By Angelos Angelou, Founder & CEO, AngelouEconomics
It’s back. With the introduction (and subsequent retraction) of the American Health Care Act, health policy is once again at the forefront of political discourse within the United States. Who should pay? How much should they pay? How should they pay? These are just some of the questions being asked in this most recent round of what is one of America’s most consistent—and contentious—political and social debates.
But even within the emotionally-charged, high-stakes arena of health care, few topics stir passions as much as the pharmaceutical industry. Amalgamated within the collective American psyche as the so-called “Big Pharma,” the industry is frequently the source of polarization and debate. As much as pharmaceutical companies undoubtedly split opinions, though, the fact remains that these companies play an instrumental role in the lives of many Americans.
A 2015 study published by the American Medical Association found that nearly three out of every five adults in the U.S. were regularly taking at least one prescription medication. Whether it’s a preventative statin regimen, a life-saving cancer treatment, or just something to enhance quality of life—think sildenafil—pharmaceuticals have become synonymous with improving and maintaining health.
The importance of the pharmaceuticals industry extends well beyond the already-complex issues of treatment, health, and wellness, though. As with the broader health care industry, the development, production, and distribution of medication plays a massive role within the U.S. economy. A 2016 report produced by the U.S. Trade Administration, for instance, measured industry sales within the United States at $333 billion in 2015, accounting for 1.9 percent of GDP and 10.7 percent of all health spending. (It should be noted that the term ‘pharmaceuticals’ is often interchanged with ‘biopharmaceuticals’, the latter reflecting the integration of biotechnology and other innovations on top of the traditional chemical formulation process). A study undertaken by pharmaceutical industry advocate PhRMA went even further, claiming an astounding $1.2 trillion in economic activity “supported” by biopharma.
While accepting that pharmaceuticals account for wholly seven percent of the U.S. economy requires a certain level of…credulity, there can be no doubt that the industry’s contribution is vital to the U.S. economy. The U.S. Cluster Mapping Project measured industry employment in 2014 at 231,000, and analysis of Bureau of Labor Statistics data puts industry-related employment as high as 480,000. Though even this higher number represents a relatively small proportion of total U.S. employment, these are some of the highest quality jobs in the United States; estimates of the average industry wage range between $95,000 and $115,000 per year. This is roughly double the U.S. median household income, and makes biopharma the 5th highest-paying industry tracked by the Cluster Mapping Project.
The pharmaceuticals industry also stands out as one of the last bastions of high-quality advanced manufacturing within the United States. Fully three-quarters of the medications consumed in the U.S. (as measured by sales) were produced domestically, and industry exports were valued at $47 million in 2015. While, as with nearly every other industry, there is a sense that this is beginning to change as companies look to shift manufacturing operations overseas to reduce costs, the fact remains that biopharmaceuticals is one of the top-quality employers within the United States.
Instrumental to the success of American pharmaceuticals is the strong emphasis on innovation and heavy investment into research and development efforts. Estimates place U.S. industry R&D expenditures somewhere between 15 and 20 percent of revenue, or roughly $50 billion dollars, every year. A whole host of factors contribute to this culture of rigorous innovation. Between its strict IP protections, strong scientific and academic base, and a plethora of both public and private sector funding, the U.S. has historically proven itself as a fertile ground for pharmaceuticals. What’s more, the dividends paid by this intense level of investment are readily apparent ‒ more than half of all new drugs created in the past decade were developed in the U.S.
Indeed, 2016 brought no shortage of notable pharmacological developments and breakthroughs. A new drug from New York-based Bristol-Myers Squibb has dramatically increased the life expectancy of metastatic melanoma patients. California’s Gilead Sciences introduced a new drug that could cure the full spectrum of hepatitis C genotypes. And, while not necessarily “lifesaving,” U.S. pharmaceutical powerhouse Johnson & Johnson has revealed what appears to be the most effective psoriasis treatment to date. This comes as big news for the 7.5 million Americans that suffer from psoriasis, as the new treatment is almost twice as effective. It comes as big news for Johnson & Johnson because Humira, the current leading treatment, is the best-selling drug in the world.
It is also worth mentioning that some of the most interesting and promising developments in the field are not the result of purely pharmacological endeavors, but are rather the fruits of robust cross-disciplinary efforts. As an example, bioinformatics—the synthesis of traditional life sciences with information technology—represents not only a new way to improve patient lives, but also an incredible economic engine. Valued at $3.5 billion globally in 2013, this sub-market is expected to add as much as an additional $10 billion in valuation by 2020, effectively tripling the size of the market in less than a decade.
While the specifics are complicated, the main advantage provided by bioinformatics is that the data provided by these techniques opens whole new avenues in treatment and prevention; mapping the interaction between chemical compounds and a specific gene can allow for drugs to be customized for a particular individual, or against a particular strain of a disease. That methodology can also be extended towards personalized nutrition. Bioinformatics pioneer InSyBio provided an excellent example of the latter. In partnership with the Nestle Institue of Health Science, they developed a whole suite of biomarker analysis tools, allowing for not only personalized nutrition/supplement regimens, but also the ability to predict how different individuals will react to dietary changes.
Now, it’s important to keep in mind that many “new” drugs and treatments are in fact years old. The pipeline for FDA approval is a long (and expensive) one, and it will be years before many truly contemporary breakthroughs bear fruit. But, the fact remains that progress is being made every day and lives are being improved—or saved outright.
So where are these breathtaking advances in therapeutic pharmacology taking place?
The short answer is, all over the country. When considering major biopharmaceuticals hubs in the United States, many of the most prominent regions cited are those one would expect for an industry so heavily reliant on technology and innovation: Boston, Seattle, New York, San Diego, and Silicon Valley.
However, the industry has also grown to be an essential economic development asset in numerous cities still coming into their own as centers of research and technology. For example, unassuming Philadelphia is home to 10,000 industry jobs, and PWC’s MoneyTree tracked more than $200 million in biotechnology-related venture capital funding awarded to area companies in 2015. Likewise, the Raleigh-Durham “Research Triangle” continues to prove itself one of the country’s leading biopharma clusters, a reputation that was recently strengthened by Spanish biotherapeutics giant Grifols’ investment of an additional $210 million in the region. Boulder, Colorado is home to 142 bioscience firms employing 4,600 employees with an average wage in excess of $100,000, while Albuquerque, New Mexico is home to the region’s only life sciences incubator. Even the lesser known Silicon Slopes around Salt Lake City, Utah rank relatively well in regards to industry specialization factors.
The success of many of these locales, as world-renowned biopharmaceuticals cluster, rests at least partially on their strong business climates and the strong support provided by the state and local governments. Massachusetts’ Life Sciences Initiative—a $1 billion fund managed by the Massachusetts Life Sciences Center—represents a massive investment into pharmaceutical and other biotech companies at all levels of development. Even better, it leverages relationships with private companies and investors to do so. Similarly, the Cancer Prevention Research Institute of Texas manages a $3 billion investment targeted specifically at innovation in the realm of cancer translational research, product development and prevention research.
Another tool boosting pharmaceuticals innovation is the variety of biotech and life sciences incubators/accelerators found all across the United States. The Boston-Cambridge region alone has at least 15 incubators providing more than 100,000 square feet of lab space on top of a variety of ancillary services. The aforementioned BioScience Center in Albuquerque, New Mexico supports over a dozen resident companies with funding leads, networking opportunities, and, of course, lab space.
In a similar vain, the Philadelphia-Centric HealthShare Exchange of Southern Pennsylvania provides unique opportunities for bioinformatics and Health IT innovators by sharing (sanitized) health records across the region. The message being sent by these programs, incubators, and support networks is clear: these regions not only want to dominate the market now, they want to cultivate the next wave of innovation and stay on top for years to come.
So, in many ways, the examples above represent many of the best practices for maintaining and growing a regional pharmaceutical powerhouse. But is that enough to drive the U.S. pharmaceuticals industry to success? This is not some cottage industry, after all. For better or for worse, pharmaceuticals is a sector of the economy that is highly sensitive to federal policies, and its success or failure is thus tied closely to the efficacy—and stability—of said policies. Thus, with the current atmosphere of political and policy upheaval, the industry is facing many pressing questions that have yet to be definitively answered.
Chief among those questions is the matter of drug pricing; specifically, whether or not Medicare—the largest single buyer of pharmaceuticals in the world—will start negotiating bulk prices, as opposed to continuing the current system of accepting manufacturers’ prices outright. This is an important issue with very real implications for the profitability and performance of drug companies.
Opinions within the industry are split on the matter. Advocates of pricing regulation point out, often convincingly, that the double-digit price hikes seen in the market don’t reflect the just desserts of industry innovation so much as they do a sure-fire way to boost profits.
On the other hand, opponents point to a variety of circumstances that contradict this appealing yet perhaps overly-simplistic narrative. There’s the fact that pharmaceuticals haven’t grown as share of total health spending over the past several decades. Then there’s the possibility that fixing prices will reduce incentives to develop new drugs and ultimately hurt consumers in the long run. Then there’s the admission by the U.S. Trade Administration that domestic prices are unnaturally high to offset the effect of price controls in foreign markets, meaning the U.S. market is essentially subsidizing foreign consumers. And finally, there’s the simple truth that, obscenely priced or not, these drugs are saving lives, and often in a (relatively) cost effective manner.
Pricing is not the only policy-related consideration that could potentially impact the future of the pharmaceuticals industry, though. Another hot-button issue where policy change could prove a double-edged sword for the industry is the Food and Drug Administration’s drug-approval process. Currently, the FDA’s extensive process is considered one of the most thorough and rigorous in the world, but it’s also costly. Estimates place the price of bringing a single drug to market as high as $2.6 billion, and the process often takes more than a decade.
But, even when weighed against the considerable time and monetary costs, streamlining the FDA approval process is a complicated proposition. For some drugs, such as generic version of formulations that have already been approved, cutting back some red tape will almost certainly benefit both the industry and consumers. For experimental drugs, conversely, rule changes could make it difficult to obtain insurance and underwriting for new projects, to say nothing of the safety considerations.
Finally, there’s the big unknown hanging, not only over pharmaceuticals, but many other U.S. industries as well as tax and trade policy. Pharmaceutical companies stand to gain a lot from a reformed corporate tax structure, and many industry executives are predictably on board. A revised tax structure could help resolve the drug-pricing issue while protecting manufacturers’ bottom line. But the other side of that coin is trade policy. The distinctly, anti-trade slant of the current administration could have major implications for U.S. drug companies, particularly those with extensive operations outside of the U.S.
So how will this all shake out? In many ways, it’s too early to tell, but one thing is certain: the pharmaceuticals industry has been singled out, which likey means something will likely have to give. Industry players, investors, and state and local governments need to keep a careful eye on which way the policy winds are shifting, so that they can adapt to ensure their well-being—and the well-being of the millions of Americans who rely on them.
AngelouEconomics is a leading Corporate Site Location and Economic Development Consultancy. The firm has provided site location services to clients with over $5 billion worth of data center projects and developed over 400 economic development strategic plans for U.S. and international clients. To learn more, visit www.AngelouEconomics.com or email: Angelos@AngelouEconomics.com, (512-658-8400 cell).