President Biden’s efforts to revitalize the nation’s technology-based industries, which began with semiconductors and electric vehicles, should encompass the life sciences. Biotechnology, pharmaceuticals, medical devices, digital therapeutics, diagnostics, genomics, and AI-based clinical decision support compete in a global market where other nations are doubling down in support for their domestic champions. The benefits of investing in the life sciences cannot be measured solely in terms of improved health — they also include high-wage jobs, exports, and tax revenues; pandemic and military preparedness; and spillovers to other sectors.
Support for a more active life sciences industrial policy isn’t a one-party endeavor. It should be a bipartisan effort, especially in the context of rising concern for China’s ambitions. Staunch conservatives in Congress call for more sanctions on unfair subsidies and on the theft of intellectual property. Former President Donald Trump advocates across-the-board tariffs and reductions in U.S. drug prices to the level of prices paid in other nations. And President Biden has been strongly supportive of reshoring the entire technology innovation pipeline, from research through product development, manufacturing, and distribution.
Unfortunately, bipartisan perspectives on policy do not translate into bipartisan political support for policies. The greatest challenge facing the U.S. life sciences industry is the country’s continued difficulty in developing a vision and implementing a strategy for achieving it. But the commonalities between the Trump administration’s Operation Warp Speed (OWS) and the Biden administration’s Advanced Research Projects Agency for Health (ARPA-H) indicate where the common path could lead.
The perceived threat from China is forcing a reassessment of the traditional innovation policy paradigm in the U.S., which has emphasized governmental responsibility for scientific research and industry responsibility for product development. In short, conventional wisdom has favored public funding for the R in R&D and private funding for the D. The U.S. developed this framework during the decades of its unquestioned technological, economic, and political hegemony after World War II. That era is over. The U.S. now plays a more modest role on the world stage and has been falling behind China in key industries like solar power and speed trains. If the U.S. does not develop a coherent industrial policy for the life sciences, the life sciences may soon be next.
A new industrial policy
Two goals must be pursued simultaneously in implementing industrial policy. First, public investment must target areas of high social need that have the potential for successful innovation. Second, policies must ensure that the social and economic benefits flowing from public investments accrue in large part to the U.S. rather than to other nations.
The U.S. cannot continue down the now-familiar path in which it pays for basic science only to see product manufacturing, then development, and then design move offshore. The country has lost much of its semiconductor, computer, battery, electric vehicle, and wind power industries to Japan, Taiwan, and South Korea, and risks losing the remaining pieces to China. The same pattern is appearing in the life sciences. China is moving up the value chain from producing active pharmaceutical ingredients to making generic, biosimilar, and oncology drugs, and is now pursuing the cutting edge of cell and gene therapies.
New models of push funding. The new life sciences industrial policy should include a renewed commitment to funding by the National Institutes of Health. The life sciences are more dependent on scientific insights than any other sector, yet the country has allowed NIH funding to erode in inflation-adjusted terms over the past two decades. The tax framework should also be redesigned to catch up with tax policies in rival nations. But most important will be the expansion of public grants from research to product development.
Venture capital and other private investors lack the deep capital pockets and risk tolerance to fund the scaling up of startups, especially those outside the software sector. As demonstrated by the successful industrial policies of nations in Asia, only the public sector has the budget, and potentially the vision, to do this.
Operation Warp Speed achieved its historic success in Covid-19 vaccine innovation by providing public grants for product development, expanding manufacturing capacity, and developing distribution systems. ARPA-H seeks to follow the model of its DARPA progenitor in the defense sector, offering grants for technology projects with high potential for breakthroughs in diagnostic and therapeutic modalities.
The expanded use of push grants by OWS and ARPA-H show that the U.S. can develop successful policies that favor domestic over foreign firms. Other nations have supported their startups, midsized scale-ups, and large corporations with grants for technology development, credit guarantees, low-interest loans for manufacturing expansion, and public equity investments that supplement those by private equity. The U.S. should learn from the world leaders in innovation policy, including Israel and China.
New models of pull rewards. The traditional reward for successful innovation in the life sciences has been the ability to charge high prices in the U.S. market. Drug firms have proved themselves willing to accept low prices in foreign markets once assured of high prices and profits in the U.S. Average drug prices in the U.S. are much higher than those of other wealthy nations. The U.S. accounts for 4% of the world’s population but 46% of global industry revenues and 78% of global industry profits in the pharmaceutical sector. High prices are paid for drugs not only to firms based in the U.S. but also to those based in competitor nations, who repatriate their profits to build out their innovation ecosystems at home. This may have been acceptable when those competitors were based in Switzerland or Japan but becomes questionable when they are based in China, given its playbook for technology-based industries: partner with Western firms to gain intellectual property and expertise, transfer it to nascent Chinese firms, progressively exclude foreign firms to allow domestic firms to gain scale and scope in the domestic China market, then prepare a global export offensive.
Which alternative pull mechanisms can the U.S. adopt? The expanded push funding offered by OWS was accompanied by large vaccine advance purchase commitments to de-risk the demand side of the market. Vaccine manufacturers always face the risk that an epidemic will fade away, or that patient skepticism will invalidate estimates of market size. Advance purchase commitments remove that risk, at least if offered by credible governmental purchasers. More generally, sophisticated purchasers contract simultaneously for price and volume, obtaining reductions in the former in exchange for increases in the latter. China, for example, pays the world’s lowest prices for drugs in its very large domestic market. This somehow seems more sensible than the U.S. policy of paying the world’s highest prices.
The limits of industrial policy
Industrial policy has its critics. These include the corporations and consultants who have profited handsomely from the U.S.’s deindustrialization. I’ll ignore them here. More important are the analysts who identify concerns that deserve serious attention. First, will an industrial policy for the life sciences lead to public investments being diverted to serve private interests? And second, even if the government tries to do the right thing, can it — does the public sector have the administrative capacity to pursue risky, long-term, and technologically complex initiatives?
Let me address the first concern, that expanded public support for the life sciences will be diverted to enrich politically connected interest groups. Some diversion invariably accompanies public investments, and to fully foreclose it the U.S. would mean eliminating Medicare, the military, and most other public programs. There is no reason to assume the challenge of fighting special interests will be greater in the life sciences than elsewhere.
Does the U.S. have the capacity to design and implement industrial policy for technologically complex sectors? As demonstrated by successful initiatives for antibiotics in the World War II era, for orphan drugs in the 1980s, for the human genome project in this millennium, and for Covid-19 vaccines within months of the start of the pandemic, the country can accomplish what it really tries to accomplish. But there is work to be done. In particular, if the United States wants a world-leading technology sector, it will need to train a world-leading technology workforce.
Let’s do it
In seeking to predict the future, it helps to look to the past. The U.S. is emerging from the Covid-19 pandemic because it was able to develop novel incentive mechanisms, extend them from scientific research to product development, support domestic manufacturing and distribution, launch multiple effective vaccines, and save millions of lives. This was done in collaboration with the private sector but initiated, directed, and financed by the public sector. Not bad, America. Let’s do it again, and this time across all the life sciences.
James C. Robinson is the Leonard D. Schaeffer Professor of Health Economics at the University of California, Berkeley.