BioScience Biz

SBIR Reauthorization—Déjà vu All Over Again

I could probably just repost my earlier updates on the progress of the SBIR reauthorization because nothing really changes much. It looks like we are going to get another continuing resolution while the House tries an end-run around Nydia Vazquez’s (D-NY) stonewalling as I described in my earlier post here.

The Small Business Technology Council issued the following notice yesterday:

The Senate passed a continuing resolution on Friday that would extend the SBIR program another two months. That would make the new expiration date for the SBIR program September 30th, 2009. This CR also needs to pass the House of Representatives to be enacted, and we expect it to pass the House on Tuesday.

Currently, the staff from the House Small Business and Science Committees are in negotiations in conference with the staff from the Senate Small Business Committee to produce a compromise SBIR reauthorization bill that will incorporate elements from both the House and the Senate Reauthorization Bills. We have heard and have reason to believe that both sides are negotiating in good faith, and that no party is acting unreasonably or otherwise sabotaging the process. Because there is an agreement between the staffers in the conference, we won't know what's in the compromise bill until it is finished and released to the public.

The SBTC will be hosting a conference call on Thursday to discuss these developments. Contact Alec Orban if you'd like the call-in number and code

Stay tuned or follow the tortuous path of this legislation at www.SBIRreauthorization.com.

The SBIR Clock is Ticking

Members of the Senate Small Business and Entrepreneurship Committee and the House Small Business, and Science and Technology Committees are meeting, yet again, to see if this time they can resolve the impasse of two very different SBIR reauthorization bills, (Senate S.1233 and House H.R.2965).

You will recall that Rep. Nydia Velazquez (D-NY), chairwoman of the House Small Business Committee, holds the very anti-small business view that VC-owned technology companies should be able to participate fully in SBIR/STTR competition. Amazingly, she has for the last two years, prohibited any testimony on behalf of small businesses in her committee and also on the floor of the House. In contrast, the Senate’s bill preserves most of the SBIR program for small company by capping participation of VC’s, a compromise that last year was agreeable to both the VC and small business lobbies. But the Velazquez would not budge from her position.

Will this year be different?

When the full House considered its SBIR reauthorization bill, Velazquez got the Rules Committee to prohibit consideration of a Edward Markey (D-MA)-led amendment that would have made the bill similar to the Senate version. She did this because it was widely expected that the Markey amendment was favored by most members of the House and would have passed.

Several House members, led by Markey, who disagree with the obstructionist Velazquez and do not like her bullying, are trying an end run around her by sending a letter to Senator Mary Landrieu (D-LA), Chair of the Senate Small Business and Entrepreneurship Committee, expressing their support for the Senate’s SBIR reauthorization bill. This letter represents an attempt to let the Senate conference committee members know that most Representatives disagree with Velazquez’s bill.

The more members of the House who sign the letter, the greater chance that the conference committee will approve S.1233 as the final version. You can help by emailing the Markey letter to your Representative and ask that s/he sign on this week. Time is of the essence since an acceptable compromise must be made by next Tuesday, July 28. While you are at it, ask your Rep to consider how they are going to explain to small businesses in their state why they voted against small businesses so that rich VC’s could have access to more Federal funds.

SBIR updates and links for contacting your Representatives and Senators can be found on www.SBIRreauthorization.com.

© 2009 Steven S. Clark, PhD, some rights reserved.  Articles contained herein, are meant to be distributed freely to interested parties. However, any use, including excerpts from any article, must credit Steven S. Clark and provide a link to the original article published in BioScience Biz.

Disclaimer: The authors used their best efforts in collecting and preparing the information published herein. However, neither Steven S. Clark, nor other authors, assume, and hereby disclaim, any and all liability for any loss or damage caused by errors or omissions, whether such errors or omissions resulted from negligence, accident, or other causes.

SBIR re-authorization update

The House just passed a controversial SBIR reauthorization bill with the usual shenanigans by Rep. Nydia Velazquez (D-NY). As in last year’s reauthorization debacle, Ms Velazquez completely stifled any testimony contrary to her preferences. The major point of contention is whether to allow companies that are majority-owned by VCs to be eligible for SBIR funding—currently they are not. Even though Velazquez chairs the Small Business Committee, through which the bill passed, the small business lobby was not allowed any input on the bill. Velazquez wants VC owned companies to share in the SBIR pool, which, as opponents point out will limit money available for not-as-well funded companies. The argument against doing this is that the earliest stage companies, which are not likely to attract VC funding will suffer the most from this diversion of funds.

Perhaps they ought to change the name of Velazquez’s committee to the VC Business Committee. She certainly is not representing small businesses here.

The devilish details

The following details of the House’s actions are modified from a posting by Rick Shindell, aka the “SBIR Insider”.

The SBIR Program was created by the Small Business Innovation Development Act of 1982. Every few years, the SBIR program must be “reauthorized” by Congress or it will cease to exist. Reauthorization was enacted in 1986, 1992, and 2000 and was slated again for September 2008; but, instead, the program was temporarily extended by a continuing resolution (CR) to March 20, 2009 and again to July 31, 2009.

Although H.R. 2965, "Enhancing Small Business Research and Innovation Act of 2009," passed on the House floor, any opportunity for discussion or vote on compromise amendments that Ms Velazquez did not favor were summarily dispatched by the House Committee on Rules. The rules committee, led by chairwoman Louise Slaughter (D-NY), under a "closed rule" allowed only 5 of 34 amendments to be ruled "in order" and brought to the floor. The amendments mostly spelled out small things like SBIR award preferences for minority and woman owned businesses and for businesses in economically depressed areas.

The big surprise was the committee's "out of order" ruling of the compromise amendment from Ed Markey (D-MA), Niki Tsongas (D-MA), Peter Welch (D-VT) and Paul Hodes (D-NH). The amendment would put a ceiling on VC awards (similar to what the Senate favors), and increase award sizes to $150K for Phase I, and $1M for Phase II. Reportedly, this amendment has strong bipartisan support in the House and would have passed if a vote was allowed. This would have been a major embarrassment to Velazquez, and perhaps the House leadership.

What next?

The bill now goes to the Senate which has passed its own version that was sponsored by Russ Feingold (D-WI). As mentioned, the Senate version contains several attractive features that Velazquez has not supported in the past. These include a significant increase in the award size and in the total SBIR set-aside, as well as the compromise cap on the number of awards to VC owned companies. Ultimately there will be a conference committee of the House and Senate that will either hammer out a compromise bill, or, once again, fail to reach an agreement, whereby the decision for another Continuing Resolution (CR) either will be considered, or the SBIR program will lapse (STTR is good through September 30, 2009). Something needs to be done by the end of this month.

You are encouraged to contact your congressional representatives to urge them to take action to ensure that the SBIR program does not die from neglect (or abuse). Here is an old template of a suggested letter you can update and send to your Representative and Senators. If you are worried about the SBIR grant application you plan to submit soon, you might consider sending a letter to every member of the House Small Business Committee.

Tell them what an important “stimulus” the SBIR program is for small business development and job creation. That ought to get their attention.

Slicing and Dicing SBIR Award Data

If you like numbers and acronyms, you will like this article. SSTI (State Science and Technology Institute), a national nonprofit network of practitioners and policymakers dedicated to improving the economy through science and technology, recently published SBIR Phase I proposal and award statistics by state for 2008. They also have similar data going back a few years. Being an Excel addict, I copied and pasted the data into a spreadsheet and was able to parse interesting tidbits from the larger meal of information. For instance, in 2008 the overall success rate for all Phase I SBIRs was just under 17%, somewhat better than research grant success rates at most NIH institutes, with which I am painfully familiar. The percentage of SBIR applications that were awarded ranged from a low of 9.4% at the DoT to a high of 24.1% at the NIH (more than twice the rate of RO1 investigator-initiated research grants in 2008).  Other agencies awarded grants at the following rates: DHS (9.6%), DoD (14.9%), NSF (15.4%), USDA (17.4%), NASA (18.4%), and DoE (18.7%). The raw data can be found on the SSTI web site.

Also interesting is the total number of SBIR grants awarded by the different agencies. In 2008 a grand total of 3555 Phase I awards were made by all participating federal agencies.  By far, the DoD made the most awards at 1825, more than half the total number of awards.  Trailing way behind were NIH (739 awards), DoE (280), NASA (276), NSF (224), USDA (77), DHS (28) and EPA (25).  Other agencies, such as NOAA, are not included here because they awarded so few SBIR grants they had minimal impact on these analyses.

State-by-state data

As I played with the spreadsheet and filtered the data in different ways, I learned a few other things. The top ten states with the most awards are the following in descending order and with the total number of awards in parentheses: California (688), Massachusetts (476), Virginia (224), New York (195), Colorado (182), Maryland (156), Texas (140), Pennsylvania (129), Ohio (120) and Florida (102). Wisconsin came in at a mediocre number 24 with a total of only 37 awards in 2008.

"...SBIR success pretty much follows Big 10 football and basketball success..."

If these data are taken as a measure of the success by which each state translates new technology into business, then Wisconsin (#24) is well behind Michigan (#12), Alabama (#13) and even New Mexico (#14). Illinois comes in at #18 and Minnesota at #22.  Compared to other Big 10 states, Wisconsin is just ahead of Indiana #25.  Iowa trails at #35. If you think about it, SBIR success pretty much follows Big 10 football and basketball success with Michigan and Ohio on top, while Wisconsin is in the second tier with Minnesota, Illinois and Indiana.  A cynical observer might conclude that sports success predicts technology business success. But, that seems to only work in the Big 10, since Massachusetts, with no sports powerhouses, is in the top two of SBIR grant winners from almost all agencies (more on that below).

At face value it may be surprising that states like New Mexico and Alabama are more successful than Wisconsin at winning SBIR grants (ok, so New Mexico also kills my sport’s success analogy).  And these states are consistently more successful than Wisconsin at winning SBIR grants.  From 2005-2008 Alabama won 103, 79, 72 and 73 grants—a declining trend. During the same period, New Mexico SBIR awards were more constant with an uptick in 2008, numbering 57, 60, 56 and 67. In contrast, Wisconsin enjoyed an upward trend from 2005-2007 with a downtick in 2008, with 36, 42, 49 and 37 SBIR awards, respectively. But, the reality that Alabama and New Mexico are more successful than Wisconsin in this regard needs to be tempered by the fact that different states focus on different technologies and may be more competitive in different areas. For instance, in Wisconsin, the number of SBIR awards from each federal agency in 2008, with the success rate in parentheses, is as follows: 1 award from NSF (6.7% success), 1 from USDA—surprising for an ag state,  (8.3%), 10 from DoD (14.7%), 2 from NASA (11.8%), 20 from NIH (29%), 2 from DOE (13.3%). Wisconsin is trending up in NIH supported SBIRs with 13, 19, 22, and 20 grants over the years 2005-2008.  Over the same period, DoD grants were fairly consistent in Wisconsin, numbering 8, 10, 13 and 10. Clearly, Wisconsin is spinning out more life science related tech business than technology business from other industries, with defense-related technology business springing up at about half the rate of biotech business.

Compare Wisconsin’s strong emphasis on life sciences to what is happening in Alabama and New Mexico. Alabama’s 2008 SBIR portfolio is as follows: 2 grants from USDA (40% success rate), 56 from DoD (16.7% success), 4 from NASA (10%), 7 from NIH (18.4%), 4 from DOE (30.8%).  Clearly Alabama focuses on defense and lags behind Wisconsin in biotechnology transfer.

In 2008 New Mexico also focused on defense as well as space and energy related technology transfer. This state won the following SBIR grants: 5 awards from NSF (19.2% success rate), 2 from USDA (40%), 1 from DOT (50%), 24 from DoD (14%), 13 from NASA (32.5%), 5 from NIH (14.7%), 14 from DoE (41.2%).  The state has consistently done well with energy grants since 2005, but the NASA grants awarded in 2008 represents a 2-3 fold jump from previous years.

One take home message from these analyses is that if you are an engineer or chemist, go to New Mexico, if you are a biologist, Wisconsin is a better place to find a job.

Room to improve in Wisconsin

Clearly, in 2008, biotech was the strength of WI SBIR success—with more NIH SBIR awards than awards from all other agencies combined. Wisconsin was 11th in the country in the number of NIH SBIR grants, behind the usual suspects. The top 10 in order were, CA, MA, MD, NY, TX, NC, PA, CO. MI and WA. But after CA (140 biotech SBIR grants) and MA (with 103), which together won 33% of all the NIH SBIR grants, there is a sharp drop in the number of SBIRs awarded by NIH. For, instance, coming in at number three, MD only won 43 SBIR grants from NIH. So, Wisconsin, while ranking near the top 80th percentile for NIH awards with 20 grants, is further behind the leaders than its ranking suggests. 

"...investment in quality research universities pays large dividends
in developing technology businesses..."

Interestingly, CA and MA are also in the top two for NSF, DoD, NASA, and DoE SBIR awards. It is no accident that many of the elite research universities in the US are found in these states and it is these academic elites that feed the new technology pipeline that leads to new business development. Together, these data point to the reality that investment in quality research universities pays large dividends in developing technology businesses—a lesson that Wisconsin cannot afford to forget, but sometimes tries to forget. This state has one elite research university and it pays huge dividends.  Without the UW-Madison, which spins off the lion’s share of biotech and health related (and other) technologies, we would be much farther down the line spinning out new technology businesses.  One question is how can the state get the UW-Milwaukee, Medical College of Wisconsin, Marshfield Clinic and other institutions to move up in R&D status to help make Wisconsin more competitive in generating life science technology businesses? Another question is what would it take to make Wisconsin more successful in translating engineering, energy, defense and agricultural technology into state businesses.

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© 2009 Steven S. Clark, PhD, some rights reserved.  Articles contained herein, are meant to be distributed freely to interested parties. However, any use, including excerpts from any article, must credit Steven S. Clark and provide a link to the original article published in BioScience Biz.

Disclaimer: The authors used their best efforts in collecting and preparing the information published herein. However, neither Steven S. Clark, nor other authors, assume, and hereby disclaim, any and all liability for any loss or damage caused by errors or omissions, whether such errors or omissions resulted from negligence, accident, or other causes.

SBIR (non)Authorization Redux?

The latest word from Washington is that getting the SBIR reauthorization passed before it expires on March 20 is about as unlikely as the Cubs winning the World Series without a shortstop.  In order to keep the program alive until Congress can get around to the reauthorization, a continuing resolution (CR) is needed to temporarily extend its life. In fact, the SBIR program currently lives on via CR life-support since the last Congress did not complete the reauthorization bill.

The SBIR Program, created by the Small Business Innovation Development Act of 1982, periodically comes up for reauthorization every few years.  It was reauthorized in 1986, 1992, and 2000 and was slated again for September 2008; but, instead, congress failed to act and the program was temporarily extended by CR to March 20, 2009.

"You are encouraged to contact your congressional representatives..."

In 2008, Nancy Pelosi’s (D-CA) House made a heavy-handed attempt at the reauthorization, and under pressure from the biotech lobby, a bill (H.R.5819) was strong-armed through the House Small Business Committee. A major point of contention was whether to allow companies that are majority-owned by VCs to be eligible for SBIR funding—currently they are not. In other words, the debate centered on whether to emphasize the “S” vs the “B” in the reauthorization act.  To the consternation of the small business community, which was not allowed any input by the Committee, the bill passed and SBIR eligibility was extended to companies mostly owned by VCs.

Over on Harry Reid’s (D-NV) side of the Capitol, and under the leadership of Senators John Kerry (D-MA) and Olympia Snowe (R-ME), the Senate Small Business and Entrepreneurship Committee recommended a compromise bill (S.3362) that was supported by both the biotech and the small business lobbies.  Despite this broad and bipartisan support, Reid never scheduled a vote on it and the 110th Congress adjourned without completing the SBIR reauthorization.

Both bills are now moribund and the SBIR program is on its last legs unless another CR is passed.  The 111th Congress will have to start from the beginning on a new reauthorization bill, but efforts to reconsider the reauthorization bill have not yet begun.  Even if Congress began work on the bill today, it is unlikely that it would make it to Obama’s desk before the end of this year, several months after the program is scheduled to expire. Hence, another CR is urgently needed in order to avoid interruption in the SBIR program.

You are encouraged to contact your congressional representatives to urge them to take action to ensure that the SBIR program does not die from neglect.  Here is a template of a letter you can send to your Representative and Senators. And If you are worried about that SBIR grant application you plan to soon submit, you might consider sending a letter to those who held up the reauthorization last year, including every member of the House Small Business Committee as well as to Senate Majority Leader Reid.

Tell them what an important “stimulus” the SBIR program is for business development, job creation and the economy.  That ought to get their attention.

Wisconsin task force formed to facilitate tech transfer

This article was originally published on genomeweb.com by Ben Butkus.

On the heels of a Wisconsin Technology Council report released last month examining academic R&D deficiencies in the state, the University of Wisconsin system is organizing a task force to examine how UW system campuses can better parlay their research into industrial partnerships and state-based startup companies.

The task force, called Research to Jobs, will comprise members of the Badger State's tech-transfer, venture-capital, and business communities, and will begin working in early March to develop specific recommendations for Wisconsin universities, research institutions, companies, and government organizations that it expects to release by early summer, task force leader Carl Gulbrandsen said this week.

UW system President Kevin Reilly is convening the task force one month after the WTC, an independent, non-profit organization formed in 2001 to advise the state's governor and legislature on science and technology matters, released its report, entitled "The Economic Value of Academic Research and Development in Wisconsin."

Gulbrandsen, who also heads the Research to Jobs initiative, told BTW this week that the overarching goal of the task force is to unlock the potential in the state's universities to use R&D prowess as a driver of economic development.

"We file a lot of patent applications, but we don’t start the number of companies

that our peer institutions in San Francisco or Boston do."

"We get some criticism because we spend a lot of money on research, particularly at UW-Madison," said Gulbrandsen, who is also managing director of the Wisconsin Alumni Research Foundation, the non-profit patenting and licensing arm of UW-Madison. "We file a lot of patent applications, but we don’t start the number of companies that our peer institutions in San Francisco or Boston do.

"I do think we have some environmental conditions that are quite different from those regions," he added. "We don't have the venture capital money that they have, and we don’t have the number of entrepreneurs that they have. But I still think that we could do a better job."

The report highlights the fact that academic science and engineering research activities in Wisconsin totaled about $1.067 billion and were responsible for creating more than 38,000 jobs in 2007, according to statistics from the National Science Foundation, US Department of Commerce Bureau of Economic Analysis, and other sources.

These figures, which do not include some $42 million in research expenditures by the Marshfield Clinic and the Blood Center of Wisconsin’s Blood Research Institute, place Wisconsin 13th nationally in science and engineering research activity.

However, the report also notes that state support for higher education has been weakening over the past 25 years. In the past decade alone, state appropriations as a percentage of the total UW system annual budget have declined from 33.75 percent in 1997-98, when an $880 million state appropriation was applied to a $2.6 billion UW system budget, to 24.21 percent in 2006-07, when a $1.04 billion state allocation covered less than one-fourth of the $4.3 billion UW system budget, according to the report.

In addition, the $3.8 billion that Wisconsin allocated for all R&D expenditures placed it 23rd among all US states. "If not for Wisconsin’s relatively high ranking in academic R&D, the state would slip out of the top half of all US states in total research and development spending," the report stated.

Also, the report noted that approximately one-fifth of the total $1.04 billion in academic science and engineering research activity was centralized at UW-Madison, the UW system's largest campus, highlighting the need to better tap into R&D activity at the other 12 US campuses. It also noted that despite pocketing the lion’s share of the UW system’s cash for these disciplines, UW-Madison has not taken full advantage of its R&D activity for economic development.

Wisconsin's universities "tend to be underutilized assets from the standpoint of research and development and technology transfer," the report stated. "Without a broader foundation in academic R&D, Wisconsin will find it difficult, if not impossible, to leverage these assets in pursuit of a robust, high-tech and knowledge-based economy for the 21st century."

The UW system has made a concerted effort to spread the wealth from UW-Madison to other campuses in the system. One example is the WiSys Technology Foundation, which WARF established in 2000 to manage intellectual property for all other campuses in the UW system.

This had included four-year campuses at Eau Claire, Green Bay, La Crosse, Milwaukee, Oshkosh, Parkside, Platteville, River Falls, Stevens Point, Stout, Superior, and Whitewater; and a number of two-year campuses. However, in July 2007 UW-Milwaukee said it would manage its own IP in an attempt to contribute more to local economic development (see BTW, 7/30/2007).

Nevertheless, Gulbrandsen said that through WiSys "we've learned that there is a lot of talent at all of the campuses of our university system. We need to work better at linking this talent to the businesses we have in the state. That’s really the focus of this: How can we use the technology that’s being developed in our universities to help improve Wisconsin businesses and start Wisconsin companies?"

As with university tech transfer in general, an overwhelming percentage of the activity is in the life sciences arena, particularly at UW-Madison, which is an internationally recognized leader in areas such as stem cell biology, and which holds multiple key patents that form the basis of commercial research programs in that area.

Gulbrandsen said that "there is good life science research going on at all of the UW campuses. We also have institutions like the Marshfield Clinic, [the UW]-LaCrosse/Gunderson [Lutheran Medical Foundation], and the Medical College of Wisconsin, all of which can be tapped to help with this effort."

Despite the biomedical R&D prowess at UW institutions, Gulbrandsen stressed that it was important not to ignore several other important areas of research within the UW system, such as physical science, nanotechnology, and materials science.

"The newspapers like to write about the life sciences, but we’ve got great physical sciences technologies coming out of Madison, too," he said. "These physical sciences and materials sciences technologies sometimes have a much shorter product development life cycle and time-to-market than the life sciences. We shouldn’t lose sight of those when we’re thinking about economic development."

Gulbrandsen said that Research to Jobs will likely begin its activities in early March, and will make a formal announcement about the various members of the task force sometime before that. However, he did specifically mention the names of a few members who have committed to the task force, including Brian Thompson, president of the UW-Milwaukee Research Foundation; Mark Bugher, director of the University Research Park at UW-Madison; and Tom Still, president of the WTC.

The task force hopes to produce specific recommendations for state economic development players sometime in the early summer. "We're setting aside 10 weeks to do this," he said.

Besides providing proposals to UW system schools and regional corporations, the task force is considering recommendations "with respect to legislation that could help encourage collaborations between companies in Wisconsin and our universities in the area of product development," Gulbrandsen said.

Pharma makes a pragmatic left turn in this election, by Steven S. Clark

Reversing trends where drug makers routinely throw their financial support behind the Republicans, big pharma decisively backed the Democrats this election year. Pharma gave the Obama campaign more than three times the money they gave to Republican, John McCain. Compare that to four years ago when drug makers gave Bush twice as much as Kerry. Indeed, over the last decade, the drug industry has spent millions to keep Republicans in the White House as well as in Congress, according to a report in Politico.

Even more revealing about the industry’s left turn is how poorly McCain fared during the primaries. As of the end of September, drugmakers gave $758,724 to Obama, $632,219 to Clinton, and a paltry $284,900 to McCain—just 20% of the Democrats’ total.

This trend was repeated in the Congressional races where, for the first time in six election cycles, House and Senate Democrats reveled in receiving the lion’s share of pharma campaign donations. Clearly, the industry preferred equids over pachyderms this election year.

Does all this reflect a love affair with Obama and the Dems, disappointment with McCain and the Republicans or both?

Factoring into all of this is McCain’s feud with the pharmaceutical industry, which he famously tagged “the big bad guys” and he likes to boast about “taking on the drug industry,” which certainly didn’t sit well with pharma executives.

But are hurt feelings enough to reverse historical trends? The evidence suggests that the issue is deeper and more complicated and is, in fact, tied to a significant shift that is underway in the health care market in this country.

Both parties favored similar drug policies

When looking at the two presidential candidates’ policies, it is hard to understand pharma’s Obama obsession. For instance, headlines during the campaign declared the following: "Obama plan could whack Big Pharma", "Big Pharma could be big loser under Obama health plan", "...neither candidate loves pharma" and this, "Barak Obama and John McCain go to war with Big Pharma."

According to the Boston Consulting Group, Obama favors letting a federal agency set discounted drug prices, which will cut the drug industry’s revenues by a whopping $10-30 billion a year. And the Wall Street Journal’s Health Blog speculates that this would be further exacerbated if private insurers, following the government’s lead—and why shouldn’t they—also insist on paying less for prescription drugs. To make matters even worse, the Dems’ favorite son also favors importation of cheap drugs from abroad.  These are issues that are hotly opposed by the drug industry.

"These are issues that are hotly opposed by the drug industry."

Meanwhile, according to the BCG study, John McCain was “officially silent” on the issue of negotiating drug prices. But, a few years back, he voted against President Bush’s Medicare drug benefit plan partly because it didn’t allow the government to negotiate drug prices.  Furthermore, just like Obama, McCain favored the re-importation of prescription drugs to save money.  Both candidates also endorsed increased use of generic drugs and favor making the exclusivity period of biological drugs as short as possible, all of which pharma steadfastly opposes.

Clearly pharma didn’t feel the love from either candidate, so what explains their swoon for Obama? Did they just close their eyes while kissing up to the presumptive winner?

What are the stakes?

In order to answer this question, we first need to understand basic economics of health care in the US. This country has long favored a free market model for health care, believing that this leads to increased consumer choice and promotes the production of new medicines. A big new drug is reckoned to cost $800 million to develop and the drug giants argue that they need the higher profits from the US free-market in order to drive the R&D required to develop these expensive new drugs and therefore protect their product pipeline and future revenue.

It is said that scientific research follows the money and this is no more evident than in Europe which is not free-market driven and regulates drug prices. Europe also is simultaneously steadily losing its pharmaceutical edge to US labs, which generated two thirds of the new drugs launched in the world over the past five years.  So, while the US produces most new drugs, its free market also almost entirely subsidizes the cost of their development from high consumer drug prices. It follows that any reduction in US drug profits will diminish the ability of pharma companies to support future R&D for new drug development. 

Thus, as Motley Fool analyst, Charly Travers, often points out, any US government policy that caps drug costs will reduce both the number of drugs that can be developed as well as the profits for already approved drugs—a double whammy for the pharmaceutical industry.

Unfortunately, this argument is tempered by the troublesome fact that drug prices in the US are rising at a rate of 7% a year, which is difficult to continually absorb. Hence, the political pressure for price controls on drugs in the US has increased to the tipping point where, for the first time, presidential candidates from both parties favored price controls on drugs—a move away from the free market.

A health care monopsony favors the Dems

It seems that big pharma is looking into a gathering perfect storm—blockbuster drugs are coming off patent protection, drying up current profits; a thin product pipeline imperils future profits and the unprecedented specter of government regulated drug prices, which further threatens future profits.  However, there is a glimmer of hope that explains their leftward lean in this election cycle and, ironically, we can thank President Bush’s un-conservative profligacy for this political realignment.

“…we can thank President Bush’s un-conservative profligacy for
this political realignment.”

Historically, insurers have picked up most drug costs, but during the Bush administration, the heaviest burden has shifted to the federal government, which currently picks up about half the tab. Thus, there is a growing shift in the US health care market away from private insurers and toward federal health care programs—a shift that was accelerated by Bush’s expensive Medicare drug plan for senior citizens.  It truly is ironic that this erosion of the health care free market is driven by a Republican President.

The word economists use for a market in which goods or services are offered by several sellers, but purchased by only one buyer, who can dictate prices, is “monopsony.”  It is a word that too often comes with the antecedent modifier, “government.”  But, despite the tremendous purchasing power of the growing government monopsony, US taxpayers right now get no pricing leverage like they do in most European countries and Canada, where the governments negotiate and regulate drug prices. Clearly, this is going to change with a Democratic monopoly in Washington.  This government monopsony will invariably lead to regulated drug prices in the US, moving us away from the current free market, and as explained above, this worries the pharmaceutical industry enormously.

It light of these shifting market forces, it makes perfect sense that drugmakers are beginning to view the US government as their primary future market and, for this reason, they understandably want to make sure that government-run health programs are robust and bountiful. They know that Dems are more likely than Republicans to deliver on this magnanimity, and this explains why pharma cozyied up to Obama and Congressional Democrats, both of which favor more government-run healthcare.

No one ever accused drugmakers of not being pragmatic and it is in the sprit of such pragmatism, coupled with an eye to the future that accounts for pharma making nice to Dems.  But, with liberal Democrats ruling Washington and Republicans likely relegated to passive observer status after the election, pharma’s leftward lean this year could quickly return to the right if the liberal monopsonists take too big a bite out of US drug profits.