The Economic Impact of Biotechnology

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The Economic Impact of Biotechnology FEDERAL RESERVE BANK OF DALLAS Issue 2 March/April 2002 Southwest Economy . The Euro Cash Changeover At midnight on Dec. 31, 2001, for the first time in history, a currency that had not been debased through inflation had its legal tender status re- voked. From its introduction in 1948, the German mark was one of the world’s strongest currencies and was viewed as one of the great achievements of the postwar Bonn Republic. Its replacement by the euro signifies a major milestone in European integration. On Jan. 27, the mark was joined by the Dutch guilder, and on Feb. 9 the Irish punt dis- appeared into history. The French franc became a thing of the past on Feb. 17, and at midnight on Feb. 28 all of the legacy currencies of the 12-nation euro area ceased to be legal tender. The euro is now the only legal tender in most of Western Europe. The introduction of euro banknotes and coins, which began on Jan. 1 of this year, was a great success. The predictions of long lines at retail out- lets and railway stations were not borne out, and the European public has embraced the new currency with an enthusiasm that surprised even its most ardent supporters. There were glitches, but they were few. The cash changeover, far from marking the beginning of the end of economic and mone- tary union (EMU) as some had expected, simply marks the end of the beginning. (Continued on page 2) . The Economic Impact of Biotechnology It’s as daunting a task today to divine how biotechnology will affect INSIDE: future economic activity as it might have been for economists in the 18th, New Economy, 19th and 20th centuries to forecast how the steam engine, electricity and the microchip would influence and eventually transform the world economy. New Recession? With the assistance of mind-boggling inventions, humankind’s bucolic exis- tence has morphed into a world that our agrarian ancestors would scarcely • recognize. Biotechnology may change our world as much.1 Venezuela Addresses Even though the bioscience industry has been around for 25 years and Economic Stress the gargantuan task of mapping the human genome is complete, it’s still not clear to what extent life science technology will affect our economy. Some observers have already labeled this the “Biological Century,” betting that advances in the life sciences will yield changes more momentous than those of electricity and computers. Such predictions may be overinflated, but bio- (Continued on page 6) combat human disease. Scientists are The Economic Impact of Biotechnology making significant headway, but as (Continued from front page) recently as 2001, one report said the genome sequencing has not yet “materi- ally affect[ed] the speed of development technology has the potential to greatly What Transforms of any given product.”2 All this is not to affect the economy. Market Economies? understate the gains in biotechnology in Two types of economic effects are Historically, the combination of recent years but to point out that it will already appearing in the nascent indus- groundbreaking discoveries and subse- take time before products are conceived try. By analogy, they resemble the direct quent commercialization has preceded and economies materially affected. splash of a stone tossed into a still pond periods of prolonged economic expan- and the indirect rippling that follows. sion. For example, the Industrial Revo- The Splash (Direct Impact) Direct impacts from biotechnology include lution in Great Britain was launched by Karl Ereky, a Hungarian engineer, first such obvious pluses as research and de- a confluence of new technologies with coined the word biotechnology in 1919. velopment (R&D) spending, sophisticated commercial potential, such as the steam At the time, the term referred to all lines jobs and tax revenues. Biotech compa- engine. Later, the internal combustion of work involved in creating products nies have already sprouted up in many engine and electric power revolutionized from raw materials with the aid of living parts of the country (Chart 1). Less visible America. More recently, William Shock- organisms. Today, the Biotechnology In- are the indirect effects, which include ley’s transistor and Jack Kilby’s micro- dustry Organization (BIO) defines bio- improvements in quality of life and living chip laid the foundation for the Informa- technology as “the use of cellular and standards stemming from faster labor pro- tion Age. All these eras of discovery and molecular processes to solve problems ductivity growth, better health products applied research were followed by strong or make products.” and services, and a cleaner environment. economic growth. In May 2000, BIO commissioned Ernst Landmark discoveries and novel in- Benchmark discoveries and innova- & Young to determine the aggregate im- ventions have marked biotechnology’s tions such as steam power, electricity and pact firms involved in biotechnology have early history. These advances, propelled the microchip always garner the most on the U.S. economy. The study looked by public funding and market incentives, attention. But it’s usually not until the at information from firms whose primary have increased interest and sustained technology is harnessed and products are business operations fell under five Stan- research activity. The current market- mass produced that we see economic dard Industrial Classification codes. While place is characterized by intense compe- consequences. some components of biotech activity are tition but also by cooperation among Similarly for biotechnology, comple- not included in this definition, the report public and private stakeholders. However tion of the human genome map—while gives an idea of the direct impact bio- the industry and supporting science play transcendent in scientific importance— science is having on the economy.3 out, the advent of biotechnology could will remain of little use commercially The study reveals impressive growth profoundly affect our lives. until the information can be used to for the industry. The life science industry Yeast used to leaven bread and ferment beer (Egypt). Production First of cheese and insecticide— Louis Pasteur First use of fermentation of powdered Robert Hooke proposes that The term the word wine (Sumeria, chrysanthemums discovers existence microbes cause “immunology” “biotechnology” China and Egypt). (China). of the cell. fermentation. first appears. in print. 4000–2000 B.C. 500 B.C. A.D. 100 1322 1663 1675 1857 1865 1902 1906 1919 First antibiotic— An Arab chieftain Antony van Science of genetics The term “genetics” moldy soybean first uses artificial Leeuwenhoek begins: Gregor is introduced. curds used to treat insemination to discovers bacteria. Mendel studies peas boils (China). produce superior and discovers that horses. genetic traits are passed from parents to offspring in a predictable way. Biotechnology Timeline 6 FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH/APRIL 2002 Chart 1 steadily since 1994 (Chart 3). The aging of baby boomers will only augment such Private and Public Biotech Companies by Region trends. Recognizing the growth potential New England in the industry, 41 states, including Texas, San Francisco Bay Area New Mexico and Louisiana, are currently San Diego pursuing economic initiatives to foster Mid-Atlantic North Carolina growth in their emerging biotechnology New York sectors. (See the box titled “BioTexas.”) Los Angeles/Orange County Southeast The Ripples (Indirect Impact) Midwest New Jersey Still a relative newcomer to the econ- Pacific Northwest omy, biotechnology is already having a Pa./Del. Valley Texas positive indirect influence on economic Utah activity. Ernst & Young estimates that Colorado biotechnology has an employment mul- Other tiplier of 2.9. In other words, each job 020406080100 120 140 160 180 200 Number of firms SOURCE: Ernst & Young, Biotechnology Industry Report: Convergence, 2000. Chart 2 Health Care Indexes, more than doubled revenue from $8 bil- biotechnology are going to take some 1995–2002 lion in 1993 to $20.2 billion in 1999. R&D time have kept overall stock prices sub- Index, January 1995 = 100 spending was $11 billion in 1999, not dued (Chart 2 ). Profitability in the four 1,000 S&P 500 Biotech Index counting monies spent by colleges, uni- largest biotech firms has instilled recent 900 S&P 500 Pharmaceutical Index 800 S&P 500 Health Care Index versities and nonprofits. Total tax collec- confidence in the sector, but the majority S&P 500 tions reached nearly $10 billion. Federal of firms have yet to show a profit. 700 taxes accounted for $6.8 billion of the Biotech activity should continue to 600 500 total and state and local taxes for the expand. Overall health care and prescrip- 400 remainder. tion drug expenditures have increased 300 Completion of the human genome steadily in recent years. For example, 200 and promises of new medicines sent health care expenditures as a percentage 100 0 biotech share prices skyward in 1999 of GDP have grown from 8.8 percent in ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 and 2000. Since then, sparse profits and 1980 to 13 percent in 2000. Prescription SOURCE: Bloomberg. the realization that investment returns to drug expenditures have been climbing In Cambridge, The genetic code Hybrid corn is 24-year-old is cracked, commercialized. scholarship holder demonstrating Genentech, the first By 1945, hybrid corn, James Watson and that a sequence of biotechnology Scientific with its remarkable 36-year-old physicist three nucleotide company, is journals publish yields, accounts for Francis Crick describe bases determines founded by Robert the complete 78 percent of the double-helix each of 20 Swanson and human genome U.S.-grown corn. structure of DNA. amino acids. Herbert Boyer. sequence. 1928 1933 1944 1953 1955 1966 1973 1976 1990 2001 Alexander Oswald T. Avery and Frederick Sanger Herbert Boyer and The Human Genome Fleming discovers his colleagues at the decodes the amino Stanley Cohen succeed Project—an penicillin as Rockefeller Institute in acid sequence of in recombining DNA international effort an antibiotic.
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