Prime Minister Jean-Pierre Raffarin ignited a firestorm when he announced that he was safeguarding France's national interest in backing French-based Sanofi-Synthlabo SA's bitter battle for Aventis. But the ensuing debate over "national champions" and national interest obscures a larger issue: European pharmaceutical companies are falling behind in their global competitiveness and their capacity for innovation. In the decade that ended in 2002, Europe's R&D spending barely doubled to $21 billion, while U.S. expenditures nearly tripled to $26 billion. If current trends continue, U.S. drug makers will spend twice as much on innovation as Europe by 2012.

At first glance, Europeans seem to be in an enviable position when it comes to prescription drugs, spending about 60% less per capita on pharmaceuticals than Americans do. Yet lower drug prices for Europeans entail other costs that are harder to quantify but equally real. At the heart of Europe's competitive decline in pharma is the dramatic shift in pharmaceutical innovation from Europe to the United States.

Simply put, innovation has "followed the money." To get a return on the $1.7 billion currently required to bring a new drug to market, on average, pharmaceutical companies increasingly focus on the U.S. market, which represents the largest and fastest-growing share of the global "profit pool," now 62%. At the same time, the EU has declined in importance, falling to roughly one third of the global profit pool, despite having a larger population than the U.S. Pharmaceutical companies now depend on the U.S. as their key source of returns on R&D investments.

Innovation isn't tethered to the economies where its products cost the most. So why has the deep U.S. profit pool caused such a significant shift of R&D to the U.S.? First, the U.S. profit pool has been created not only by higher prices and per capita drug utilization, but also by government and capital-market support of R&D and new-drug-company formation. Second, major R&D investments have followed clinical trials, which play a key role as the first step in successful commercialization. That makes it valuable for companies to work with key U.S. regulators and medical opinion leaders as they put together trials. Finally, there's a broad symbiosis between U.S. scientists, labs, universities and R&D suppliers that compounds companies' innovation investments when they're made in the U.S.

The high cost of Europe's approach will be difficult to sustain over the next decade. If current trends hold, Americans will spend four times as much on drugs per capita as Europeans by 2012, a sharp increase from twice as much today and equal spending historically. The same spending patterns will likely cause a further shift in new drug launches. From 1993 to 1997, Europe accounted for 81 unique new drugs, compared with 48 launched in the U.S. But the situation reversed over the succeeding five years, with the U.S. outpacing Europe two-to-one in new drug launches.

The location of new drug launches significantly affects how quickly doctors and patients can access the most advanced treatments. The reason: lengthy reimbursement negotiations that follow government approval of any new drug. One study of drug launches shows that the U.S. averages a four-month delay from initial drug launch to market, while in Europe this delay ranges from seven to 19 months (the U.K. is shortest, while Greece is longest).

Reduced access to new drugs in Europe may be reflected in higher morbidity and mortality from diseases that are responsive to innovative drugs. Europeans are experiencing slower improvements in health outcomes in some disease areas than Americans. In Germany, for instance, 74% of eligible German patients are not receiving statins, a key preventive treatment for coronary artery disease. In the U.S., the figure is 44%. German cardiac mortality declined 8% from 1990 to 2000, while in the U.S. it dropped by 13%.

Breast cancer is another case in point. Forty-one percent of German physicians are treating early-stage breast cancer patients with taxanes-key drugs that target tumor cells. Compare that rate to the U.S., where 60% of doctors use the drugs on early-stage patients. German breast-cancer mortality decreased by 9% from 1990 to 1998, while in the U.S., mortality dropped by 19%—a striking contrast. In fact, new studies suggest that mortality rates correlate strongly with the total rate of introduction of new drug therapies, country by country.

Even without being able to fully quantify the health impacts of lower and slower rates of introduction of innovative medicines, Germany has paid a price as a result of the innovation imbalance in pharma. Germany gained an annual benefit of $19 billion from lower drug spending, according to our analysis. But the benefit is offset by $22 billion in hidden costs—on top of the $3 billion in R&D dollars that would have been invested if it kept pace with research spending in the U.S. There has been $3 billion in wages; $1 billion in forgone income taxes; $1 billion in taxes from lost corporate centers; and nearly $4 billion in jobs that surround R&D spending—yielding a net loss of $3 billion. The calculus will differ for other European countries. But in most if not all cases, countries are bound to score a loss, particularly when the full health impacts are taken into account.

French officials clearly recognize the value of retaining pharmaceutical talent and capacity within their borders. But France would better realize those benefits by nurturing a more supportive environment for global pharmaceutical investment and innovation. Indeed, global giant Pfizer recently threatened to withhold its new drugs from the French market because France's drug reimbursement rules are so complicated and penurious.

France and other European governments aren't likely to support a hike in drug prices, but they can do other things to support pharma-strengthening patent protection, for instance, stimulating new investment, increasing R&D incentives, and speeding access to the most innovative drugs. To employ the language of France's prime minister, taking such steps would be in their national interest.

Messrs. Gilbert and Rosenberg are partners at Bain & Co. and leaders of Bain's health-care practice. This article is based on research recently presented at the World Economic Forum in Davos.