Does the U.S. biotech industry deserve a bailout?

Daniel J. Nevrivy, Ph.D. is the founder of Nevrivy Patent Law Group [1], a Washington, DC-based firm that assists biotechnology and pharmaceutical companies with their intellectual property needs. Dr. Nevrivy has experience counseling clients regarding the preparation and prosecution of patent applications, conducting freedom to operate, due diligence, patentability, invalidity and noninfringement investigations, and has also helped companies navigate the patent issues associated with the development of generic and proprietary pharmaceutical products. If you have questions or comments about today's piece, you can email Dr. Nevrivy at dnevrivy@nevrivylaw.com [2].

Does the U.S. biotech industry deserve a bailout?

The global financial crisis and economic downturn has created a world of extraordinary government intervention in markets and industry, unthinkable even a year ago.

Mohammed El-Erian, CEO of the bond investor PIMCO, recently advised investors that they should position their portfolios predominantly under the umbrella of government support, in securities in sectors that the government will not allow to collapse.

But what industries and/or companies deserve to be saved, and which should be allowed to fend for themselves? Ask a half dozen officials and you are bound to get half a dozen different answers. The lack of uniformity and ad-hoc nature of the government's response to date have no doubt contributed to the uncertainty and volatility in markets. This is why, as El-Erian aptly points out, only a thin line separates courage from stupidity, and investors should follow the government's lead, and not try to anticipate their actions.

Today there is no shortage of industries scrambling to get under the government's umbrella. Commercial and investment banks are under; Fannie Mae and Freddie Mac are under; domestic automakers are under; and AIG is under. It's a big umbrella, but there is not enough room for everyone. Many CEOs are no doubt wondering if there is room for them, as the outlook in their industry darkens.

U.S. biotech (and small pharmaceutical companies) have been hit particularly hard, and have so far been denied access to the government's umbrella. The available capital to fund biotech companies has all but dried up. Many companies are drastically cutting their budgets in order to preserve their capital to focus on their most promising projects, or on those that have the shortest path to market. A recent study by the Biotechnology Industry Organization (BIO) indicates that about one-third of publicly traded companies have less than 6 months of cash on hand. 

At a recent healthcare conference, the notion that the biotech industry receive government help was ridiculed by a well-known financial executive. Doing "something stupid" over there--a reference to the U.S. auto industry bailout - doesn't mean you should do something stupid over here, remarked the executive. The remark is reflective of the evolving attitudes of Congress and the U.S. taxpayer over industry bailouts. Support for U.S. automakers, who regularly get beat by the foreign competition--even on their home turf--may have poisoned the well for other, more worthy industries like biotech that are now struggling.

Economists generally disfavor government support and subsidies; however, we are living in a world where the government is an active player, as well as a referee, and is picking winners and losers. If we have to pick winners and losers, doesn't it make a certain amount of economic sense to favor industries in which we have an advantage? If that is the case, it is wrong to equate support for the U.S. auto and biotech industries as equally bad ideas.

In contrast to the U.S. auto industry, the U.S. biotech industry beats its foreign competitors at home and "on the road." What's more, our competitors are better off losing to us in this industry, and focusing their efforts and resources elsewhere. Stated in economic terms, the U.S. has a comparative advantage in biotechnology over other countries.

Economists attribute so called "gains from trade" to comparative advantages. What this means is that if two countries trade with each other in goods or services where they possess comparative advantages, both will benefit and living standards in both will increase. The U.S. comparative advantage in biotechnology comes from several factors--the industry attracts the best and brightest from around the globe, and possesses a nurturing and translational infrastructure that is unrivalled. The industry includes America's most innovative companies and creative minds. Indeed, it is the global leader in innovation and bringing breakthrough products to the marketplace. The U.S. makes pretty good cars, but we do not have a dominant global position in autos like we do in biotech.

What's more, support for the biotech industry would fund scientific research, which promotes long-term economic growth and improved living standards. These are the types of investments that we need to position the U.S. economy towards a more sustainable future. Viewed in this context, the biotech industry deserves our financial support.