Biosciences and Growth

Over the medium-term, I regard biosciences–pharma, medical devices, broader applications of biotech–as one of the key 2 or 3 drivers of U.S. economic growth. The elements are all lined up: Great science, skilled workers, enormous potential demand. So 5-10 years from now,  we’re  likely to be reading about the founder of some hot biosciences firm joining Mark Zuckerberg  as the latest multizillionaire.

But in the short-term: Oh, lordy. The latest blow comes from the recent decisions to ban the diabetes drug Avandia in Europe and greatly restrict its use in the U.S.  Let me quote from Derek Lowe, a pharma researcher:

 The whole PPAR story looked like a great way to affect metabolic disorders and plenty of other diseases as well: cancer, inflammation, cardiovascular. That is, if we could just manage to understand what was going on. But we didn’t. Once we all figured out that nuclear receptors were involved and got busy on drug discovery on that basis, we didn’t help anyone with any diseases, and we didn’t make any profits. Big piles of money actually disappeared during the process, never to be seen again.

Megan McCardle adds:

There is a fundamental misunderstanding of the way that a modern economy drives innovation.  People tend to think in terms of a “eureka!” moment–a blockbuster idea or product that springs full blown from the head of Zeus, and then exists forever.  But in fact, an enormous amount of productivity improvement is driven by tiny, continuous, incremental change.  This is true of treating childhood cancer, it is true of drug discovery, and it is true of Toyotas.

Comments

  1. No chance, the problem with biotech is that it doesn’t scale. When Intel comes up with a new process improvement that allows them to miniaturize their transistors further and make their processors more powerful, that benefit is distributed to all the software out there, making it all run faster. However, if you can come up with a great new drug, its benefits are limited to people who have the disease or condition. Further, given the vast complexity of the human body, you’re further limited by potential side effects for segments of the population. That’s why biotech is currently intrinsically limited and may never drive economic growth. Regardless, there is so much more that can be done with computing, that this century will be the computing/internet century, just like the last was the industrial century. So computing/software/internet is it for now, with little chance that biotech will approach it, let alone become a key driver itself.

    • Mike Mandel says:

      Good point, but we don’t know yet whether biotech scales, since we haven’t seen a big win yet.

      • Doesn’t that mean that the opportunities for scaling are among the tools for general diagnosis and analysis as well as nanotech mechanical solutions? It seems that the bucket of things that can be diagnosed and treated physically rather than chemically ought to be large enough and related enough to pose an opportunity.

  2. Given pharma’s historically high profit margins, and relatively small R&D budgets, I think they can take the blow.

    Steve

  3. “The top ten drug companies (which included European companies) had profits of nearly 25 percent of sales in 1990, and except for a dip at the time of President Bill Clinton’s health care reform proposal, profits as a percentage of sales remained about the same for the next decade. (Of course, in absolute terms, as sales mounted, so did profits.) In 2001, the ten American drug companies in the Fortune 500 list (not quite the same as the top ten worldwide, but their profit margins are much the same) ranked far above all other American industries in average net return, whether as a percentage of sales (18.5 percent), of assets (16.3 percent), or of shareholders’ equity (33.2 percent). These are astonishing margins. For comparison, the median net return for all other industries in the Fortune 500 was only 3.3 percent of sales. Commercial banking, itself no slouch as an aggressive industry with many friends in high places, was a distant second, at 13.5 percent of sales.”

    “Drug industry expenditures for research and development, while large, were consistently far less than profits. For the top ten companies, they amounted to only 11 percent of sales in 1990, rising slightly to 14 percent in 2000. The biggest single item in the budget is neither R&D nor even profits but something usually called “marketing and administration”—a name that varies slightly from company to company. In 1990, a staggering 36 percent of sales revenues went into this category, and that proportion remained about the same for over a decade.13 Note that this is two and a half times the expenditures for R&D.”

    From Marcia Angell’s classic piece.

    http://www.nybooks.com/articles/archives/2004/jul/15/the-truth-about-the-drug-companies/?page=1

    “In 2001, Darren Zinner published a study in Health Affairs that addressed this very question. Here’s what he did in plain English. He looked at all clinical patent applications in 1998, and carefully examined all the scientific research cited in those applications. It’s important to remember that this would include all research, not just those for approved drugs, so it even includes the research for drugs not getting to market. He then classified where that research was done. Here’s what he found:

    The majority of research cited in patent applications was done in academic centers. Some more was done in other non-profit or government research centers. Only 15% of the research was done by industry. That’s not a very compelling argument for the indispensable contribution of industry to research.”

    From Carroll’s recent piece.

    http://theincidentaleconomist.com/wordpress/pharmas-research/

    Of course, I have seen lots of drug reps in my career. What is it, one drug rep for every four docs? Mind you I am talking about big pharma, not so much about pure biotech.

    Steve

    • Mike Mandel says:

      Please don’t cite 2001 statistics on this blog as your most recent data…it’s not polite (seriously).

      According to the latest stats from the National Science Foundation, the pharma industry spent almost $70 billion on R&D in 2008. By itself, that number accounted for more than 20% of all business R&D spending. The R&D/sales ratio for pharmaceuticals was 13%, almost double the computer/electronics industry.

      You may not like what they are spending it on, you may not think they are effective, but they are outspending almost everyone else, R&D-wise.

  4. “Please don’t cite 2001 statistics on this blog as your most recent data…it’s not polite (seriously).”

    Sorry, it was handy and I cited it mostly for its profit margins stats. I think it also good to be aware of the history of the industry. I also get irritated with the industry guys who fail to acknowledge how much they benefit from research done by academia.

    Steve

  5. steve2, thanks for actually bringing some data to the discussion.🙂 I was wrong about the pharmas not having huge margins, I misremembered this profit margin ranking that showed that medical insurance companies’ margins aren’t that high and thought it might have been for the pharmas too, shows what happens when you don’t check the data.😉 The pharmas are clearly very profitable, up there with software and information services. However, you are clearly wrong about R&D, as the pharmas put more of their money into R&D than practically any other market segment. Also, I don’t necessarily begrudge them their high margins because what they do is very difficult, just like I don’t begrudge all the money google makes off search, which is similarly very difficult to get right (it must be since Microsoft and Yahoo have poured billions into it and have never even had a credible alternative😉 ). However, I do think pharma prices and margins are distorted by all the govt involvement in the medical market, which is why we’d be better off if we got rid of Medicaid and Medicare and the prescription drug benefit and all the other dumb govt laws and moved to medical savings accounts with true medical catastrophic insurance instead. It is also alarming how much money the pharmas spend on marketing, but if it raises awareness of useful drugs, they must know what they’re doing.😉

  6. I used to work in the biomedical sciences (15 years at the bench) One shouldn’t underestimate the role of very basic public-sector research. Discovery is indeed incremental. One of the issues is that we are dealing with complex signal transduction pathways that have feedback loops and redundant systems that create what can seem like an impossible tangle. Generally speaking – the early gains are found in academia and once an application seems feasible it can move from academe to industry. Much of the work that moves mountains is performed by unsung academics laboring for years on a problem that everyone thought was obscure.

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