US biopharmaceutical finance and the sustainability of the biotech business model

William Lazonick, Oner Tulum
Work package: 
WP 5
Publication number: 
01 July 2009

Abstract: In the decade before the 2008 economic crisis, the US biotechnology industry was booming. In a 2006 book, Science Business: The Promise, the Reality, and the Future of Biotech, Gary Pisano implies that, given the 10-20 year time-frame for developing biotech products and the lack of profitability of the industry as a whole, the US biotech boom should not have happened. Yet the biotech industry has received substantial funding from venture capital firms as well as from established companies through R&D alliances. Why would money from venture capitalists and big pharma flow into an industry in which profits are so hard to come by? The purpose of this article is to work toward a solution of what might be called the “Pisano puzzle”, and in the process to provide a basis for analyzing the industrial and institutional conditions under which the growth of the US biopharmaceutical (BP) industry is sustainable. One part of the answer has been the willingness of stock-market investors to absorb the initial public offerings (IPOs) of a BP venture that has not yet generated a commercial product, and indeed may never do so. The other part of the answer is that the knowledge base that BP companies can tap to develop products comes much more from government investments and spending than from business finance. Indeed, we show that, through stock buybacks and dividends, established corporations in the BP industry have been distributing substantial sums of cash to shareholders that may be at the expense of R&D. We use the framework that we have developed for analyzing the sustainability of the US BP business model to pose a number of key areas for future research and policy, with an emphasis on the implications of the financialization of this business model for the generation of safe and affordable BP drugs as well as the need for a theory of innovative enterprise.

Keywords: US Biopharmaceutical Innovation; R&D Finance; Corporate Governance; Orphan Drug; Stock Repurchase; Shareholder Value

Originally posted in July 2009 this paper has been revised as of April 2011. In 2011 this paper has been accepted for publication in the Research Policy journal.

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