Issue Brief

Brief on the Global Biotechnology and Pharmaceutical Industries

Jason Matheny, January 15, 2007

Sections: Summary | Overview of U.S. Biotech and Pharma | Federal Investment | Global Trends | Asia | Strengthening U.S. Biotech and Pharma | References

  
Summary

In 2005, the U.S. biotechnology and pharmaceutical industries generated revenues of $48 billion and $145 billion, respectively. These industries employed more than 400,000 people at an average wage of $72,600 — 86% higher than the U.S. private sector average.

Each job in the biotech industry generates an estimated 5.8 jobs in other industries, and each dollar in biotech earnings translates into an estimated $2.90 in earnings for other industries.

Public investments in biotech and pharma are cost-effective: 40% of the recent gains in life expectancy are attributable to pharmaceuticals, and each dollar invested in new medicines saves an estimated $6 in total health spending.

The biotech industry plays a critical role in national defense by producing countermeasures to biological weapons. The domestic capacity to develop and manufacture these countermeasures is threatened by several developments:

• Federal funding for all R&D in the life sciences is well less than half of federal funding for traditional defense R&D, despite the growing recognition that future threats to national security are unlikely to be met by traditional defense technologies.

• Since 2003, NIH funding for R&D—representing 86% of all federal funding for the life sciences—has decreased each year in real terms.

• The number of U.S. citizens and permanent residents receiving doctorates in the life sciences has not increased over the last decade.

• U.S. trade in biotech and pharma is deteriorating. The U.S. trade deficit for all life sciences products is now $18 billion per year.

• From 1990 to 2003, pharmaceutical imports increased from 2% to 21%, as a share of U.S. pharmaceutical consumption.

• The United States is increasingly dependent on R&D conducted overseas. In 1970, 8% of U.S. pharma R&D expenditures were spent overseas; in 2005, the figure was 20%.

• Asian biotech firms are poised to become global competitors in the next decade. Their revenues and R&D expenditures increased 46% and 23% in a single year, respectively. (The figures for U.S. firms were 12% and 2%.) Pharma firms can significantly lower their costs by moving operations to India and China, and will increasingly do so.

Without concentrated investments by the federal government, U.S. biotech and pharma industries are likely, ten years hence, to be less competitive. Domestic industries can be strengthened by increasing federal funding for bioscience research and for post-secondary education.

Overview of U.S. Biotech and Pharma

In this brief, “U.S. firms” are U.S.-owned firms or U.S. divisions of foreign-owned firms. “Biotechnology firms” are those whose primary commercial activity depends on the application of biological organisms, systems, or processes. This definition excludes clinical research organizations, suppliers of biological reagents, medical device companies, and the majority of drug companies using little biology.

In 2005, the U.S. biotechnology and pharmaceutical industries generated revenues of $48 billion and $145 billion, respectively.¹ Together, these industries employed 406,700 people at an average annual wage of $72,600, a wage that is 86% higher than the private sector average of $39,003.² Since 2001, inflation-adjusted earnings have increased by 6.4% for all bioscience workers, compared with 1.4% for the average U.S. private sector worker.³

Biotech and pharma are resource-intensive industries and have significant economic spillovers into supporting industries, like chemical and equipment manufacturing. Based on U.S. Bureau of Economic Analysis estimates, every biotech job creates an additional 5.8 jobs in other industries, and every dollar of labor earnings and output in the biotech industry creates an additional $2.90 and $1.70 in earnings and output, respectively, in other U.S. industries.⁴

  
Figure 1: U.S. Pharmaceutical Production: 1980-2003⁶

  
Federal Investment in Biotech and Pharma

Investments in biotech and pharma yield high social returns. Pharmaceuticals are responsible for an estimated 40% of the gains in life expectancy over the last two decades.⁷ And for every dollar spent on new medicines, total health spending decreases an estimated $6.⁸ The social return of a dollar invested in cancer medicines is around $50.⁹ Biotech and pharma contributions to public health provide a strong rationale for public investment.

Most pharmaceuticals in the U.S. are derived from basic research in the life sciences funded by the federal government. About 86% of the $30 billion in federal funding for research in the life sciences comes from the National Institutes of Health (NIH).¹⁰ NIH’s research budget experienced unprecedented growth between 1996 and 2003, doubling in real (inflation-adjusted) terms. Since then, NIH’s research budget has decreased each year in real terms.¹¹ Federal funding for all R&D in the life sciences is well less than half of federal funding for traditional defense R&D, despite the growing recognition that future threats to national security are unlikely to be met by traditional defense technologies.¹²

  
Figure 2: Federal R&D Budget Authority for DOD, HHS, NSF, and DHS, 1976-2007 (inflation-adjusted)¹⁴

  
Dependence on federal funding can continue beyond basic research and into industrial development. In a 2002 Department of Commerce survey, 23% of biotechnology firms reported being dependent on federal funding.¹⁵

The federal government also supports biotechnology through education: 86% of U.S. biotech employees possess a college degree or higher, and 36% possess a graduate degree.¹⁶ In 2003, approximately 40% of full-time graduate students in biology, and 15% in medicine and other life sciences, received primary financial support from the federal government.¹⁷ U.S. universities awarded 9,183 doctorates in the life sciences in 2005.¹⁸ The number of these doctorates awarded to U.S. citizens or permanent residents has remained constant over the last decade.

Figure 3: Number of Doctorates in Life Sciences Awarded by U.S. Universities, 1996-2005¹⁹

  
Global Trends

The U.S. has long maintained global dominance in the life sciences, but its competitive advantage is declining. The U.S. share of global value added in pharmaceuticals increased from 1989 to 2001, but has since steadily declined.²⁰ Since the late 1990s, the U.S. has maintained a trade deficit in pharmaceuticals and has become increasingly dependent on imports. From 1990 to 2003, imports increased as a share of U.S. pharmaceutical consumption from 2% to 21%. The U.S. trade deficit for all life sciences products is now $18 billion.²¹

Figure 4: Global Pharmaceutical Production: 1980-2003²²

  
Figure 5: U.S. Trade in Pharmaceuticals²³

  
Figure 6: Imports as Share of Total U.S. Pharmaceutical Consumption²⁴

  
The United States is increasingly dependent on R&D conducted overseas. In 1970, 8% of R&D expenditures by U.S.-owned or U.S. divisions of foreign-owned pharma were spent overseas. In 2005, the figure was 20%.²⁶

Figure 7: Percent of U.S. Pharmaceutical R&D Conducted Overseas²⁷ 

  
In the United States from 1997 to 2005, the number of drugs in clinical or post-clinical development doubled from around 1,300 to 2,700.²⁸ Growth in emerging markets has been even more dramatic. Over the same period, in countries outside the United States, EU and Japan, the number of drugs in clinical or post-clinical development tripled from around 500 to 1500.²⁹ In 2005, foreign inventors filed 36% of all U.S. biotechnology patents granted.³⁰

Figure 8: Share of Global Pharmaceutical Production by Country/region³²

  
Asia

From 2004 to 2005, Asian biotech revenues and R&D expenditures increased 46% and 23%, respectively.³³ The figures for U.S. firms were 12% and 2%.³⁴

  
Growth is especially marked in India and China. Foreign investment in Indian and Chinese pharma has historically been low, as neither country allowed patents on pharmaceutical products. Now, however, both countries permit drug patents, have established mechanisms for patent enforcement, and have reached compliance with the World Trade Organization and the Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS).³⁶ These developments are drawing foreign investment.

In a 2005 survey, 37% of pharmaceutical executives reported that by 2010, they intended to invest at least $150 million in facilities located in India and China.³⁷ The same survey found that a range of R&D and tax benefits offered by both nations were an attraction to foreign investment. In India, profits derived from a local firm are tax-free for the first five years, and manufacturers pay no excise duty. India also allows pharmaceutical companies to deduct 150% of their R&D costs from taxable income. While most Chinese companies pay a 33% tax rate, foreign companies locating in China have been able to reduce their tax to 15% or less.³⁸

India and China have become hubs of low-cost manufacturing in other industries, due to low labor and material costs. Savings from outsourcing research and manufacturing to Asian firms typically ranges from 50 to 80%.³⁹ The cost-savings in pharmaceuticals are likely to be comparable. A United Nations Conference on Trade and Development (UNCTAD) report found that drug companies reduce their costs 20% to 30% by moving R&D to India, where research wages are less than a third of those in the United States.⁴⁰ Preclinical studies in China cost 30% to 90% less than they cost in the U.S.,⁴¹ and drugs there reach the market in 5 to 8 years, compared with 8 to 10 years in the U.S.⁴²

The Indian Department of Science and Technology has made expansion of the pharmaceutical industry a priority, outlining a national strategy to grow a $5 billion biotech industry by 2010.⁴³ In 2005, revenues for Indian biotechs reached $1 billion, up from $700 million in 2004.⁴⁴ India has the largest number of FDA-certified drug manufacturing facilities outside the U.S.⁴⁵ India has historically concentrated on generic manufacturing, which represented 70% of India’s pharmaceutical sales in 2005. However, from 2000 to 2005, R&D spending increased from 2% to 10% of revenues. In 2004, alone, growth in R&D spending was 60%. India’s pharmaceutical contract research industry is increasing by 40% to 50% per year. Outsourcing of clinical trials to India is expected to increase, as a 2005 law there now allows companies to conduct simultaneous Phase II and Phase III trials.⁴⁶

China has increased its annual public investment in biotech from $100 million in 2001 to $1.2 billion in 2005.⁴⁷ By 2010, China plans an annual public investment of $8.8 billion.⁴⁸ In 2003, China’s pharmaceutical industry accounted for 6% of global production, up from 1% in 1990.⁴⁹ While global and U.S. pharmaceutical production doubled over the last 15 and 12 years, respectively, Chinese production doubled over the last 5 years,⁵⁰ as did its share of global production.⁵¹ Most of the world’s 25 largest pharmaceutical companies now have operations in China.⁵²

The future strength of India and China is their human capital. In 2004, China graduated over 100,000 university students in the biosciences, while India graduated over 200,000.⁵³ By comparison, in 2002-3 the U.S. graduated 75,000 university students in the biosciences.⁵⁴

Figure 9: Chinese Pharmaceutical Production, 1980-2003⁵⁵

Figure 10: U.S. Pharmaceutical Imports from China and India, 1989-2005⁵⁶

  
Strengthening U.S. Biotech and Pharma

Since 2003, federal funding for life sciences research has declined in real terms. The number of U.S. citizens and permanent residents earning doctorates in the life sciences is not increasing. The country is increasingly dependent on imported life sciences products and on R&D and manufacturing performed overseas. India and China will emerge as world-class competitors, thanks to low labor costs, strengthened patent protection, and a growing bioscience workforce.

Without concentrated investments by the federal government, U.S. biotech and pharma will, ten years hence, be less competitive. These industries can be strengthened by increasing federal funding for bioscience research and post-secondary education. The industries would also benefit from additional tax incentives; streamlining of patent application, facility approval, and drug review processes; and increased public procurement and reimbursement of U.S.-produced medicines.⁵⁷

Increased dependence on imports is not necessarily undesirable. International trade increases efficiency by allowing countries to focus on their comparative advantages in production. U.S. consumers benefit from this efficiency by having access to cheaper medicines. However, given the possibility of trade disruption during global crises, there is an argument for domestic self-sufficiency in biodefense-related pharmaceuticals, as the United States now maintains self-sufficiency in defense industries such as aerospace, munitions, and shipbuilding.

The Defense Production Act of 1950 gives the federal government broad authority to “ensure the adequacy of [domestic] productive capacity and supply” in critical industries. The Act appears to have never been applied to pharmaceuticals. But HHS’ recent arrangement for Tamiflu to be produced domestically suggests that the federal government supports self-sufficiency in some critical pharmaceuticals.

To weigh the costs and benefits of U.S. self-sufficiency in all critical pharmaceuticals and enabling “infratechnologies” would involve identifying which imported products are critical and which are most vulnerable to supply disruptions, and then estimating the cost of producing these domestically. Trade welfare studies could help estimate these costs, if coupled with probabilistic risk assessments of trade disruptions.

References

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2. Milken Institute. Biopharmaceutical Industry Contributions to State and U.S. Economies. October 2004.

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