US cities lose jobs and revenues as big
pharma companies close R&D facilities
By Tony Favro, USA Editor*

9 April 2012: In 2007, Pfizer, the pharmaceutical company, closed its research and development facility in Ann Arbor, Michigan, displacing 2100 workers. In 2009, the University of Michigan purchased the vacant site and expected to create two to three thousand jobs over ten years. At the time of the sale, Ann Arbor Mayor John Hieftje expressed mixed emotions. On the one hand, he said in a statement, “If the University of Michigan is able to greatly expand life sciences research in Ann Arbor it will have far-reaching long-term economic benefits for the whole region.” On the other hand, Mayor Hieftje told Crains’ Detroit Business newspaper, “[The deal] has troubling aspects for local government”. Hieftje was referring to the $14 million in local taxes paid by Pfizer, which will not continue since the University of Michigan is a tax-exempt organization.

• Profits versus R&D
• The Government steps in
• Shift in research culture
• Bigger government

The Ann Arbor story is not unique. According to the US Bureau of Labor Statistics, the pharmaceutical industry shed 35,000 in the United States in 2010, the most recent year for which complete data are available. Cities throughout the US were burdened by plant closures. Ann Arbor was luckier than most cities. The University of Michigan employed about 1,700 workers at the former Pfizer site at the end of 2011. These workers are doing much of the research formerly done by Pfizer — and this gets to the heart of the matter. Big pharma companies are abandoning basic drug research, leaving the federal government and universities to pick up the slack.

Profits versus R&D
According to the August 2011 issue of the journal Nature Reviews Drug Discovery, the decline of prescription drug research and development R&D is the result of 15 years of continuous industry consolidations and the drive by drug manufacturers to maximize profits.

Since 2000, for example, Pfizer has acquired three major drug makers, Warner-Lambert, Pharmacia, and Wyeth, closing research centers with each acquisition. “These [closed] sites housed thousands of scientists, and many major drugs were discovered there,” the journal notes. “The same pattern has been observed after most of the mergers and acquisitions by other major pharmaceutical companies during the past decade.”

Profit is another reason big pharma companies are abandoning basic research. Over the past couple of decades, big drug firms competed to produce blockbuster drugs that yielded huge payoffs. Drugs such as Merck’s Vioxx and Pfizer’s Lipitor generate several billion dollars in annual sales and reap big profits for their makers. The fierce competition leads to costly duplication of work with as many as 20 companies vying to be the first to come out with the next blockbuster drug. The stakes for drug companies become higher as patents expire for popular and profitable drugs and revenue streams dry up.

The potentially enormous profits of a breakthrough discovery, however, are proving too elusive to offset the heavy upfront costs of basic research and development, an estimated 10 to 20 per cent of total expenditures. As a researcher told the Rochester Business Journal, “The days of the blockbuster drug are over”.

Businesses survive by making money for their shareholders, and when part of a business can no longer reliably generate profits — in this case, basic drug research — the unprofitable part is understandably jettisoned.

This makes good business sense, but poor public policy. People need pharmaceuticals — in many instances, it’s a question of life or death — and so the federal government has had to fill the void left by drug companies’ retreat from basic and early-stage research.

The government steps in
Over the past few years, the federal National Institutes of Health has invested hundreds of millions of dollars to build a drug-discovery infrastructure. Most of the federal expenditures have been used to establish a network of 60 “clinical translational centers” at research universities. These centers are changing the direction of pharmaceutical research and creating new opportunities for public-private collaborations.

In essence, the emerging drug-development model in the USA has big pharmaceutical firms coming in at a later stage to market and distribute drugs that have been discovered and tested by university researchers and small, private biotech companies.

The emerging model promises to greatly expand opportunities for universities to earn royalties from pharmaceutical companies. The federal funding for “translational” research also incentivizes entrepreneurship at universities. Universities that develop and hold patents are expected to translate that knowledge into jobs, not only by contracting with big pharma but also by incubating and spinning-off small, private drug-development companies. In the federal model, big drug makers will strike licensing deals directly with universities or with small companies, primarily university spin-offs. One potential benefit of the new model is that entire categories of drugs previously ignored by big pharma because of their low-profitability may now be brought to market.

Shift in research culture
Federal monies are helping build a research infrastructure at the university level to bring basic discoveries to market as well as catalyze broader economic growth. This requires a culture shift at both universities and businesses. Traditionally, a scientific advance by a university professor might end as a research paper read by a few colleagues in the same field. In the clinical translational model supported by the National Institutes of Health, scientists must collaborate with colleagues in different fields — the chemist with the engineer and sociologist and marketing professor, for example. Drug companies also have to discuss their research and results with academics and with their counterparts at different drug firms. They can no longer label such information as proprietary and keep it to themselves.

Bigger government
Critics of big government should take note: when businesses contract, government often has to expand to protect citizens. Businesses may create jobs, but they will also pass their costs to taxpayers when they can. Large drug companies consider delivering a return to shareholders their first duty, and therefore cut R&D that drains short-term profits. But short-term business sense may threaten public health and even the profitability of corporations since, over the long-term, a less-healthy labor pool could drive up the cost of doing business.

And sometimes government requirements and mandates, such as the clinical translational research model, can spark economic growth. According to Dr. Karl Kieburtz of the University of Rochester, one of the first universities to be funded by the National Institutes of Health, “We are looking at many things, surgical devices and other things, not just drugs.” The University of Rochester, which purchased a building that Wyeth vacated for research, has already spun-off 30 companies. As multinational pharmaceutical companies unload more of their marginally-profitable but publicly-indispensible activities, the public and nonprofit sectors will have to fill the gap.

The effect on US city governments is uneven. Cities will lose jobs and property tax revenues when pharmaceutical companies close their R&D facilities. Cities fortunate enough to have a university with a translational research center should eventually recover their losses and more.

*Tony Favro also maintains the blog Planning and Investing in Cities.

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