How Washington is capable of saving the US biotech industry 

President Barack Obama has been actively defending the government’s $528 million loan to Solyndra, a solar-energy company that later collapsed.

The president argued that “hindsight is always 20/20” and that the program “went through the regular review process and people felt like this was a good bet.”

While cronyism might not be involved in the government’s failed investment, the president’s comments reveal a fundamental misunderstanding of how to spur successful market-driven innovation.

Obama’s primary defense of his solar-investment strategy seems to be that if the Chinese are “pouring hundreds of billions of dollars into this space,” then the U.S. should too.

This is exactly the wrong approach. The U.S. has no particular “comparative advantage” in the field, and we can’t create one by just throwing money at the problem.

A better template for building a world-class, innovation-based industry that can out-compete our rivals in Europe and Asia can be found in America’s world-beating biotech and pharmaceutical industries.

The U.S. wasn’t born with a comparative advantage in biotechnology. The world’s “pharmacy” started in Europe in the 19th century and was dominated by firms in Germany, France and Switzerland for most of the 20th century.

But starting in the 1970s and 1980s, American policymakers embraced a number of pro-innovation policies that helped create the world’s most attractive investment climate for biomedical innovation.

Strong patent protection, incentives for universities to license promising technologies to industry, significant research and development tax credits, rapid access to vibrant capital markets and funding for basic science research all helped to turn the U.S. into the world’s most successful incubator for medical innovations.

From 1971 through 1980, U.S. firms produced about 31 percent of all new drugs coming to market, compared to 55 percent combined from France, Germany, Switzerland and the United Kingdom.

By the first decade of the 21st century, that ratio had flipped, with the U.S. producing 57 percent of all new medicines and Europe’s Big Four producing just 33.

Unfortunately, America’s biotech edge shows troubling signs of slipping, particularly in the most innovative part of the industry’s “ecosystem” — small start-up companies that depend on venture-capital funding to develop potentially breakthrough new technologies.

In 2010-11, first-time funding of U.S. start-up companies in the life sciences fell by 50 percent. In 2010, total venture funding fell for the third year in a row, including a 25 percent decline since 2009.

The causes of the decline in venture capital are many — tougher drug approval requirements at the FDA, more reimbursement hurdles from public and private insurers, and enormous market uncertainty generated by health care reform.

Maintaining America’s edge in the life sciences will require the same far-reaching policy changes that helped energize the industry over the past 40 years. This is where Congress and Obama should be directing their energies.

By creating a stable platform for investment in knowledge-based industries like biotechnology, government can ensure that private investors direct capital to the most promising companies and new technologies, without the need for government handouts that put taxpayers at risk.

Paul Howard is the director of the Manhattan Institute’s Center for Medical Progress.

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