US pharma out-competes China now, but government control cedes the industry.

Over the last two decades, China has successfully challenged American industrial competitiveness in many industries, but as China has gone all in on its “Made in China 2025” strategy, the challenge will increasingly be to U.S. advanced and innovation-based industries. However, America still maintains competitive advantage over many nations, including China, in the biopharmaceutical industry. In fact, since 2001, while U.S. manufacturing jobs have fallen, the number of biopharmaceutical jobs has increased over 20 percent. In short, biopharma is a U.S. manufacturing success story.

However, “Made in China 2025,” as well as other plans, target life sciences for global leadership. China is taking a range of steps, including regulatory changes, funding of biomedical research and venture capital (VC), restructuring of the industry to eliminate many smaller producers, expanding medical tourism, and expediting listings on the Hong Kong exchange, to propel China to become a major global biopharma competitor—particularly by developing a world-class generics industry. However, while some of these policy actions are fair and legitimate, many are not because they are “innovation mercantilist” in nature, seeking to unfairly benefit Chinse firms at the expense of U.S. and other foreign firms. In other words, China is seeking to challenge the United States in one of the most high-value-added, innovation-intensive industries in the world—the kind of industry for which the United States has held a competitive advantage for decades.

To be sure, the Chinese market is large, growing rapidly, and represents significant market opportunities for producers in the United States, so U.S. policy should continue to push for market access. However, Chinese policies, if coupled with potential U.S. policy errors— particularly drug price controls that would slow down U.S. biopharma innovation—could mean that within the next decade or two, the U.S. biopharmaceutical industry could lose significant market share and jobs to China, hurting not only the U.S. economy and workers, but also global biopharmaceutical innovation.1 However, unlike when the United States lost emerging technology industries such as solar panels to China, today, no one should be able to claim ignorance of China’s playbook and end game. Should U.S. policymakers decide it is in the U.S. national interest to have a globally leading life-sciences industry, they will need to respond appropriately, particularly ensuring U.S. policies, including drug-pricing policies, support industry investment in research and development (R&D) and innovation.

This report first discusses the competitive position of the U.S. biopharmaceutical industry and why a competitive industry is in the U.S. national interest. It then examines the competitive position of China’s biopharma industry, followed by a review of Chinese mercantilist industrial policies in other industries. The report then reviews China’s strategy and policies for growing the biopharmaceutical industry. Finally, it discusses how the U.S. government should respond.

IMPORTANCE OF THE BIOPHARMACEUTICAL INDUSTRY TO THE U.S. ECONOMY

The biopharmaceutical sector includes research, discovery, testing, and manufacturing of medicines and therapeutics that cure disease and improve patient health. As life-sciences industry experts David Beier and George Baeder have written, there are at least four essential policy components nations need for a strong life-sciences innovation industry: “1) strong research and development infrastructure (including skilled researchers); 2) effective intellectual property protection; 3) integration in global standards of trade, IP [intellectual property], and drug regulation; and 4) functioning markets offering sufficient reimbursement.”2 The United States is one of the few nations with all four components, which is a major reason why it is highly competitive in life sciences, although with recent calls for drug price controls, it is at risk of seeing a weakening of the second and fourth factors.

These strengths are why employment in the biopharmaceutical industry (classified as a manufacturing industry by the U.S. government) grew 26 percent between 1998 and 2019, while total U.S. nonfarm employment increased 23 percent, and employment in manufacturing declined 27 percent.3 Moreover, wages in the industry exceeded the average private wage by 50 percent or more in 43 states, and by more than 75 percent in 24 states.4

The sector, along with medical devices, performed $111.8 billion of R&D in 2016 (the most recent year for which public data is available), of which $85.9 billion was self-funded.5 Of the total research performed, $79.4 billion was invested in the United States. Partly because 19 percent of its domestic employment was involved in research, the pharmaceutical industry accounted for 20.4 percent of all domestic R&D in the United States.6 Moreover, the United States increased its share of pharmaceutical R&D expenditures among developed countries between 1995 and 2010 from 43 percent to 57 percent.7 One reason is U.S. firms have kept most of their research activity at home, while European and Japanese firms have shifted some R&D to the United States.

This is why the United States remains the predominant powerhouse of drug discovery and production, ranking first in nearly all measures of innovation.8 The Biopharmaceutical Competitiveness and Investment Survey ranked the United States first among mature markets in 2017, followed by Switzerland, Germany, and the United Kingdom.9 The United States scored higher than the average of its top-three competitors in each of the survey’s five categories, in addition to recently being ranked as the top location for life-sciences jobs in the world.10 That same year, 11 of the top 25 pharmaceutical companies were headquartered in the United States, accounting for 48 percent of total sales from this group. Moreover, in 2015, the United States attracted 74 percent of all worldwide venture-capital investments in the biopharmaceutical industry.11

The United States leads the world in life-sciences innovation. In the 2000s, more new chemical entities were developed and approved by regulatory authorities in the United States than in the next five nations—Switzerland, Japan, the United Kingdom, Germany, and France—combined.12 Broadening the lens to the years 1997 to 2016, U.S.-headquartered enterprises accounted for 42 percent of new chemical and biological entities introduced and approved around the world, far outpacing contributions from European Union member countries, Japan, China, and other nations.13

But this has not always been the case. In the latter half of the 1970s, European-headquartered enterprises introduced more than twice as many new drugs to the world as did those in the United States (149 to 66).14 Throughout the 1980s, fewer than 10 percent of new active substances were introduced first in the United States, as figure 1 shows. And, as recently as 1990, the global research-based pharmaceutical industry invested 50 percent more in Europe than in the United States.15 As Shankar Singham of the Institute of Economic Affairs noted, “Europe was the unquestioned center of biopharmaceutical research and development for centuries, challenged only by Japan in the post-war period.”16

Yet, in recent decades, that picture has changed. Whereas less than 10 percent of new drugs were first introduced in the United States in the 1980s, by the 2010s, more than 60 percent of new drugs were first introduced in the United States.18 By 2006, pharmaceutical companies invested 40 percent more in the United States than in Europe. And the United States has been the world’s largest funder of biomedical R&D investment over the past two decades—a share some analysts have estimated has reached as high as 80 percent.19 This has contributed to an unprecedented era of life-sciences innovation, and the retention and creation of good U.S. jobs. Over the last decade, biopharmaceutical companies have invested over half a trillion dollars in R&D, while more than 350 new medicines—many firsts of their kind—have been approved by the Food and Drug Administration (FDA).20

America’s wresting of global life-sciences leadership has been no accident, but rather the result of a series of intentional policy decisions designed to make America the world’s preeminent location for life-sciences research, product commercialization, and production. For instance, the United States’ introduction of the world’s first R&D tax credit in 1981 played a catalytic role in spurring greater levels of private-sector R&D. In the life-sciences sector, this was complemented by the 1986 introduction of the orphan drug tax credit, which allows drug manufacturers to claim a tax credit on research costs for orphan drugs (i.e., drugs for rare diseases affecting 200,000 or fewer U.S. patients). The 1992 introduction of the bipartisan Prescription Drug User Fee Act, which authorized the FDA to collect user fees associated with applications from the biopharmaceutical industry for regulatory approval of new human-drug submissions, has played a pivotal role in reducing the time it takes the FDA to make safety and efficacy determinations for new drugs—from the over 30 months it took on average in the mid-1980s to less than 10 months today.21 America’s strong IP system—including allowing 12 years of data exclusivity for biologics and providing a period of marketing exclusivity for drugs independent of exclusive patent rights, as well as providing patent linkage and patent term extension through the HatchWaxman Act—has helped spur investment.

Robust funding for the National Institutes of Health (NIH), especially the doubling of funding in the late 1990s and early 2000s, has helped lay the groundwork for robust biopharma innovation.22 The United States also benefits greatly from having a drug-pricing system that permits companies to earn sufficient revenues from one generation of biomedical innovation to reinvest in the next. That matters greatly because, as the Organization for Economic Cooperation and Development (OECD) has written, “There exists a high degree of correlation between pharmaceutical sales revenues and R&D expenditures.”23 Limited government price controls also make investing in the United States more attractive than in many other nations.24

The lesson of the U.S. gain in global competitive advantage in the biopharmaceutical industry should be clear. It was not based on absolute advantage (e.g., some nations being good in agriculture because they have a lot of arable land). Rather, it was and is based on competitive advantage (e.g., factors that are malleable by policy, such as a strong drug-approval system and reasonable drug pricing). As such, have competitive advantage in industries such as biopharmaceutical is something that has to be earned and worked at to retain. As some European nations and nations such as Japan found to their distress, competitive advantage is not a birthright; it can be lost. That should be the message for the United States: while the United States is doing well in the industry now, it could easily lose that advantage, particularly to China, which has targeted the industry for global leadership. This means that the United States needs to keep in place the right policies and make them even stronger while at the same time continuing to press China to roll back its innovation mercantilist practices in this industry.