Genomics and Society: Reinventing Life? - Innovation and Growth in Pharma-Biotech: puzzles and interpretations

The papers in this session will look at the relationship between innovation, profits, and growth in the biotech and pharmaceutical industries, highlighting the puzzles that the interesting (and sometimes troubling) relationships raise for the future of the sector. Policy relevant issues are raised using empirical (qualitative and quantitative) and theoretical tools in industrial economics and the history of technology.

Session Chair: Professor Mariana Mazzucato, Innogen, Open University
Session Discussant: Professor Luigi Orsenigo (Innogen) University of Brescia CESPRI, Bocconi University

Even though both evolutionary and neoclassical economic theories assume that innovative firms should grow more than non-innovative ones, empirical evidence for the impact of innovation on firm growth remains mixed. This raises the question: if innovations do not necessarily boost firm growth, does this mean that ‘market selection’ fails? In this paper, we study firm growth dynamics in relation to innovation using different proxies for innovation. We focus on growth and innovation dynamics in the pharmaceutical industry using a dataset of 323 pharmaceutical firms over a period of more than 25 years. The pharmaceutical firms are categorised based on their size (small vs. large), innovative activities (patentee vs. non-patentee), R&D intensity, persistence of innovations (persistent patentee vs. non-persistent patentee) and involvement in biotech related external activities such as research and marketing collaborations with other firms (involved vs. not involved). Results show that for most firms innovation does not affect firm growth: innovative activities only boost the growth of certain ‘types’ of firms—mainly small ‘persistent’ patentees, involved in biotech related external activities. We also find that understanding how market selection works provides important insights into the underlying dynamics behind the ‘complex’ properties of industry structure which have recently puzzled industrial economists: we find that those firms that grow due to their innovation efforts are the same firms that are responsible for ‘bimodal’ firm size distribution and ‘fat tailed’ growth distribution.

The once separate worlds of “science” and “business” are converging. Whereas once science was the province of universities and not-for-profit research institutes, and business focused on commercial applications, today these boundaries are blurring. Universities are becoming involved in the business of science through spin-offs, licensing, and corporate collaborations. And, businesses are becoming direct participants in the world of science through their own research and through collaborations. Nowhere is this convergence more pronounced than in biotechnology and biomedical science where academic scientist-entrepreneurs start firms within months of making major breakthroughs, where private enterprises undertake basic research that used to be considered the province of academia, and where established pharmaceutical companies look to academia to pluck the next generation of scientific leadership. In essence, science is becoming a business, and the biotechnology industry represents a 30 year “experiment” to answer the question: can science be a business?

My talk will draw from my research on the biotechnology industry over the past two decades, and recently published in my book, Science Business: The Promise, The Reality, and The Future of Biotechnology. In my presentation, I will discuss how science-based businesses like biotechnology require novel business models, organizational structures, and financial arrangements. “Off the shelf” approaches that have worked elsewhere in “high tech” are often not appropriate for the realities and constraints of a science-based business. My talk will utilize the historical case of biotechnology to explore the challenges of science-based business and discuss implications for business models, organizational structures, strategy, and other institutional arrangements.

Since the late 1990s the US biotechnology industry has been booming. In Science Business: The Promise, the Reality, and the Future of Biotech (2006), Gary Pisano argues that, given the lack of profitability of the industry as a whole, the US biotech boom should not be happening. Yet he also shows that biotech has received substantial funding from venture capital firms and the public stock markets, and recognizes that big pharma has invested in the industry through R&D alliances. Why is smart business money supporting a profitless industry? One part of the answer is the willingness of stock market investors to absorb IPOs long before the companies that go public have generated commercial products. The other part of the answer is that government, not business, is the prime source of investments in the knowledge base that biotechnology companies can tap. We outline the extent of government support for the US biopharmaceutical industry, emphasizing the roles of government research funding, subsidies, regulation, and spending in enabling an industry that depends on investments in a complex knowledge base to exist and grow. Our analysis provides insights into the limits to the sustainability of the US biotech boom. In particular we ask why US biopharmaceutical firms need high drug prices to fund R&D when the most successful firms use so much of their profits to repurchase their own stock.