The hit-and-miss nature of R&D is a risk that firms in the pharmaceutical sector have to live with, Merck Sharp & Dohme president Per Wold-Olsen tells Barry O'Halloran.

Last year Merck Sharp & Dohme's (MSD) research and development (R&D) pipeline suffered a bad blow. The company had been working on two new drugs, treatments for depression and diabetes, but lost them at a comparatively late point in the clinical testing phase. Both were scheduled for a launch in 2005, and might have generated sales of $1 billion globally.

In industry jargon, they were likely "blockbusters", treatments that corporations in Merck's business need to continue driving their sales and profits. Their loss not only meant the loss of projected revenue, it also meant the very real loss of the cost of developing them in the first place. It can cost up to €700 million to develop a product and successfully bring it to market.

Per Wold-Olsen, Merck's president of its Europe, Middle East and Africa (EMEA) division, acknowledges that the company needs to bounce back from that situation. "That was a real setback for us," he says. But Merck is not the first pharmaceutical operator to lose potential treatments late in the development day. And it is unlikely to be the last. On the plus side, Merck still has other compounds on the way.

"On the other hand we have a rich pipeline right now in terms of vaccines," he says. "We have one where the indications are very strong that it will actually prevent cervical cancer. That's a product that the world needs; that would be a very strong product."

Developing products like this is integral to what companies like Merck do. A high proportion of annual profits, often more than 20 per cent, is ploughed directly back into pure R&D activities that create compounds in laboratories and ultimately turn them into medicines. It can take more than a decade, hundreds of millions of euros, and the associated risks are high.

Chief executives in the sector regularly say they employ talented research chemists who have never come up with a compound that has ended up on pharmacy shelves. The same chemists frequently produce what are potential treatments for virtually every imaginable ailment, but they fall at some point in the development process.

The hit-and-miss nature of R&D is a risk that companies in the sector have to live with. It's really a risk that they cannot afford not to take. Mr Wold-Olsen says R&D always has been, and always will be, key to what his business does. It was also at least part of the reason he was in Ireland this week.

Mr Wold-Olsen launched a new subsidiary, MSD Ireland (Human Health) Ltd. One of its activities will be to conduct clinical research for the multinational's European division. It will invest €5 million in the venture over the next 12 months, and it's likely to employ 120 at full strength. It already has 40 staff, and this week began recruiting the other 80.

Merck has been here since 1976. It has a manufacturing plant in Ballydine, Co Tipperary, where it employs 450 people. Its US division, Merck & Co, has invested an estimated €750 million over the last three decades. Ballydine produces the active ingredients for drugs that treat osteoporosis, migraine, high cholesterol and asthma. The active ingredients are the business end of a drug - the chemicals that do the work. Manufacturing them is a comparatively high-value-added activity.

Its migraine treatment, Socor, was Merck's number one selling drug in Europe. But its patent is due to run out shortly. Once that happens, other firms will be able to produce cheaper "generic" versions of the drug, undermining Merck's ability to generate revenue from it. On the other hand, Mr Wold-Olsen says its asthma treatment, Singulair, is "exhibiting strong signs of growth around the world".

He says there is at least an aspiration that the new subsidiary will work on projects with this country's research institutions. He says the Government's policy of building an economy based on innovation, research and development is realistic, but adds that it needs to create the right environment for co-operation between the State, academia and research-based industries like his own. And therein lies the rub, because he does not believe the EU has created the right environment for innovation, and it is losing the race with the US. "Europe has lost out to the US big time," he says. "As a function of over regulation, as a function of not being able to establish this climate, this dialogue, the environment in which the three players (state, industry, academia) can truly work together.

"There are two reasons, there is such an incredible focus in many markets on controlling their healthcare expenditure. And in controlling healthcare expenditure, it is relatively easy to go after the pharmaceutical industry and drug prices. That is easier than saying you don't need so many nurses, or you don't need so many hospitals and so on.

"The fact that European governments take that short-sighted approach means we don't have a predictable environment in which we can invest and have an appropriate understanding for what the future will bring. If I have a basic discovery in the lab today, I will not get that to the market for 10 years, and I will not get a return on this investment for 10 to 20 years."

To invest in that discovery, he says firms such as Merck must be able to make a reasonable assumption they will get a return on it.

But he says this does not exist in Europe because of the attitude of Governments which own and operate individual states' healthcare systems.

First, he says they delay access to the market by taking long periods to decide on the appropriate price for a new drug.

When they do, Mr Wold-Olsen says that it is low, and there is no scope to increase it in line with inflation or currency changes.

Then there is politics itself. "There are regular draconian initiatives in terms of price reduction," he says. "For example, the French could wake up tomorrow and say we spend too much on cholesterol, so cholesterol drug prices will be reduced 10 per cent.

"Then you have this other dimension where the European Commission is arguing forcefully for a single market. The states say that's fine, but I decide price and reimbursement in my own market."

The consequence is that prices vary from state health authority to state health authority.

This creates opportunities for parallel traders who buy products cheaply in one state, and sell them for higher prices in another.

"It's happening as function of over-regulation," he says.

"The reality is that you cannot, in the European market, get an appropriate return on your investment, in terms of the revenues you get for your product portfolio, the numbers just don't add up."