Special Report

Protecting Biotech

Because America is freer, it dominates the biopharmaceutical industry worldwide. Shouldn't that make the politicians happy?

By 4.27.05

Send to Kindle

SAN DIEGO -- The California biotechnology industry recently gathered for its annual CALBIO conference. Participants were excited at the prospect of developing new medical miracles. But the ever-present potential of government interference hung over the proceedings like dark clouds on the horizon.

Much is at stake. Nearly $50 billion was spent last year in pharmaceutical and biotech R&D. The big drugmakers devoted $38.8 billion to finding new cures. Biotech companies, in the main smaller and more dependent on investors willing to risk their money on unproven ventures, spent another $10.5 billion.

The U.S. dominates the biopharmaceutical industry worldwide. America's big pharma companies account for more than half of R&D internationally. The U.S. is even more dominant in the biotech field.

America's advantage is not that its citizens are smarter, better educated, or nicer. Rather, America is freer.

Despite manifold regulations and controls by states as well as the federal government, it is still easier to conduct research, create products, and sell medicines in the U.S. than overseas. In contrast, Europe faces a full-scale scientific brain drain in many industries due to its increasingly stultifying economic environment.

American dominance results in two obvious benefits. One is increased economic activity, particularly sales and employment.

Biopharmaceutical leaders are financial leaders. Pfizer ranks number 24 on the list of the Fortune 500. Johnson & Johnson comes in at 30, and Merck at 84. There are a half dozen more in the top 500 companies and another 11 in the next 500.

Biotech concerns typically don't rate a Fortune 500 mention. Nevertheless, the nearly 1,500 firms are enormously important, offering the sort of diversity and entrepreneurial possibilities commonly associated with start-ups and small businesses.

Revenues for the top three drugmakers alone run $123 billion. Their total employment is 288,000. Indeed, Pfizer and Johnson & Johnson have larger work forces than some of the companies ahead of them in revenues, such as Exxon Mobil, number two on the Fortune 500 list.

A new study for the Milken Institute calculates that the biopharmaceutical industry collectively employed 406,700 people in 2003 and, "when the full multiplicative impact is captured, is responsible for 2,724,800 jobs and 2.1 percent of total employment in the nation. Each job in the industry creates another 5.7 jobs elsewhere in the economy, substantially above the average for all industries."

Particularly notable is the kind of employment offered by the drugmakers and biotech firms. Notes the Institute, "The pharmaceutical industry is one of the most enduring and most critical knowledge-intensive sectors in the U.S. economy." The results are higher-than-average wages and higher-than-average real output per worker, $72,600 and $157,300, respectively, in 2003.

Drugs once were but a subset of the chemical industry. Advances in chemical applications led to development of a separate complex of firms now driving medical innovation. Then came biotechnology.

Notes the Milken Institute, "Biotechnology is an outgrowth of interdisciplinary research in molecular biology, immunology and biochemistry, aided by new techniques such as X-ray structural analysis and computer-assisted drug synthesis." It comes as no surprise that the innovative possibilities of such a combination are immense.

BIOTECHNOLOGY IS CREATING ITS own unique medicines. It also offers the possibility of reviving traditional drugs that failed in testing by adjusting their use or tailoring their patient base. For instance, find the genetic feature that leads to an adverse side effect and direct the medicine to other patients.

Some biotech firms go it alone. Many traditional drug companies have developed their own biotech research programs. Others have joined with biotech concerns, matching established resources to emerging possibilities. The overall result is a vigorous national effort.

Observes the Milken Institute: "Biopharmaceuticals accounted for 8.2 percent of all industry R&D in the United States in 2002, despite representing only .3 percent of total non-farm employment."

This R&D is what generates the other important public benefit, life-saving-and-enhancing drugs.

Last year the U.S. biopharmaceutical industry won FDA approval of 38 new products. In industry parlance, there were 31 new molecular entities and seven new biologics.

A half dozen of the medicines treat cancer. Three address infectious diseases, two ease pain, and two help eliminate radiation contamination. Others treat alcoholism, blood disorders, depression, diabetes, immune deficiency, kidney disease, pulmonary disease, and more.

There's also the prospect of more and better drugs in the future. The leading drugmakers alone have 146 medicines in development for heart disease and strokes, the second and third leading killers, after cancer, in America.

Of course, not all of these substances will make it to the drugstore, let alone become blockbusters. But that's why it costs so much to make drugs.

Pharmaceutical companies spend about a fifth of their sales revenue on R&D. Spending has more than doubled over the last decade. The Tufts Center for the Study of Drug Development figures that the average cost of creating one drug has increased about two and a half times since 1987, to $802 million.

Yet only three of every ten medicines that get to market -- the latter only about one out of every 5,000 to 10,000 compounds originally examined -- actually earn enough revenues to cover their R&D cost. And the three successes have to rack up sufficient sales to pay for dry holes and everything else.

It's not an easy business.

IT IS MADE MORE DIFFICULT by a public that doesn't want to admit that such benefits don't come cheap and politicians dedicated to winning votes by demagoguing the industry. Although there probably isn't an American alive today who hasn't benefited from a new medicine developed in the last decade, over the same period the drugmakers have increasingly been compared to tobacco companies, polluters, and corporate outlaws.

Participants at the CALBIO conference spent most of their time discussing how better to create new medicines. Panel sessions examined how to raise funds for life science companies, deal with the threat of bioterrorism, and understand new emerging medical technologies,

Yet the attendees also worried about regulatory efforts, especially attempts to drive down prices through price controls, restrictive drug formularies, and "reimportation" of their own products from abroad. Such steps threaten even industry leaders, such as Pfizer, Johnson & Johnson, and Merck.

Far more vulnerable, however, are smaller biotech concerns, and especially recent start-ups which have no ongoing sales or accumulated income and thus must entirely depend on investment capital. C. Boyd Clarke, CEO of Neose Technologies, a Pennsylvania biotech concern, observes that "more than 90 percent of such companies remain unprofitable 30 years into the biotech age."

It is far better to get sick today than it was 10 or 20 or 30 years ago. A coalition of seven health care organizations, The Value Group, recently estimated that every dollar invested in health care yields benefits of $2.40 to $3.00.

Still, too many people tragically die. But, thankfully, fewer are likely to die 10 and 20 and 30 years from now. Biopharmaceutical researchers are offering Americans a bright future filled with unbounded opportunities.

However, these possibilities will go unrealized if politicians kill the golden goose. Alas, unlike the golden eggs of the fable, wonder drugs cannot be produced for nothing. Those of us who benefit so much from the wonders of biopharmaceutical research must be willing to pay for them.

Like this Article

Print this Article

Print Article
About the Author
Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).