Healthcare Technology Industries include a broad range of high technology areas related to life sciences and medical instrumentation. The products of these industries include a pill for lowering cholesterol, a device for opening a blocked artery, and an iPhone application that wirelessly connects to an electronic device implanted in the human body for observing a patient’s health.  Like other technology-based industries, healthcare presents immense growth opportunities for firms that invest in transforming technologies and accessing new markets. In the highly competitive markets that now characterize the healthcare technology industries, companies that do not invest in innovation are likely to fall victim to those that do. Indeed, even firms that are highly innovative may find that they have been outcompeted by companies that are generating even higher quality, lower cost products.

In the health-care industries, the high degrees of uncertainty that are inherent in investment in innovation are mitigated by government investment in the indispensable knowledge base and government subsidies to companies. As the prime example, the US governments provides the National Institutes of Health, launched in 1938, with an annual budget of about $31 billion, which in real terms is triple its level in the mid-1980s and double its level in the early 1990s. Of the many subsidies that governments provide to the health-care industries, very important ones are provided under the Orphan Drug Act of 1983 for rare and genetic diseases. At the same time, given government support and the high degree of uncertainty about the success of investments in innovation, healthcare technology industries attract financial speculators who seek to make gains from buying and selling a company’s stock, regardless of whether the company ever actually generates a commercial product. This speculation can channel large amounts of money into healthcare technology firms which can be used for investment in new products and processes. But it also means that the very people upon whom we rely to make these investment decisions often have the possibility of becoming wealthy even when the firms that they run are unsuccessful in delivering innovation. Indeed, it may well be the case that financialized business behavior is a prime cause of a lack of innovative success.

Currently, theAIRnet is engaged in research on the sustainability of the US biotech and blockbuster business models in terms of both its own organization and competition from other parts of the world, especially Europe. Here are some key issues:

Despite rising research and development expenditures among pharmaceutical companies, more drug candidates in pipelines, and  worldwide efforts to strengthen the research base of the pharmaceutical drug industry, a stagnation in new drug approvals still persists. The theory of innovative enterprise provides a framework for research into the innovation paradox.

One major result of the productivity bottleneck is the growing interest of large pharmaceutical companies in biotechnology firms, both early stage and established, as a way of replenishing the product pipeline. With patents expiring on many blockbusters, big pharma faces a rising threat of the generic drugs. This M&A activity has also been encouraged by the convergence of the fields of bio and chemical engineering within the pharmaceutical drug industry. Companies are perceiving substantial opportunities in highly-fragmented product markets that because of the small sizes of the patient populations, were previously considered to be  commercially unviable.

Given the technological complexity of drug development as well as  strict government safety regulations, biopharma product development is a costly and lengthy process that faces technological, market, and compete-tive uncertainty, and high rates of failure. It is therefore not readily apparent how, why or under what conditions biotech firms gain access to the large sums of committed financial resources required for investment in innovation.

The United States is the world leader in biopharmaceuticals. But is the business model that prevails in the US biopharmaceutical industry sustainable? The growth of US biopharma has been highly dependent on government funding of the knowledge base through the National Institutes of Health and many government subsidies on one side and a highly speculative stock market that can absorb often product-less initial public offerings as well as big pharma investments and research contracts on the other side. As a result of the financial meltdown in 2008, the IPO market dried up, and the sustainability of the US biotech business model was placed in doubt. As Ernst and Young put it in its 2009 Global Biotechnology Report (p. 2): “In market after market, valuations of pre-commercial biotechs have plummeted, capital has dried up and the landscape is littered with companies struggling to survive. While the crisis will almost certainly wipe out many of these firms, it could also, at the extreme, have implications for the sustainability of the sector and the viability of its business and financing model. Even by the standards of an industry where ‘business as usual’ is a gauntlet of unpredictable initial public offering (IPO) windows, shifting investor sentiment, daunting product-development odds and tightening regulatory pressure, this feels different.”

Ageing members of the baby-boomer generation are expected to drive the demand on healthcare-related technologies in the coming years.  Innovation in this sector can improve the life-quality and life-span of the population, and can possibly cut the costs of doing so. In the current economic climate, many healthcare technology companies face profound market uncertainty and financial resources that are much more limited than in the past. In the coming years, the Health Care and Education Reconciliation Act of 2010 is expected to extend the size of the healthcare products consumer market by providing affordable healthcare coverage for those who would otherwise not be able to afford health insurance or innovative healthcare products. There is concern in the industry that the new legislation may lead government to control the prices that firms can charge for these products, and restrain investment in the development of new products. But as theAIRnet research has shown, rather than use high product prices to invest in new products, many of these companies spend hundreds of millions, and sometimes billions, of dollars per year buying back their stock to give a boost to the companies’ stock prices. Although the problem of financialized corporate behavior is by no means limited to the health technology industries, there is a case to be made for new regulations that would ensure that drug and medical device companies use a substantial proportion of their profits to invest in the next round of innovation.