Commerce Report Helps Define Biotech Industry

Biotechnology is projected by many to be the "next big thing" for economic growth — and money is following the hype. Congress has over the last several years accomplished the goal of doubling the budget for the National Institutes of Health, already the nation's largest funder of life science research. Several issues of the SSTI Weekly Digest over the past few years have included stories of states and communities across the country investing heavily to capture some portion of the projected growth of this nascent industry. Now, private money has embraced the pursuit as last quarter marked the first time the biotech sector captured the largest share of reported venture capital investments (see story above).

Our understanding of the biotech sector has been limited, however. For instance, the interdisciplinary nature of biotechnology does not fit neatly into the traditional fields of science and engineering used by the National Science Foundation to measure research and development (R&D) expenditures. Because of the broad application of biotech, firms commercializing the technology also can be found in more than 60 of the North American Industry Classification System codes. And, as the billions in research investment yield even more commercial applications, the diffusion of biotech into other fields likely will expand.

A new report from the Office of Technology Policy (OTP) provides one of the most comprehensive and detailed looks yet at the emerging U.S. biotech industry. Drawing on more than 3,000 companies' responses to a 22-page questionnaire, A Survey of the Use of Biotechnology in U.S. Industry characterizes the sector across a broad range of categories: financial and economic performance, R&D expenditures, employment and workforce.

For example, the survey found respondents who are engaged in biotechnology research, development, and applications reported in 2001 they had more than 1.1 million employees, total annual net sales of about $567 billion, operating income of $100.5 billion, capital expenditures of $29.5 billion, and R&D expenditures of $41.6 billion. The value added for respondents’ businesses was at least $272.8 billion, or 2.7 percent of U.S. Gross Domestic Product, in 2001.

The survey also confirms some of the high expectations for growth coupled with significant risk inherent for biotech investments. It states, "Patent data underscore the dynamic and rapidly evolving nature of biotechnology. In the last quarter of 2002, companies reported 33,131 pending applications for biotechnology products or processes, compared with 23,992 current portfolio patents." Hot leads on commercial applications based on today's research quickly can be outdated by new scientific advances and understanding.

Fifty-six percent of respondents reported zero or negative operating income in 2001, and 44 percent of the firms with fewer than 50 employees had received some VC investment.

Survey results also reveal general characteristics for biotech firms in specific areas. For example, R&D intensity (calculated as a ratio of R&D expenditures to net sales) was highest for the 41 reporting firms that engage in environmental remediation and natural resource recovery.

The report is consistent with other reports in its portrayal of the current geographic concentration of biotech activity, including the Brookings Institution's Signs of Life: The Growth of Biotechnology Centers in the U.S.. Seventy percent of respondents were headquartered in 10 states, with 26 percent located in California. Other states with large concentrations included Massachusetts, Maryland, Pennsylvania, North Carolina and New Jersey.

As with other industries, biotech firms reported workforce issues as prevalent: employment growth averaged 12.3 percent annually for 2000-02 across respondents, but "smaller companies (those with fewer than 50 employees) reported difficulty in filling positions. Nearly half of these firms reported that more than 20 percent of their biotech-related positions had been unfilled for more than three months. This was true for only 1 percent of firms with more than 50 employees."

Tech-based economic developers should note it appears foreign and domestic outsourcing, which currently is creating havoc for higher-wage U.S. information technology workers, will quickly become an issue for the biotech industry as well. "Half of all survey respondents are contemplating outsourcing some jobs domestically to U.S. firms," OTP states. More than one-fourth are "thinking of outsourcing to foreign firms or facilities."

Barriers to business competitiveness most often reported by respondents were regulatory approval process and costs (59 percent), and research costs and access to start-up capital (53 percent each).

The report's conclusion, which addresses competitive strategies and outlook, should be useful for state, regional and local tech-based economic developers designing initiatives to grow a bio-based economy. For example, the majority of respondents (53 percent) say they are developing technologies that can be licensed to others. As a result, the local economic development impacts of public investments in research-oriented firms could be minimal unless the licensing partners and commercialization capacity are also located in the region.

OTP is a division of the Department of Commerce's Technology Administration. A Survey of the Use of Biotechnology in U.S. Industry is available at: http://www.technology.gov/Reports.htm