How to Ensure That America’s Life-Sciences Sector Remains Globally Competitive

March 26, 2018
America’s lead in life sciences is being challenged. Other countries are aggressively seeking to attract and grow companies with innovation-based tax incentives, a range of firm-specific enticements, increased government research funding, improved IP protections, and streamlined regulatory approval processes. The federal government should act to ensure U.S. life sciences remain competitive.

The life-sciences sector, consisting of pharmaceuticals (both chemical and biological drugs) and medical equipment, as well as the research that supports them, plays a central role in both the economy and health care system of the United States. These industries are extremely research-intensive, employ a large number of skilled workers earning above-average wages, and represent a critical traded sector that helps the U.S. economy compete internationally. Because the industry is one of the most technologically complex in the world, funded predominantly by investments of large amounts of capital for long periods of time in the face of significant technological and market risk, it requires both specialized and general infrastructures, business conditions, and policy supports. In terms of general factors, success depends on an effective corporate tax system, including robust incentives for research and development, a strong patent system, and an effective rule of law. In terms of industry-specific factors, it needs a strong institutional infrastructure, including trained life-sciences workers, access to research labs, an experienced investment community, an effective regulatory approval system, a fair device and drug payment system, generous government funding of biomedical research, and a strong international trade effort to limit foreign “life-sciences mercantilism” (including weak IP protections, compulsory licenses, and deep government-forced price discounts).

Despite losing global market share over the last 20 years, the United States still has a strong life-sciences sector. America’s health care system does a laudable job of compensating companies for their discoveries, while the FDA’s drug-approval process remains relatively effective. Meanwhile, the federal government funds a healthy collection of top-tier research centers, while a combination of strong life-sciences and related skills, a robust venture capital industry, and firm patent protection provides a climate in which companies can emerge and grow.

But America’s leadership has been slipping over the past two decades. Foreign nations are aggressively competing, in both fair and unfair ways, to grow and attract more life-sciences sector investment. Moreover, many countries use their central government’s monopsony power as a purchaser of drugs and devices to limit the prices U.S. firms are able to charge for their exports—thereby artificially inflating the United States' trade deficit in the sector. These foreign pricing policies also allow many other nations to piggyback on the U.S. life-sciences innovation system in order to get the benefits of better treatments without having to pay their fair share for costly research and development (R&D).

Meanwhile, the United States has been lukewarm in its support of the industry, cutting federal biomedical research in real terms and increasingly considering pricing policies that would hurt innovation and U.S. life-sciences competitiveness. Such policies create uncertainty regarding the willingness to pay for future treatments and the research necessary to discover and bring them to market. And, unlike other countries, the United States only recently stopped taxing the foreign income of American companies at what was considered an uncommonly high rate. It is also falling further behind in providing innovation-focused tax incentives, such as an innovation box or a competitive research and development tax credit—something the recent tax reform only made worse.

It is important for the United States to maintain a highly competitive life-sciences sector. The life sciences—especially pharmaceuticals—generate high-skilled, high-paying jobs, many of which are in research and manufacturing. And because its medications and devices are sold throughout the world, the industry makes up a key component of the U.S. traded economy. A weaker competitive position would mean a lower value for the dollar, a larger trade deficit, or both, coupled with plant closures and job losses. And as ITIF has shown, these losses would extend to many states.

Other nations gaining global market share at the expense of U.S. production would cause serious ramifications to the life-sciences industry—even if the value of the dollar were to later fall significantly. After the devastation of World War II, the United States captured the lead from Europe in life sciences thanks to its large domestic market, strong system of university research labs, competent regulation and pricing regime, and generous federal R&D funding. Creating an industry like this was extremely difficult. Recreating the industry if it were to be lost would be even harder—if not impossible.

Major takeaways from the life-sciences sector’s contribution to the U.S. economy include the following:

  • The pharmaceutical and medical-instrument subsectors’ combined output was $675 billion in 2015, almost 4 percent of total GDP. 
  • In 2016, the sector employed over 1.2 million workers. The pharmaceutical subsector alone created an additional 3.5 million jobs indirectly both by creating demand for inputs and as a result of its workers spending their incomes. Employment since 2001 has been growing rapidly, especially in pharmaceuticals.
  • Jobs in the pharmaceutical subsector earned an average wage of $124,400 in 2016, while those in the medical-equipment subsector earned $86,200. Both were significantly higher than the average annual wage for workers in all industries of $53,500.
  • The life sciences account for a large share of new start-ups in each of the subsectors. Start-ups tend to focus largely on research and development, and account for a higher proportion of job growth than start-ups in other industries, in part because technology-based industries such as life sciences are better able to translate their R&D investments into jobs.
  • Life-sciences companies located in the United States performed $96.5 billion of research and development in 2013. Of this, $74.5 billion was self-funded. Of the total research, $79.4 billion was performed domestically, which was almost 25 percent of all corporate R&D performed in the United States. Private investment in pharmaceutical research equaled 10.3 percent of sales, almost three times the ratio of the average industry. The equivalent figure for the medical-equipment subsector was 4.4 percent.
  • Nearly 22 percent of domestic pharmaceutical employees work in research and development, making it one of the most research-intensive industries. This percentage is nearly four times that of the average U.S. industry. The ratio for medical equipment is almost 12 percent.
  • Private firms are not able to capture all of the benefits from the research they perform, although much of it does benefit the larger society in the form of increased productivity, lower medical costs, and less personal suffering. The total social return from biomedical research (public and private) has been estimated at 150 percent, implying that society would benefit from a significant increase in research spending—which is the opposite of what is likely to happen with widespread restrictions on drug prices.
  • Over the 14-year period ending in 2013, the United States accounted for roughly 40 to 45 percent of all triadic patents (patents filed in the United States, Europe, and Japan) in biotechnology, medical technology (generally medical or veterinary science), and pharmaceuticals.
  • The life-sciences industries exported almost $90 billion worth of products in 2017. Pharmaceutical exports have grown 191 percent in the last 15 years, while medical-equipment exports grew by over 185 percent. Yet imports have grown at roughly the same rate or faster. Although the medical-equipment subsector is running a rough trade balance, pharmaceuticals is experiencing a trade deficit of $56.2 billion, with imports growing faster than exports, especially since 2013.
  • The trade statistics are influenced by at least two factors that artificially raise the value of exports while lowering the value of imports, both of which make the trade imbalance look better than it actually is. Past tax policy encouraged international companies to shift as much of their profits abroad as legally possible, causing some domestic production to be undercounted, while widespread and often deep foreign suppression of life-sciences prices through government price controls resulted in reduced U.S. export prices, thus allowing these nations to import U.S. goods without having to remunerate an equivalent value of exports to the United States.

The United States’ lead in the life sciences is being challenged. Other countries have aggressively courted life-sciences companies with lower tax rates, a range of firm-specific tax benefits, increased government research funding, improved intellectual property (IP) protections, and streamlined approval processes. In order to retain its competitive advantage, the United States needs to enact a number of important reforms.

Going forward, the United States can strengthen its life-sciences economy by:

  1. Implementing better tax policy. The tax reform legislation Congress passed in 2017 achieved several important things, including lowering the statutory rate and moving toward a territorial system. However, although the tax reform bill did not amend the R&D tax credit, the combination of a lower statutory tax rate and the requirement that companies begin amortizing R&D expenses starting in five years reduces the tax incentives for conducting more research. The legislation also failed to enact an innovation box, while at the same time cutting the orphan drug credit rate.
  2. Reversing the long-term decline in federally supported basic research. For example, to restore National Institute of Health (NIH) funding to its 2003 share of GDP, its budget would have to increase by $11.6 billion per year.
  3. Taking more forceful action to address unfair trade practices by other nations, including IP theft, abuse of the compulsory license process, technology transfer as a condition for selling into a market, lack of transparent processes for obtaining government approvals, and use of government power to reduce prices and, by definition, U.S. export revenues and jobs.
  4. Expanding and improving workforce training in STEM subjects. Many life-sciences workers do not necessarily need a college degree in order to gain valuable skills. But they do need specific skills in science, engineering, and manufacturing. Overall, we need more qualified STEM workers.
  5. Passing health care reforms that restore long-term stability and provide adequate reimbursement, including for novel therapies.
  6. Continuing to value the role robust IP rights play in underpinning life-sciences innovation. For instance, policymakers should continue to support the Bayh-Dole Act of 1980, which creates a uniform patent policy enabling small businesses and non-profit organizations, including universities, to retain title to inventions they make with federal funding.
How to Ensure That America’s Life-Sciences Sector Remains Globally Competitive