Understanding the U.S. Biopharmaceutical Innovation Ecosystem

The Changing Role of Universities in the Biopharmaceutical Ecosystem

The changing role of universities in the biopharmaceutical ecosystem occurred at a time when public investment in medical research was increasing. As noted, between 1998 to 2003, the NIH budget increased from $13.6 billion to $27.1 billion. At the same time, the number of research grants awarded increased from an average of 7,000 grants each year from 1990–1999 to 9,500 grants each year from 2000–2010. In addition to the Bayh-Dole improvements, this increase in funding and the number of grants have been major drivers of the surge in pharmaceutical innovation since the 1990s.

Startups and Venture Capital

Startups are another vital component of biopharmaceutical innovation. Recent estimates find that startups and small pharmaceutical companies were responsible for the introduction of 64 percent of new molecular entities in 2018. In terms of research and development (R&D) expenditure, according to one report, small biopharmaceutical firms spent $637,735 per employee in 2021, compared with $82,515 per employee in large biopharmaceutical firms during the same year. Notably, among the 260 small biopharmaceutical companies listed as the largest global R&D investors, 193 were based in the United States. With access to outstanding universities as well as a skilled workforce and extensive capital—especially in the nation’s biotech hubs such as Boston and San Francisco—these firms work at the cutting edge of biopharmaceutical research, often taking a chance on novel products that are too risky for the larger, more established players in the market. This may include pursuing abandoned projects or investing in areas of pharmaceutical research known for higher-than-normal failure rates. Usually, such firms concentrate their energy on a single drug or a very small set of drugs before expanding their portfolio.

Startups in the biopharmaceutical industry rely on venture capital (VC) firms and other early-stage funders (e.g., angel investors or those through the Small Business Innovation Research or Small Business Technology Transfer programs) as critical sources of capital. VCs play a particularly important role in the early stages of drug development, providing the resources to demonstrate proof of concept (preclinical and early clinical trials) before a drug reaches phase III of clinical trials. Venture financing opportunities in the U.S. biopharmaceutical space outmatch every other country by a significant margin. One study of new venture investments in the industry between 2010–2015 found that the number of investments in the United States was 2.7 times Europe’s total. Similarly, according to McKinsey’s China Drug Innovation Index (2020), industry experts in the life sciences scored China’s access to venture capital in the biopharmaceutical sector a 6 out of 10, while the United States came in higher with a score of 8 out of 10.

Addressing Biopharmaceutical Competition from China

U.S. leadership in biopharmaceuticals, built on this complex system, is being challenged today by reforms and industrial policies undertaken by China.

Easing Regulations: Since 2015, China has introduced several sweeping reforms aimed at overhauling its pharmaceutical regulations to bring it in line with international standards. Beijing streamlined the Center for Drug Evaluation, reducing the time required to approve clinical trials while enabling faster approval of new drug applications. Alongside this change, Chinese regulators included innovative drugs in the National Drug Reimbursement List (NDRL)—the system that decides which drugs are covered by government’s Basic Medical Insurance schemes. As more than 95 percent of China relies on government-provided health insurance, this change makes Chinese biopharmaceutical companies producing innovative drugs eligible for lucrative government contracts.

Reforming Patents: Reforms in biopharmaceutical regulations have been accompanied by similar changes to China’s patent system and increased access to capital. In 2021, Beijing instituted stricter intellectual property laws, making it easier to enforce patents, including an increased ability for patent owners to recover enhanced damages. In terms of funding, private equity and venture capital are important resources enabling biopharmaceutical innovation. China is the second-largest destination in terms of VC investments, amounting to $50 billion in 2023. In addition, it adds to the liquidity of China’s capital markets by channeling government funds into its private equity firms.

Rapid Industrial Growth: Taken together, these expansive reforms and favorable market conditions have positioned China as a major source of research and product development in the biopharmaceutical industry. China’s share of the global biopharmaceutical innovation pipeline increased from 4.1 percent in 2015 to 13.9 percent in 2020. In addition, according to the 2024 Global Startup Innovation Report, Chinese cities such as Beijing and Shanghai dominated the world in the number of patents produced in the life sciences, outpacing U.S. biopharmaceutical clusters. In 2023, the Chinese biopharmaceutical industry crossed an important milestone when outbound pharmaceutical deals surpassed inbound deals. According to news site Caixin, these deals were collectively valued at $45 billion. These positive developments point to a larger trend where the Chinese biopharmaceutical industry is transitioning to developing innovative first-in-class drugs as opposed to building on breakthroughs from other countries. This transition has encouraged continued Western investment in China’s biopharmaceutical industry, despite U.S.-China geopolitical tensions and restrictive domestic laws preventing the use of medical data gathered in China outside of its borders.

Securing the Future of the U.S. Biopharmaceutical Sector

Underpinning the U.S. biopharmaceutical industry is a diverse and interconnected innovation system that is brought together with sustained funding for basic research at universities and national laboratories as well as through partnerships among innovative startups and large pharmaceutical companies. The system also encompasses public and private research centers, philanthropic foundations, a variety of small and medium enterprises, contract research organizations, contract manufacturing organizations, and pharmacies.

Source: csis.org