Pharmaceutical Investment and Innovation: Big business and small business advancing solutions, saving lives

By at 3 February, 2022, 11:07 am


by Raymond J. Keating –

The pharmaceutical and medicine manufacturing industry has the reputation for being all about large businesses. This mistaken view is widely pitched in political circles. However, while large firms, of course, are critical to the industry, and to the life-saving, life-enhancing treatments it produces – firms that grew as a result of producing new and improved drug treatments – it pays to keep in mind the entrepreneurial nature of the sector.

According to the latest data from the U.S. Census Bureau (for 2018), 47.6 percent of employer firms within the pharmaceutical and medicine manufacturing industry have fewer than 10 employees, 59.4 percent fewer than 20 employees, and 78.9 percent fewer than 100 workers.

This critical industry is very much a small business industry.

And it pays to keep in mind that each of today’s large pharmaceutical firms at one time were small startups. And because this industry was able to flourish, we’ve seen the incredible accomplishments relating to COVID-19 vaccines and treatments.

Fast-Track Innovation Can Be Fostered

As the Associated Press noted last month:

“Developed and rolled out at blistering speed, the vaccines have proved incredibly safe and highly effective at preventing deaths and hospitalizations. Unvaccinated people have a 14 times higher risk of dying compared to fully vaccinated people, the Centers for Disease Control and Prevention estimated based on available data from September.”

Drug Innovations Saved Lives

As for lives saved, reported:

“It is estimated that this astonishingly rapid development and deployment has saved at least 750,000 lives in the United States and Europe alone — and probably many more globally, although researchers are as yet unwilling to commit to a number. A study from the WHO and the European Centre for Disease Prevention and Control in Solna, Sweden, published last month estimated that 470,000 deaths had been averted across 33 European countries in those aged 60 and over alone. Another modelling study, which is yet to be peer reviewed, from epidemiologists at Yale University in New Haven, Connecticut, estimated that 279,000 lives had been saved by late June by the vaccination drive in the United States.”

Economic Pain Reduced

And as devastating as this pandemic has been for the economy, a new report from HeartlandForward found the following:

“The rapid development and deployment of vaccines during the COVID-19 pandemic lessened the impact of the virus on the economy, generating an estimated economic savings in the U.S. of $438 billion in terms of 2021 real GDP gain, or 2.3% of 2021 real GDP.”

The authors went on to explain:

“These savings, and the development of the vaccine itself, are possible because of the United States’ unique public-private partnership between government agencies, academia and the biopharmaceutical industry that supports innovations in disease therapy. Specifically, the biopharmaceutical industry was and continues to respond to the pandemic swiftly with new therapies because it has been allowed to commercialize other therapies in the past which then provides available capital for new research and development activities.”

Innovations Generate Savings in Other Areas, Extend Lives

Along these lines, a CBO report on prescription drug pricing makes two important points regarding what the pharmaceutical industry has accomplished over the years, and how, in part, that has been achieved. As for the accomplishment, it is clear:

“Nationwide spending on prescription drugs increased from $30 billion in 1980 to $335 billion in 2018. (All estimates of drug spending and prices in this report are expressed in 2018 dollars.) Over that period, real per capita spending on prescription drugs increased more than sevenfold: from $140 to $1,073. That increase in spending was driven by the development and use of many types of drugs that have yielded myriad health benefits. Because of those health benefits, some drugs, such as those that treat cardiovascular conditions, are associated with reductions in spending on services pro- vided by hospitals and physicians. Other types of drugs, such as those that treat multiple sclerosis or cancer, may not offer such compensating savings, but they have improved the lives of those with chronic conditions and have also extended life.”

And as for how this has come about:

“Decisions about whether to undertake the necessary laboratory research and clinical trials for any particular compound must be made in the face of uncertainty about its ultimate clinical value. Most drug com- pounds yield no significant therapeutic results; of those that enter clinical trials, only about 12 percent make it to market.

“So, for a firm with 100 products in development and 12 that make it to market, profitability depends on the revenues from the 12 marketed products and the cost of all 100 products in development. Even in those few cases in which a manufacturer successfully develops a new product, it sees no revenue for years following the various decisions about whether to proceed with the requisite stages of development.

“Investment capital that is committed to drug R&D could have been invested instead in other activities that are less risky yet still profitable. Because of the relatively high risk of failure in drug development, investors in R&D for those drugs tend to require, in compensation, a high return on their investment if drug development is successful. The investment decisions
of manufacturers of brand-name drugs are informed by that same mechanism. A recent report by the Congressional Budget Office found that both total spending on R&D by manufacturers of brand-name drugs and the fraction of their revenues devoted to spending on R&D have increased in recent years. Accordingly, the opportunity costs of that investment capital—the returns that could have been earned through other investments—are an important component of a manufacturer’s total costs and must be taken into account when measuring the company’s profitability over the long term.”

Policies Matter, Let’s Be Smart and Supportive

Enormous challenges obviously persist on the health and economic fronts. But it pays to keep in mind where we would be without the innovation from and investment in the pharmaceutical industry.

From a policy perspective, lawmakers need to keep the following foremost in mind: Price controls on prescription drugs and weakened property rights, as often advocated by politicians and certain activists, would undermine entrepreneurship and private investment in the industry, and therefore, would undermine the creation of new and improved drugs, medicines and vaccines.

Starting up and investing in pharmaceutical companies rank as endeavors rich in risk and uncertainty. As highlighted in the CBO report, there are many other undertakings that have less risk and uncertainty, and still offer profits. The potential for returns must be present to incentivize the investment that funds innovation.

Limit those returns via price controls and/or weakened property rights, and we’ll experience a grim limit on the discovery and production of new and improved life-saving and life-enhancing drugs.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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