Abstract: U.S. Biopharmaceutical Finance and the Sustainability of the Biotech Boom

William Lazonick and Öner Tulum


Since the late 1990s the U.S. biotechnology industry has been booming. In <em>Science Business: The Promise, the Reality, and the Future of Biotech</em> (2006), Gary Pisano argues that, given the lack of profitability of the industry as a whole, the U.S. biotech boom should not be happening. Yet he also shows that biotech has received substantial funding from venture capital firms and the public stock markets, and recognizes that big pharma has invested in the industry through R&amp;D alliances. Why is smart business money supporting a profitless industry? One part of the answer is the willingness of stock market investors to absorb IPOs long before the companies that go public have generated commercial products. The other part of the answer is that government, not business, is the prime source of investments in the knowledge base that biotechnology companies can tap. We outline the extent of government support for the U.S. biopharmaceutical industry, emphasizing the roles of government research funding, subsidies, regulation, and spending in enabling an industry that depends on investments in a complex knowledge base to exist and grow. Our analysis provides insights into the limits to the sustainability of the U.S. biotech boom. In particular we ask why U.S. biopharmaceutical firms need high drug prices to fund R&amp;D when the most successful firms use so much of their profits to repurchase their own stock.