutical industry are an industry that creates a global public good in the sense that they enable the protection of human beings from the various disadvantages caused by diseases for many years to come. At the same time, the pharmaceutical industry does not rely on public investment to finance the majority of its research and development (R&D) costs; rather, it is an industry that is required by capital markets to recover all R&D investment from the manufacture and sale of new drugs that are successfully launched and to pay investors for the risk borne by the industry2). ²⁾.

There are two major economic contributions that the pharmaceutical industry makes: the first is the contribution as an economic driver derived from people's health as a result of benefiting from pharmaceutical products. The first is the contribution as an economic driver derived from people's health through the benefits of pharmaceuticals: the future health of consumers themselves or the effect on the economy resulting from their health, which is extremely difficult to assess quantitatively because the effects of pharmaceutical use on health occur over a long period of ^time3). However, the recent outbreak of a new type of coronavirus infection has revealed that the loss of a safe and secure lifestyle has a significant impact not only on the lives of individuals but also on the economy, and the contribution to the economy made by the health of people is socially recognized as important as the significance of the existence of pharmaceutical products4). ⁴⁾.

Another economic contribution of the pharmaceutical industry is the creation of added value from the production of goods and services as an advanced R&D-intensive manufacturing industry, the accompanying maintenance of a stable and high level of tax payments to the government, and the creation of direct employment of highly productive and highly skilled human resources. In addition, the pharmaceutical industry contributes to the sustainable growth of society through its economic activities by bringing about economic and employment spillover effects created by the supply chain.

As an example of concrete figures, in 2020, the WifOR Institute, a German economic research institute, quantified the contribution of the pharmaceutical industry to GDP (Gross Domestic Product), a key economic ^indicator5). According to the report, the global pharmaceutical industry contributed US$ 532 billion in Gross Value Added (GVA) ⁶⁾ to the world in 2017 as a direct effect, an amount equivalent to 1% of global gross value added (= global GDP). The report also indicates that the GVA of the Japanese domestic pharmaceutical industry contributes 6% of the total GVA of the global pharmaceutical industry, which is second only to the United States (24%), Europe (28 countries) (21%), and China (15%). However, neither the contribution rate of the pharmaceutical industry GVA to each country's GDP in Japan and major Western countries (the U.S., Germany, the U.K., and France) nor an analysis over time was provided.

Therefore, in order to understand the economic contribution of the domestic pharmaceutical industry as a manufacturing industry, this report compares the GVA generated by the Japanese pharmaceutical industry with that of major countries over time using data from the Organization for Economic Co-operation and Development (OECD). In addition, we compared the GVA generated by the pharmaceutical industry in Japan with that of other major countries over time. In addition, in order to gain a more detailed understanding of the situation of the pharmaceutical industry in Japan, we analyzed the economic structure using the Input-Output ^table7) published by the Japanese government, and examined the relationship between total supply and total demand for goods and services provided by the pharmaceutical industry, its contribution to GDP, a key economic indicator, and the distribution of GVA generated by the pharmaceutical industry. The following is a report on our study of the relationship between total supply and total demand for goods and services provided by the pharmaceutical industry, its contribution to GDP, a key economic indicator, and the distribution of Gross Value Added (GVA) generated by the industry.

Survey Methodology

The definition of the "pharmaceutical industry" for the purposes of this study is as follows In Section 3: International Comparison of GVA, OECD. ^Stat8) was used as the data source, and "Division 21: Basic pharmaceutical products and pharmaceutical preparations" was used as the survey target. It should be noted that, unlike the figures for the United States, Germany, France, and the United Kingdom, which are the other countries surveyed, the figures for the Japanese pharmaceutical industry are based on estimates by the ^OECD8). This may arise from the fact that the Cabinet Office does not publish values for the pharmaceutical manufacturing industry as gross domestic product data by economic activity in its annual national accounts.

Section 4 of this paper: In the analysis of domestic industries, the Ministry of Internal Affairs and Communications' "Input-Output Tables 2005-2011-2015" ⁷⁾ and the Ministry of Economy, Trade and Industry's "Input-Output Tables for the years 2008, 2009, 2008, and 2022: 2015 (2015) Standard " ⁹⁾ were used, and sub-category 165 "Pharmaceutical Manufacturing " ^{10) of the} Japan Standard Industrial Classification was used for the study. The survey covered the pharmaceutical manufacturing industry. For gross domestic product GDP values, we used the Cabinet Office's "National Accounts for FY2021 (2015-based, 2008SNA) " ¹¹⁾. All of these statistical tables are based on the 2008 SNA, the latest international standard for national accounts agreed to by the United Nations in 2009, and were prepared based on the 2015 standard. SNA (System of National Accounts ⁾ are macroeconomic statistics that systematically and systematically capture and record the various aspects that make up a country's economy, and are prepared by member countries of the United Nations based on common standards provided by the United ^Nations12).

The "national concept" is used to capture the regional scope of international comparisons and domestic industry analysis. The national concept, in short, is the idea that the scope of economic activities conducted within the territory of a country. For example, it includes the activities of foreign companies conducted within the territory of Japan, but excludes activities conducted by Japanese companies within the territory of foreign ^countries7).

Note that the scope of the pharmaceutical industry surveyed in Sections 3 and 4 are not completely identical due to differences in the definitions of the pharmaceutical industry in the statistical tables used in the survey. In addition, as companies are rapidly expanding internationally, the analysis was not conducted as a category of Gross National Income (GNI), which is an indicator of the size of economic activity, including both domestic and foreign economic activity, by including overseas earnings of Japanese companies and dividend and interest income from investments in foreign stocks and bonds. As a limitation of the study, we would like to point out in advance that the value added by the pharmaceutical industry, which is undergoing further globalization, may be underestimated.

International Comparison of GVA: Analysis of OECD data

3-1. Contribution of Pharmaceutical Industry GVA to GDP

First, we compare the contribution of ^GVA6) generated by the pharmaceutical industry to GDP in Japan and major Western countries (the U.S., Germany, the U.K., and France) using data for the 20-year period from 2000 to 2019 (Figure 1). Data are based on nominal values (CURRENT PRICES).

In 2019, the contribution of each country's pharmaceutical industry GVA to each country's GDP was in the following order: the United States (0.87%), Japan (0.84%), Germany (0.83%), the United Kingdom (0.67%), and France (0.59%). The contribution of the pharmaceutical industry GVA to GDP has been declining since around 2010 in the United Kingdom and since the late 2000s in France, indicating that the pharmaceutical industry's share of value-added creation has been declining relative to the economic growth of all industries in each country. On the other hand, Japan, the U.S., and Germany have maintained stable contribution rates to the GDP of their respective countries over the past 20 years.

3-2. Degree of Growth and Scale of Pharmaceutical Industry GVA

Next, we compare the changes in the scale of GVA generated by the pharmaceutical industry in Japan and major Western countries (the U.S., Germany, the U.K., and France) using data for the 10-year period from 2010 to 2019 (Figure 2). Data are in nominal terms (CURRENT PRICES) and in local currency.

Looking at the pharmaceutical industry GVA scale in 2010 as a baseline, the U.S. and Germany showed a trend of sustained GVA expansion, growing 1.37x in the U.S. and 1.26x in Germany in 2019. On the other hand, Japan (1.05x), France (1.09x), and the United Kingdom (0.97x), although to varying degrees, could not be said to have sustained expansion in the scale of GVA, and were only maintaining their scale.

Additionally, in order to compare the scale of GVA generated by the pharmaceutical industry in each country in 2019, we converted the GVA values of the pharmaceutical industry published by the OECD in each country's local currency into US dollars (Table 1).

As a result, the scale of Japan's pharmaceutical industry GVA in 2019 was calculated to be US$42.5 billion, equivalent to about 1/4 of the US$179.3 billion pharmaceutical industry GVA in the US, which is generally consistent with the results of previous ^studies5). Compared to European countries, the scale of GVA generated by the Japanese pharmaceutical industry was approximately 1.5 times that of Germany (US$29.1 billion), 2.5 times that of the United Kingdom (US$17.3 billion), and 3 times that of France (US$14.4 billion).

Domestic Industry Analysis: Analysis from Input-Output Table

4-1. Breakdown and Trends of Total Supply and Total Demand for Goods and Services by the Pharmaceutical Industry: Nominal Value

In the previous section, we have looked at the GVA generated by the pharmaceutical industry in Japan from an international comparison. As a result, the scale of GVA has remained flat for the past 10 years, with some ups and downs, although it has been maintained as a contribution to GDP. In order to analyze why this situation is the case, we will clarify the economic structure of the pharmaceutical industry in Japan by looking at the breakdown of total supply and total demand for goods and services related to the pharmaceutical industry obtained from the Input-Output ^table7) and their trends (Figure 3). The terms used in the figure are as ^follows7).

Pharmaceutical industry GVA refers to the gross value added created by the pharmaceutical industry, i.e., the pharmaceutical industry's contribution to ^GDP6), and is expressed as the amount of domestic production by the pharmaceutical industry minus the amount of intermediate inputs. Intermediate inputs represent goods and services purchased as raw materials. Then, total domestic supply is the sum of domestic production (= pharmaceutical industry GVA + intermediate inputs) plus imports. Total demand, which is fully consistent with total supply, is the sum of total domestic demand (= intermediate demand + domestic final demand) and exports. Intermediate demand represents goods and services sold to each industry as raw materials, etc. In the case of the pharmaceutical industry, sales to the medical industry are identified as intermediate demand, which accounts for a large portion of total demand for the pharmaceutical industry. In the case of the pharmaceutical industry, sales to the medical industry are considered as intermediate demand, which accounts for a large portion of total demand for the pharmaceutical industry. All figures for each item in the figure are those published by the government in the Input-Output table.

Figure 3 shows that the total supply and total demand by the pharmaceutical industry has been increasing in 2005, 2011, 2015, and 2019, approximately every five years, indicating that the economy is expanding in size due to the increased supply of new drugs and other products to meet domestic demand. However, from 2015 to 2019, total supply and total demand increased by 270 billion yen, from 10.2 trillion yen to 10.47 trillion yen, which was a smaller increase than before. This increase was the same amount as the increase in exports during this period. In addition, during this period, intermediate demand, which is mainly demanded by the medical industry, decreased by 190 billion yen from 8.99 trillion yen to 8.80 trillion yen.

Looking at the supply side, we see that the increase in total demand was met mainly by an increase in imports. Comparing 2005 and 2019, domestic production increased from 6.65 trillion yen to 7.1 trillion yen, a decrease of 490 billion yen from 6.65 trillion yen to 7.1 trillion yen. Comparing 2005 and 2019, domestic production increased by 450 billion yen from 6.65 trillion yen to 7.1 trillion yen, while intermediate inputs increased by 590 billion yen from 2.82 trillion yen to 3.41 trillion yen during this period, resulting in a 130 billion yen decrease in GVA generated by the pharmaceutical industry, from 3.82 trillion yen to 3.69 trillion yen.

4-2 Breakdown and Trends of Gross Supply and Gross Demand for Goods and Services by the Pharmaceutical Industry: Real Value

Next, we will look at the breakdown of total supply and total demand for goods and services related to the pharmaceutical industry in the previous section 4-1 and their changes, not in nominal value terms, but in real value terms (Figure 4). The difference between nominal amount and real amount is described ^below13).

The nominal amount is an estimated value based on prices actually traded in the market. On the other hand, the real amount is the value obtained by removing the increase or decrease in prices from a certain year (reference year). In other words, real value can be said to represent the quantity of goods and services. In the case of the pharmaceutical industry, it is considered to be an industry in which real value (i.e., quantity of goods and services) increases as consumers gain access to a variety of drugs due to an increase in the variety of drugs resulting from the creation of new drugs, rather than the picture seen in many other industries in which consumption increases as prices of individual drugs decrease. The industry is considered to be one in which the real value (i.e., quantity of goods and services) increases as consumers gain access to a variety of drugs. The reference and base year for all of the industry-level tables in this study is 2015 (2015).

Since nominal amounts are affected by price fluctuations due to inflation and deflation, when looking at economic growth rates, we often look at real amounts and real GDP growth rates after removing these factors. In other words, when looking at the contribution of each industry to GDP, a key economic indicator, it is important to consider how much the amount of Gross Value Added (GVA) by industry (= real GVA) grew domestically and contributed to the nation's economic growth; in other words, whether it increased the amount of value added provided to the public (= increased consumer benefits).

Figure 4 shows that the total supply and demand by the pharmaceutical industry has increased over the past five years (2005, 2011, 2015, and 2019), and the expansion of the supply of new drugs to meet domestic demand has also increased its contribution to the economy. In terms of real value, total supply and total demand from 2015 to 2019 increased from 10.2 trillion yen to 11.07 trillion yen, an increase of 870 billion yen. This amount is more than three times larger than the 270 billion yen increase in nominal value shown in the previous section 4-1, and the compound annual growth rate (CAGR) for this period was 0.65% in nominal value and 2.05% in real value.

More broadly, comparing nominal and real amounts for total supply and total demand for all years from 2005 to 2019, we see that prices in the Japanese domestic pharmaceutical industry have declined, i.e., have been consistently deflationary from 2005 to 2019.

Looking at the demand side, total domestic demand (= intermediate demand + domestic final demand) and the real value of exports have been increasing since 2005, and the intermediate demand value, which is mainly demanded by the medical industry, has also been decreasing in nominal value, as shown in the previous section 4-1, but has been growing in real value. This indicates that the quantity of goods and services demanded, i.e., the quantity demanded by consumers as they gain access to a wide variety of drugs, continues to increase.

Looking at the supply side, in real value, domestic production value (= pharmaceutical industry GVA + intermediate inputs) has been increasing since 2005, with particularly large growth from 2015 to 2019, increasing by 1.24 trillion yen from 7.06 trillion yen to 8.30 trillion yen. In other words, it can be confirmed that there has been a large increase in the volume of pharmaceuticals produced by the domestic pharmaceutical industry. On the other hand, imports decreased by 390 billion yen in real terms from 3.15 trillion yen to 2.76 trillion yen between 2015 and 2019. In other words, it has decreased as a volume imported during this period.

The major difference between nominal and real amounts is that GVA generated by the pharmaceutical industry grew significantly in real terms: comparing 2005 and 2019, GVA generated by the pharmaceutical industry increased by 1.76 trillion yen in real terms, from 3.13 trillion yen to 4.89 trillion yen. This result indicates that the consumer benefits that the public enjoys from pharmaceuticals have increased significantly due to an increase in the number of available pharmaceuticals.

4-3. trends in GVA and GDP contribution of the pharmaceuticals industry: nominal value vs. real value

Using the GVA generated by the pharmaceutical industry as shown in the previous sections 4-1 and 4-2, we show the transition of the contribution rate to GDP (Figure 5). In this section, visualization was conducted for all years (2005, 2011, and 2015-2019) for which data could be extracted on a 2015 basis in the various input-output tables.

The GVA (nominal value) generated by the pharmaceutical industry increased from 3.8 trillion yen in 2005 to 4.2 trillion yen in 2011, but declined in 2015 and 2016, picked up again, albeit slightly, in 2017 and 2018, and then began to decline again in 2019, with an amount of 3.7 trillion yen. In other words, the GVA value (nominal value) of the pharmaceutical industry remained flat during this period. Looking at the contribution rate to Gross Domestic Product GDP (nominal value), the contribution rate expanded from 0.72% in 2005 to 0.84% in 2011, but has been declining since then, and was calculated to be 0.66% in ^201914).

In contrast, for GVA generated by the pharmaceutical industry (real value), there was an increasing trend from 3.1 trillion yen in 2005 to 2019, expanding to 4.9 trillion yen in 2019. Looking at the contribution rate to Gross Domestic Product GDP (real value), the contribution rate expanded from 0.61% in 2005 to 0.79% in 2011, and although it declined to 0.69% in 2015, it has been growing continuously since then and was calculated to contribute 0.88% in 2019. In other words, the pharmaceutical industry expanded its contribution to the country's real GDP by increasing the amount of value added it creates. This confirms that the industry was increasing its contribution to the country's real economic growth.

Comparing the compound annual growth rate (CAGR) from 2015 to 2019 for the pharmaceutical industry GVA in nominal and real values, the CAGR was calculated to be -0.28% in nominal terms and +7.02% in real terms. This indicates that the pharmaceutical industry is continuously creating and providing new value-added products that can meet demanded needs, i.e., pharmaceuticals that meet unmet medical needs of consumers, but the value-added value has remained flat without growth in value terms.

4-4. distributional aspects of pharmaceutical industry GVA: breakdown and transition

Having presented a breakdown of the total supply and demand for goods and services related to the pharmaceutical industry and an analysis of their trends, we will now look at how the GVA (nominal value) created is distributed. Note that the GVA (real value) published in the input-output table is defined as the difference between the total domestic output and total intermediate inputs after realization, and the itemized value of the distributional aspect after realization is not published, so only the nominal value is analyzed.

Figure 6 shows the changes in the distributional aspect of the gross value added GVA of the pharmaceutical industry as published in various input-output tables from 2005 to 2019. The terms used in the figure are as ^{follows7, 11, 15).}

Allowance for capital depletion is the sum of depreciation and capital contingent loss, which is the cost drawn to compensate for the depletion in the value of fixed capital (tangible and intangible). Capital depletion related to intra-company R&D and intellectual property production such as patents is included in the capital depletion allowance for each sector. In other words, based on the idea that the results from private-sector intra-company R&D operations accumulate as R&D stock and contribute to future production, the R&D stock is included in the capital depletion allowance on the distribution side, and the value added increases by that amount on the production side.

Employment income is all income, in cash and in kind, paid to domestic private and government employees as compensation for their labor.

Operating surplus consists of operating profits in each industrial sector, interest payments, net rents on movable and immovable property used, and direct taxes. In Japan, the distributional side is only partially measured, such as employer compensation and fixed capital depletion, and the distributive operating surplus is calculated as the residual to match the total with the expenditure and production side. The concept is similar to that of operating income in corporate accounting, but it should be noted that the level of operating surplus in SNA and that of operating income in corporate accounting are very different, as well as the year-on-year ^movements16).

Non-household consumption expenditures correspond to so-called "corporate consumption" and consist of lodging and per diem, entertainment expenses, and welfare expenses.

The distributional trends from 2005 to 2019 shown in Figure 6 indicate that while GVA in the pharmaceutical industry has remained flat, the capital depletion allowance (including private-sector capital investment and capital related to R&D within companies) has continuously expanded through 2018, with an increase of 306.0 billion yen from 1,660.1 billion yen to 1,966.1 billion yen. However, in 2019, the amount was ¥1,898.7 billion, a decrease of ¥67.4 billion from 2018, which was about the same as in 2016.

Next, looking at changes in employment income, it continuously declined from 2005 to 2017, with the amount decreasing by 305.1 billion yen, from 898.2 billion yen to 593.1 billion yen. It then increased by 43.7 billion yen in 2018, but turned downward again in 2019 with a decrease of 13.3 billion yen, the amount of which was 623.5 billion yen.Comparing 2005 and 2019, employment income decreased by 274.7 billion yen, from 898.2 billion yen to 623.5 billion yen.

Finally, looking at trends in operating surplus, the downward trend has continued since 2011; following the figures since 2015, operating surplus decreased by 106.8 billion yen from 960.5 billion yen to 853.7 billion yen from 2015 to 2016, although it increased by 114.1 billion yen to 967.8 billion yen in 2017, The operating surplus decreased by 84 billion yen to 883.8 billion yen in 2018 and by another 41.2 billion yen in 2019, resulting in an operating surplus of 842.6 billion yen, the smallest amount since 2005 The decrease from 2017 to 2019 is 125.2 billion yen.

5. summary and discussion

We will now discuss the findings obtained. First, an international comparison based on OECD data (five countries: Japan, the U.S., the U.K., Germany, and France, in nominal value terms) in section 3 of this report confirms that the GVA generated by the pharmaceutical industry in Japan in 2019 was second only to that of the U.S. in both contribution rate to GDP (Figure 1) and GVA size (Table 1). Japan's pharmaceutical industry has maintained a stable contribution rate to GDP for 20 years. However, the GVA size of the pharmaceutical industry has remained flat over the past 10 years and has not grown as much as in the U.S. or Germany (Figure 2).

Figures 1 and 2 show that in the case of Japan, since national GDP itself was stagnant, if the pharmaceutical industry continued to maintain the size of GVA, its contribution to GDP would also stabilize. In the U.S. and Germany, the scale of GVA of the pharmaceutical industry has expanded along with the growth of GDP, and thus the contribution rate to GDP has been maintained. On the other hand, France and the U.K. maintained the size of GVA of the pharmaceutical industry, but their contribution rate to GDP declined as their national GDPs grew due to the growth of other industries.

In Section 4 of this paper, in order to analyze the economic structure of the pharmaceutical industry in Japan, we visualized the breakdown of total supply and total demand for goods and services related to the pharmaceutical industry obtained from the input-output table, and their changes in nominal and real values (Figures 3 and 4). The results show that the Japanese domestic pharmaceutical industry has expanded its economic scale in response to domestic demand in terms of both nominal and real values of total supply and demand. However, the increase in demand was mainly met by an increase in imports, while exports grew, but the growth was small compared to imports. In addition, amid globalization, the nominal value of domestic production did not decline significantly, while the real value of domestic production expanded significantly. The comparison of nominal and real values confirms that prices in the Japanese domestic pharmaceutical industry have been declining, i.e., the industry has always been in a state of deflation.

A comparison of nominal and real values of the contribution of GVA generated by the pharmaceutical industry to GDP (Figure 5) shows that while the Japanese pharmaceutical industry is in a state of deflation, the GVA generated by the industry is maintained in nominal terms and increased in real terms. As a result, the contribution to nominal GDP remained stagnant, but the contribution to real GDP expanded, indicating that the industry contributed to Japan's real economic growth by continuously increasing the amount of value added benefiting the public.

The reason for this sustained increase in value added in real terms may have been due to an increase in the number of drugs in different therapeutic segments from those in the past, such as drugs for rare ^diseases17) and drugs in specialty areas that satisfy unmet unmet medical needs, such as oncology ^drugs18), due to an increase in the number of approved specialty drugs, etc. This may have occurred because not many replacements occurred. It is also possible that the real Gross Value Added (GVA) by the pharmaceutical industry increased significantly, driven by an increase in domestic production due to genericization of drugs that were imported in the past, against the backdrop of an expanding domestic volume share of generic ^drugs19). Drug value obsolescence occurs when a drug is no longer used because it is replaced by a new drug or the disease itself disappears, but if these new drugs satisfy unmet medical needs, then existing drugs do not become obsolete. The replacement of drugs with generics and the decline in drug prices will not result in a substantial decrease in the value of drugs, although the price of drugs will fall, and the amount of demand, or clinical use of drugs, will not decrease.

Next, regarding the deflationary state of prices in the pharmaceutical industry, in recent years, the replacement of brand-name drugs with generic drugs after patent expiration, as well as annual drug price revisions and restraint measures, have resulted in an industrial structure in which prices in the Japanese pharmaceutical industry are declining. The deflator for pharmaceuticals shown in the annotation to Figure 5 indicates that the rate of price change declines significantly in the even-numbered years of 2016 and 2018, i.e., the years of the NHI price revisions. Although domestic production continues to increase due to the sustained creation of a variety of pharmaceuticals to meet unmet medical needs and other factors, the sustained decline in NHI prices has left the industry struggling to maintain Gross Value Added (GVA) in nominal terms without growth, negatively impacting nominal GVA growth in the pharmaceutical industry. This suggests a negative impact on nominal GVA growth in the pharmaceutical industry. If the policy of artificially and drastically lowering drug prices continues, there is a risk that if intermediate inputs on the supply side increase significantly in the future due to a weaker yen and overseas inflation, Gross Value Added GVA will decline significantly, which will have a serious impact on incentives for domestic R&D investment and the survival of domestic production.

As for the relationship between imports and exports, this arises from a structure in which domestic pharmaceutical companies, like other Japanese manufacturers, have moved their production bases overseas, so that the value of exports has not grown relative to each company's overseas sales, while the value of imports has increased because overseas companies do not have many manufacturing bases in Japan. This expansion of overseas manufacturing is the result of pharmaceutical companies' choice of location for manufacturing pharmaceuticals, and is caused by structural factors such as Japan's high effective corporate tax rate and lagging infrastructure development for biopharmaceutical manufacturing, in other words, the structural factors of Japanese-style globalization. ²⁰⁾ In 2013, Nagasawa aptly discussed this issue in his paper "The Role of the Japanese Pharmaceutical Industry in the Development of the Japanese Pharmaceutical Industry," in which he argues that the Japanese pharmaceutical industry is a "globalized" one. aptly discussed the issue, stating that "Pharmaceutical manufacturing is an essential value chain for drug discovery and plays an important role in enabling innovation in the healthcare sector and the contribution of the domestic pharmaceutical industry to Japan's healthcare, economy, and science and technology. Unfortunately, Japan does not have policies in place to address the importance of pharmaceutical manufacturing. If structural factors related to location selection are left unaddressed, there is a risk that the manufacturing base in Japan itself will be relocated overseas, hollowing out domestic manufacturing in the future. ⁽²⁰⁾. Unfortunately, no major policy change has been seen since then, but the recent Corona pandemic has exposed various structural issues, and in addition, the importance of economic security has been recognized due to the Ukrainian problem caused by Russia, and the importance of domestic manufacturing bases for vaccines and pharmaceuticals, along with semiconductors, etc. is being recognized by the public. The public is becoming more aware of the importance of domestic manufacturing bases for vaccines and pharmaceuticals, as well as semiconductors. We hope that Japan will seize this opportunity and take bold measures to resolve the structural factors that affect the choice of location.

Finally, we will discuss the data on the distributional breakdown of GVA in the pharmaceutical industry as described in section 4-4 of this report. Figure 6 shows that while the pharmaceutical industry's employment income has continued to shrink since 2005, it maintained employment income in the last two years. According to the database of the Research Institute of Economy, Trade and Industry (RIETI), labor productivity growth in the pharmaceutical industry has been high during this period, while the labor productivity growth rate (= value added/working hours) for the manufacturing industry as a whole from 2005 to 2010 and from 2010 to 2018 was 3.0% and 1.2%, respectively, The labor productivity growth rate of the pharmaceutical industry amounted to 12.2% from 2005 to 2010 and 5.6% from 2010 to ^201821). This suggests that one reason for this contraction in employment income was that the pharmaceutical industry was improving productivity through management rationalization.

In addition, although the capital depletion allowance, which includes private-sector capital investment and in-house R&D, had continued to expand, it had turned to decline in 2019. This can be considered to indicate that the pharmaceutical industry had continued to increase its R&D investment and capital expenditures for innovation generation. However, since it turned to decline in 2019, it will be necessary to watch the trend from 2020 onward. The total amount of capital depreciation allowance and employer income has remained almost constant, suggesting that the reduction in employer income due to management rationalization has been used to invest in R&D within companies and corporate facilities. However, it is not clear from the data whether there is a causal relationship.

In addition, changes in operating surplus confirm that it was at its lowest in 2019, the most recent year for which data are available. A characteristic feature of the data is that the operating surplus increases in odd-numbered years and decreases in even-numbered years. In other words, it is thought to decrease in the year of the NHI price revision. Therefore, it is thought that the operating surplus decreased in 2019, an odd-numbered year, because of the revision due to the consumption tax hike.

After 2019, NHI price revisions will be implemented every year from 2020 to 2022. Therefore, it is expected that Gross Value Added (GVA) in nominal terms will remain stagnant or decline in the future. The effects of these annual NHI price revisions are likely to have a negative impact on the distribution of GVA, i.e., a decrease in the distribution of GVA to employment income and a decrease in the allowance for capital depreciation, including capital investment and R&D investment, which will prevent investment in human resources and R&D to create innovation.

This paper does not yet provide specific solutions to the structural problems identified in analyzing the economic contribution of the pharmaceutical industry, and we would like to leave these issues for future research.

6. conclusion

In this report, we have looked at the economic structure of the pharmaceutical industry in terms of Gross Value Added (GVA). The Japanese pharmaceutical industry is currently in a good position internationally, and has been continuously contributing to the Japanese economy by maintaining the value added and expanding the amount of value added. However, it became clear that there are structural problems that will prevent the industry from continuing to create innovation in the future, such as a deflationary industrial structure, structural factors related to location selection that have continued from the past, and the possibility of declines in R&D investment and employment income affected by the stagnation of value added due to the annual NHI price revisions that have been implemented in recent years. The results of the survey revealed that there are structural problems that will affect the continued creation of innovations in the future.

The goods and services created by the pharmaceutical industry, i.e., medicines, do not decrease in real drug value, although the price of medicines decreases due to the replacement with generics and falling drug prices, and the amount of demand, i.e., clinical use, does not decrease. However, under the current system, the pharmaceutical industry contributes to ensuring the public's access to a wide variety of the latest medicines by continuously creating new value-added products that can meet their needs. The situation is that the value-added is stagnant in value terms due to the deflationary structure of the pharmaceutical industry.

In concluding this paper, we would like to reiterate the contribution of the pharmaceutical industry to the Japanese economy by expanding the real value of the gross value added (GVA) generated by the industry.

In the pharmaceutical industry, there is a parallel between the patent expiration of new drugs on the market and the entry of generics, which lowers drug prices, and the creation of new drugs to meet unmet medical needs and the introduction of new drugs into the market, which diversifies the range of drugs on the market. The increase in the demand for pharmaceuticals is not due to a decrease in the price of individual drugs and an increase in consumption. Rather, it is increasing as consumers gain access to a greater variety of drugs. In other words, the increase in real value added represents an increase in consumer benefit. It represents the effect, albeit imperfectly measured in terms of price, of improved health as consumers gain access to a greater variety of drugs, both in terms of quality and quantity of medically necessary drugs, with an ever-increasing variety of drugs accessible to consumers.

In this light, the increase in real value added represents both of the two economic contributions of the pharmaceutical industry described in Section 1 of this paper, namely, its contribution as an economic driver resulting from the benefits of pharmaceuticals to people's health, and the value added generated by its production of goods and services as an advanced, R&D-intensive manufacturing industry. The pharmaceutical industry's two economic contributions represent both the economic drivers of people's health through the benefits of pharmaceuticals and the value-added generated by the production of goods and services as an R&D-intensive advanced manufacturing industry.

It is hoped that this study will assist in considering the economic contribution and structural challenges of the pharmaceutical industry.

7. acknowledgements

We would like to thank Sadao Nagaoka, Director of the Pharmaceutical Industry Policy Institute (Professor at Tokyo Keizai University), for his many suggestions regarding the economic interpretation of this study. We also received valuable advice from members of the Industry Promotion Subcommittee of the Industrial Policy Committee of the Japan Pharmaceutical Manufacturers Association (JPMA) during the initial stages of the survey. We are deeply grateful for their cooperation. 3.

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