THE CAPITAL CRISIS IN BIOTECH AND THE INVISIBLE COSTS OF REGULATION

Abstract

This paper argues that while the FDA approval process may be trivial in terms of geologic time, it is an eternity when viewed from the perspective of the biotech industry. A delay of even a few months can mean life or death for a nascent one-product biotech company. Spread over an entire industry over a period of years, such delays impose very real costs on companies which may be forced to curtail or eliminate valuable drug research. In the near term, such costs are borne by public shareholders and venture capitalists who voluntarily subject themselves to a risky market and seemingly do not deserve much sympathy. Annualized return rates do not seem to present a very compelling case when human life is at stake. But these same costs are ultimately borne by consumers in several more subtle ways that do put real lives on the line: (i) Consumers are denied use of drugs that are awaiting approval; (ii) When drugs finally do make it through the developmental pipeline, delays in the process increase industry costs and in the absence of governmental price regulation, those increased costs are passed along to consumers in the form of higher drug prices, raising issues of access and regressive taxation; and (iii) Most insidiously, consumers are denied the benefit of drugs that will never be discovered or whose discovery will never be exploited because increased industry costs imply reduced spending on research and development.