The recent rapid pace of discovery in life sciences raises a host of economic issues. Advances in biotechnology will likely affect the well-being of people worldwide for years to come. While we can only speculate on the specific form those advances will take, we can address many of the economic questions raised by developments in the life sciences.

What potential economic benefits does biotechnology offer? How is the industry’s emergence similar to the infancy of now-established industries? What legal and regulatory issues does the industry face? How will biotechnology research be financed and what are the funding hurdles? Where do biotechnology firms locate?

To address these and other important questions on the subject, the Federal Reserve Bank of Dallas hosted “Science & Cents: Exploring the Economics of Biotechnology” on April 19, 2002. The conference brought together distinguished experts who discussed economic and scientific issues related to biotechnology.

AN ECONOMIC PERSPECTIVE ON THE BIOTECH REVOLUTION

Professor Michael Darby of the University of California at Los Angeles opened the conference with an economic perspective on whether biotech advances will kindle a new industrial revolution. He emphasized that biotech research appears to be a major, metamorphic revolution that is creating new industries, rather than incremental progress that perfects existing products.

As with earlier metamorphic revolutions, a lack of data and history hampers our ability to gauge biotech’s importance. Another characteristic of such revolutions is that many new firms enter an emerging industry that has few or no incumbents, but just a fraction of these new firms succeed and thrive. The biotech sector is still in its formative stage, so the number of firms will probably expand before declining during the shakeout phase that often occurs in an industry’s development. Nevertheless, as Darby stressed, many of the economic benefits to society accrue during the consolidation and maturation stages of an industry’s life cycle.

Darby also noted that biotech research is hard to imitate and has a natural excludability in that innovators have a profound advantage over imitators in creating successful applications from the research. In particular, success in biotech is highly correlated with links to star scientists at universities, and these links are empirically the most important factors affecting the probability of success. For this reason, Darby stressed that drawing top scientific talent and expanding university research are critical to increasing biotech activity in areas like Texas.

Columbia University Professor Frank Lichtenberg reviewed some of the limited evidence on biotech’s promise from studies of the economic benefits of drugs, the most established biotech-related industry. These benefits include lower overall medical costs, higher productivity, and increased longevity. Lichtenberg said that combined, these savings imply that $34 spent on prescriptions boosts output by roughly $152.

Of course, these findings are based on past experience, and there is no guarantee that future advances will pay off as handsomely. Nevertheless, the track record for new pharmaceuticals is impressive and should be considered when evaluating policy proposals that affect incentives for innovation. This caution also applies to other biotech industries, especially in light of the key role highly risky research plays in biotech advances, a point stressed by other conference speakers. ...

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Proceedings of a Conference Sponsored by the Federal Reserve Bank of Dallas
April 19, 2002
Edited by John V. Duca and Mine K. Yücel
Federal Reserve Bank of Dallas

About the Contributors
C. Thomas Caskey is president and CEO of Cogene Biotech Ventures Ltd., a venture capital fund that supports early-stage biotechnology companies. He serves on several national research review panels, including the Intramural Human Genome Projects Special Review Committee at the National Institutes of Health, and on the editorial boards of the Journal of the American Medical Association and Science.

Michael R. Darby is Warren C. Cordner Professor of Money and Financial Markets at the University of California at Los Angeles. He is also director of UCLA’s John M. Olin Center for Public Policy, chairman of The Dumbarton Group, a research associate with the National Bureau of Economic Research, and adjunct scholar with the American Enterprise Institute.

John V. Duca is a vice president and senior economist at the Federal Reserve Bank of Dallas, where he heads and conducts research in financial-side macroeconomics.

Rebecca S. Eisenberg is Robert and Barbara Luciano Professor of Law at the University of Michigan. Eisenberg, who teaches patent law, trademark law, and torts, is on the advisory committee to the director of the National Institutes of Health and on the Panel on Science, Technology, and Law at the National Academies.

Malcolm Gillis is president and Ervin Kenneth Zingler Professor of Economics at Rice University. He is on the National Academy of Sciences Board on Sustainable Development and a board member of the National Council for Science and the Environment, Houston Advanced Research Center, and Houston Technology Center.

Henry G. Grabowski is professor of economics and director of the Program in Pharmaceuticals and Health Economics at Duke University. He has acted as an adviser and consultant to the National Academy of Sciences, Institute of Medicine, Federal Trade Commission, Office of Technology Assessment, and General Accounting Office.

Timothy F. Howe is founding partner of Collinson, Howe & Lennox, a venture capital firm that provides management and advisory services to four closed-end investment pools representing more than $100 million in committed capital. He is also adjunct professor in the School of Business at Columbia University.

Michael S. Lawlor is a professor in the economics department and a research associate in the Social Science Section of the Department of Public Health Sciences at Wake Forest University. He also directs the interdisciplinary minor in health policy and administration. Lawlor is a financial economist and economic historian who specializes in the economic behavior of health organizations and the social influences on market behavior.

Frank R. Lichtenberg is Courtney C. Brown Professor of Business at Columbia University. He is also a research associate at the National Bureau of Economic Research. His research has examined how the introduction of new technology arising from research and development affects the productivity of companies, industries, and nations.

Dennis K. Stone is vice president for technology development at the University of Texas Southwestern Medical Center. He is also a professor of internal medicine, physiology, and biochemistry and holder of the NCH Corporation Chair in Molecular Transport. Stone was a Searle Scholar and has received the Established Investigator Award of the American Heart Association.

Mine K. Yücel is a vice president and senior economist at the Federal Reserve Bank of Dallas, where she heads and conducts regional economic research.

Lynne G. Zucker is professor of sociology and policy studies at the University of California at Los Angeles. She is also director of the Organizational Research Program at the Institute for Social Science Research and director of UCLA’s Center for International Science, Technology, and Cultural Policy.

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