The Potentially Deleterious Impacts of the President’s FY 2015 Budget on U.S. Life Sciences Industries

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As ITIF notes in The President’s FY 2015 Budget Underinvests in U.S. Competitiveness and Innovation, while there are many things to like in the President’s Fiscal Year 2015 Budget, it still does not do enough to invest in innovation or to propose reforms to policies that hinder the competitiveness of key U.S. innovation industries. We see this particularly with regard to three issues impacting U.S. life sciences industries: flat funding for biomedical research at the National Institutes of Health (NIH), the budget’s call to provide only seven years of data exclusivity protection for novel biologic medicines, and the budget’s failure to repeal the self-destructive medical device tax that is contributing to the decimation of the U.S. medical device industry.

First, the FY 2015 budget proposes just $30.2 billion in funding for the National Institutes of Health, which actually represents a 3.6 percent decline over the Administration’s FY 2014 request. This would exacerbate a growing divide in critical investments in biomedical research between the United States and our global competitors. As a recent report from The New England Journal of Medicine, Asia’s Ascent—Global Trends in Biomedical R&D Expenditures found, from 2007 to 2012 countries’ average annual investment in biomedical R&D increased by 33 percent in China, 12 percent in South Korea, and 10 percent in Singapore, while it fell by 2 percent in the United States. In large part that’s because of the complementarity between public and private investment in R&D; the less we’re publicly investing in biomedical R&D, the less private sector investment and innovation in life sciences we’re going to get. And as ITIF writes in Leadership in Decline: Assessing U.S. International Competitiveness in Biomedical Research, stagnant investment in the life sciences won’t be sufficient if the United States wishes to retain global leadership in biomedical research, especially with China planning to invest twice as much in current dollars (our $150 billion vs. China’s $308 billion) and four times as much as a share of GDP over the next five years.

Also concerning for the future of biopharmaceutical innovation in the United States is the President’s proposal in his FY 2015 budget request to reduce data protection for biologic drugs from twelve years to seven. The President’s budget suggests that this change, along with prohibiting additional periods of exclusiv­ity for innovation biologics for improved product formulations, will save the federal government $4 billion over ten years. Of course, this claim fails to assess the significant damage that reducing protections for the fundamental intellectual property behind biologic innovations would inflict on developers of innovative biopharmaceuticals. As ITIF extensively documents in its report Ensuring the Trans-Pacific Partnership Becomes a Gold-Standard Trade Agreement (on pages 6-13), after extensive debate Congress in 2009 chose to enact a standard of twelve years of data exclusivity on novel biologic medicines as part of the Biologics Price Competition and Innovation Act (BPCIA). Congress recognized that setting twelve years of data protection struck an appropriate balance between enabling the developers of novel biopharmaceutical drugs (which are difficult and costly to research and manufacture) to be able to recoup their investments in biopharmaceutical innovation (which help fund future generations of investment in novel medicines) with the interests of increasing access to affordable drugs. In other words, Congress appropriately recognized that while access to medicines is important, so is the existence of medicines, and as the Washington Post quotes, “It’s the returns on one generation of medicine that finances the next generation of research.” Reversing that decision and moving to seven years of protection on novel biologic medicines would actually increase the cost to the U.S health system over the long term—because it would reduce incentives to invest billions to solve health challenges such as Alzheimer’s and cancer—while having the doubly negative effect of making the U.S. life sciences industry less globally competitive and successful, thus reducing the industry’s employment and total economic impact, and thus also the taxes it pays to the Treasury, while also possibly even inducing some life sciences R&D to move offshore. It’s a poor proposal that Congress should continue to ignore.

The United States has long led the world in medical device innovation and manufacturing, but as a recent study by PricewaterhouseCoopers, Medical Technology Innovation Scorecard: The Race for Global Leadership, found, “The innovation ecosystem for medical device technology, long centered in the United States, is moving offshore.” The study found that while the United States does still continue to lead on five key dimensions of medical technology innovation, the “U.S. lead is slipping on every dimension.” One of the leading culprits behind the weakening of the U.S. medical device innovation and manufacturing ecosystem—along with a regulatory system that on average takes approximately four years longer to approve new medical devices than it does in Europe—has been the 2.3 percent medical device excise tax imposed on the top-line of medical device companies’ revenues (not their profits after accounting for costs of doing business) by the Patient Protection and Affordable Care Act.

The medical device tax is damaging the U.S. medical device industry in a number of ways, including by forcing medical device firms to cut back on R&D, costing U.S. workers jobs in the sector, and making the sector an unattractive environment for risk capital that would support innovative new start-ups developing new devices and solutions. Regarding the first two points, a study called Impact of the Medical Device Tax commissioned by the Advanced Medical Technology Association found that almost one-third of medical device companies surveyed had cut research and development activity because of the tax while almost 10 percent had moved manufacturing abroad. The study further found that the medical device tax has already created a job loss of 33,000 in the medical device industry, with up to 132,000 more job losses expected. Third, the increased difficulty in earning returns on investment in the medical device industry has contributed to a near collapse of risk capital entering the industry. In fact, by one estimate, the United States is down to just ten venture capital companies actively investing in the medical device industry. That’s reflected in the noticeable decrease in deals and dollar value in the medical device industry. As the National Venture Capital Association’s January 2013 MoneyTree report found: “in 2012, venture capital investments in the Medical Device industry fell by 13 percent in dollars and 15 percent in deals.” Much of that decline occurred in first-time financings, where medical devices saw the lowest number of deals since 1995.

The United States cannot continue to simply assume that leading in key innovative industries such as life sciences or medical devices is its birthright. Our competitors are hungry to wrest leadership in these industries from us. Policymakers must be constantly attentive to implementing effective policies that support the competitiveness of these industries, with regard to issues from robustly funding basic scientific research to ensuring that regulatory policies are attuned to both protecting consumers while also supporting the competitiveness of innovative U.S. industries. The President’s FY 2015 budget proposal needs to achieve much more in both regards.

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About the author

Stephen Ezell is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF), with a focus on innovation policy, international information technology competitiveness, trade, and manufacturing and services issues. He is the co-author with Dr. Atkinson of "Innovation Economics: The Race for Global Advantage" (Yale, 2012). Mr. Ezell comes to ITIF from Peer Insight, an innovation research and consulting firm he co-founded in 2003 to study the practice of innovation in service industries. At Peer Insight, Mr. Ezell co-founded the Global Service Innovation Consortium, published multiple research papers on service innovation, and researched national service innovation policies being implemented by governments worldwide.