Europe is slipping ever further behind the US in innovation in the drug industry and needs to revamp its research and healthcare systems to reverse the trend, according to a report to be released by the European Commission next month.

The US is increasingly dominating new medicine development at Europe's expense, when measured by labour productivity, influential patent filings, research collaboration and new drug launches, it says.

Recent EU efforts to reduce the gap in "high value-added" pharmaceutical and biotechnology work have been ineffective, Fabio Pammolli, author of the study and professor of economics and management at the University of Florence, told the FT.

His research, requested by the previous Commission last year, comes at a time when José Manuel Barroso, EU president, is struggling to maintain momentum with the "Lisbon agenda" to boost competitiveness.

Prof Pammolli recommends Europe introduce systems of co-payment and other private mechanisms to help supplement over-burdened state health systems in paying for medical expenses, in order to raise prices paid to drug developers towards levels almost twice as high in the US.

But he also stresses that in the US the prices for older, generic drugs that have come off patent are much lower than in Europe. This helps stimulate innovation by concentrating resources on newer drugs.

Prof Pammolli also calls for greater collaboration and competition between European research institutes. He proposes a shift from work carried out in isolation by companies, to US-style market-driven "virtuous networks" between companies, hospitals and universities.

"The [French] Pasteur Institute co-operates more with the [US] National Institutes of Health than with the [German] Max Planck Institute," he said. At the same time he argues that there should be more EU-wide competitive research funding, rather than member states largely funding their own national facilities.

But he suggested warned that the US may in future lose its lead in innovation to countries such as India and China.

Prof Pammolli previously submitted studies to the Commission at the start of the decade, examining innovation in the pharmaceutical and biotechnology sectors.

His thinking helped inspire the G10 Medicines report produced by the Commission designed to improve the competitiveness of the industry in Europe. But he said these recommendations did not tackle the most important and sensitive issues such as reform of pricing and healthcare payments.

Based on data in the period 1996-2002, his new findings include: 70 per cent of world drug research and development collaboration originated in the US against 25 per cent in Europe; 70 per cent of "new chemical entities", the basis of innovative medicines, were launched first in the US - normally one to two years ahead of in Europe; More than half of total global patents were registered in the US, and their influence was disproportionate, representing 70 per cent of academic citations.