How the US is Exporting Its Innovation in Life Sciences

The problem described below is specific to life sciences, but it holds true for most scientific disciplines in the US.

For over four years now, I have spent the vast majority of my professional time as a life sciences venture capitalist, finding and helping nurture the most promising medical therapeutics, diagnostics and devices. There has never been a better time to invest in life sciences in the US, as there are more great technologies and low-valued deals than there is money to invest in them. However, money is not flowing into these deals, and in fact, more venture money than ever is flowing into companies outside the US. Why is this?

Four primary reasons:

1. Rate of Return

For the last decade, US venture investments in life sciences have not performed as well as many other venture classes, showing roughly a break even rate of return. Just as in the Internet, in the 90's, many life science companies that would not qualify for the public market today were able to go public, and many of these companies went bankrupt. This scared away a lot of venture dollars for a period of time. This is a shame, because the reality is we are in the midst of the renaissance of life sciences, and there has never been a better time to invest.

2. Capital Gains Tax in the US

Profits made from venture capital are taxed at the same capital gains tax rates as all other stock investments held over one year, despite the fact that the money is invested in a riskier asset class and must be tied up for seven to ten years. In other words, public stock investors pays the same capital gains tax rate as someone who has tied up his/her money for a far longer period of time. For more info on the US capital gains tax see:

http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States

President Obama has supported increasing the capital gains tax to 20% after 2010. In my view, the most productive way to spurn investments in the most innovative developments is to eliminate the capital gains tax altogether. This would boost the stock market, bring back IPO's, create millions of jobs in the US, and certainly in life sciences, it would help reduce the cost of healthcare by helping bring better, more affordable therapeutics, diagnostics and devices to the market.

One other point about venture capital (VC). VC is .2% of the GDP, yet venture backed companies account for 17% of the revenues generated in this country. As a nation, we should be doing everything possible to support VC, because it is the primary engine of innovation, and innovation is just about all we have left that we can do better than the rest of the world, though that gap is narrowing as we increasingly export it.

3. Cheaper Foreign Labor

Many US venture funds have raised India, China and Eastern European funds to take advantage of less expensive professional labor pools. This makes sense for a growing set of asset classes, and it is beginning to happen more and more in life sciences. Why? Both India and China are no longer simply less expensive countries in which to make products, but they are also becoming less expensive countries to conduct fundamental R&D for leading edge sciences. Each country graduates a multiple of the scientists in every discipline than the US. Slowly, but surely, their university systems are improving and in some disciplines they have surpassed the US. For example, in China, there are 20 universities dedicated to software development. In the US, there is not one.

So, when a venture fund sees a good idea that can be done just as well in China or India, why not take advantage of the lower cost of labor to improve ROI? In this way, our country is helping export our innovation and losing millions of jobs to nations abroad.

4. Funding GAP Between the National Institute of Health and the Market

The National Institute of Health (NIH) is a fantastic asset of this country. Before President Obama, it was investing $30B per year in the form of roughly 46,000 grants to early stage research in the life sciences, or roughly $650,000 per grant, clearly not enough to bring a product to the market, but a big help with getting it started. With the President's new stimulus package, that amount has been increased to roughly $40B per year.

These grants help advance tremendous developments, but they are not nearly enough to bring a product to the market. One would think that this is where VC or big pharma would step in, but because it takes so long to bring many of these therapeutics, diagnostics and devices from the lab to the market in the US, VC and big pharma shy away from bridging this gap.

It is much easier abroad. In Europe it is far faster to bring a device for approval to be sold in the market (EU Mark approval) than it is to obtain the equivalent in the US (IDE approval). The same goes for drugs and biologics. In Europe, there are already biosimilars (the equivalent of generic drugs for biologics) on the market. In the US, Congress and the FDA are still not settled on a definition for what constitutes a biosimilar, while big pharma is spending hoards of money to cloud the issue. As a result, we have no biosimilars on the market in the US, so this is yet another reason why Americans must pay more for healthcare.

Increasingly, Americans are traveling abroad for their healthcare, or ordering their medications over the Internet from Canada. This is a direct result of the funding gap between the NIH and the market and poor legislation from Washington.

The funding gap between the NIH and the market needs to be narrowed. There are two good ways to do this. First, streamline the FDA approval process, so that it does not take as long and cost as much to get approvals for products. Do this, and venture capital will rush in to fill that funding gap. Otherwise, we will see more and more US companies take their innovations abroad. Second, create a set of larger grants from the NIH for the most promising developments. A charitable organization, called Stand Up to Cancer (SU2C), has tried to help bridge this gap by doing just this, but the charitable monies are simply not flowing into this organization given the state of the US economy. This is a job for the NIH.

Here's hoping the new FDA head, Margaret Hamburg, and the new NIH head, Francis Collins, can help us bring more life science innovation back to our shores, and that somehow a Democratic lead Hill can see its way to lowering the capital gains tax for venture capital. The innovation of our country's future is at stake, not only in life sciences, but in nearly all scientific disciplines.

It not enough to be the best at making weapons. At some point, even that edge will vanish.

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