Rising to the Challenge U.S. Innovation Policy for the Global Economy (2012) / Chapter Skim
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Chapter 6 National Support for Emerging Industries The appropriate role of public policy in promoting specific industries has been a source of passionate debate in the United States since the founding of the Republic.1 Many nations in Europe and Asia have not hesitated to use the full force of government to attain commercial competitive advantage in industries they regarded as strategic. In the United States, however, the idea of proactive government help for private industry in the name of economic development has sometimes raised concerns about distorting market forces and the wisdom of letting public servants "pick winners." The debate began with Alexander Hamilton, who was an early advocate of "bounties" to encourage desirable industry, continued through the 19th century, and has resurfaced many times in the post-war era as U.S.
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322 RISING TO THE CHALLENGE displays with comprehensive strategies and generous subsidies, the U.S. has struggled to compete.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 323 commercial technology to companies, protect domestic producers from imports helped Japanese companies in the 1970s and 1980s seize a commanding global market share in dynamic random-access memory chips, sending the U.S. semiconductor industry into crisis.
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324 RISING TO THE CHALLENGE U.S. had a number of lithium-ion battery start-ups but virtually no production plants.3 It now has dozens of battery-related factories that are beginning to rampup, thanks in part to $2.4 billion in grants and support under the American Recovery and Reinvestment Act.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 325 competitiveness, a defense task force warned in 1987 that a dependence on foreign suppliers for state-of-the-art chips for weapons was an "unacceptable situation" because it would undermine the U.S. military strategy of maintaining technological superiority.4 This national security concern and the willingness of the semiconductor industry to collectively seek policy help from Washington were instrumental in reversing the loss of market share and technology lead that seemed irretrievably lost.
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326 RISING TO THE CHALLENGE 70 Share of Global Semiconductor Sales (Percent) 60 50 40 30 20 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 FIGURE 6.1 Global market share of U.S.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 327 enabled a rapid decline in prices.11 Persistent trade negotiations and enforcement of previous agreements won commitments from Japan to open its market to U.S. semiconductors and curtail dumping in any world market.12 This was deemed essential to prevent the United States from becoming a highpriced island in a sea of underpriced semiconductors.
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328 RISING TO THE CHALLENGE The Strategic Importance of Semiconductors The importance of semiconductors to the United States is difficult to overstate. As an industry, the semiconductor sector directly employs over 180,000 Americans and has consistently ranked as either America's No.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 329 semiconductors.18 Semiconductors also remain vital to national security, observes the Industrial College of the Armed Forces, because "they are the building blocks of the nation's infrastructure and the space, communications, and weapons systems that allow the projection of American diplomatic, information, military, and economic power."19 A New Set of Challenges Continued American leadership in semiconductors certainly cannot be taken for granted, however. The industry faces a range of technological, financial, and competitive challenges.
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330 RISING TO THE CHALLENGE decisions on where to build capacity. Countries such as Malaysia, India, Singapore, China, and Israel and regions such as Taiwan offer tax holidays or significantly reduced rates.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 331 a challenge that Nanotechnology Research Institute Director Jeffrey Welser says is as dramatic as the replacement of vacuum tubes by semiconductors in the 1940s.29 These challenges must be addressed. "At some point," the SIA warns, "without sufficient U.S.
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332 RISING TO THE CHALLENGE 50 100 45 90 Share of Production Designated for Share of Production Designated for Military Use (Percent) 40 Military Use (Percent)
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 333 especially because the high-volume memory devices were process technology drivers for the industry. The scale of production of the high-volume commodity DRAM chips justified investment in new process technologies and wafer fabrication facilities that could then also be used for lower-volume integrated circuits.
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334 RISING TO THE CHALLENGE recommendation of industry and the Defense Science Board, Congress in 1987 voted to match industry contributions for precompetitive research in a non-profit consortium. SEMATECH corporate members consisted of all of the largest device makers at the time, including IBM, Intel, Motorola, Texas Instruments, Hewlett Packard, and National Semiconductor.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 335 Rapid advances in semiconductors, in turn, enabled dramatic innovation in information technology that resulted in robust industries and higher productivity growth.45 The Securing the Future report observed: "SEMATECH's record of accomplishment was achieved in no small part through the flexibility granted its management and the sustained support provided by DARPA, the public partner, complemented by the close engagement of its members' senior management and leading researchers."46 Perhaps the clearest measure of SEMATECH's success is that corporate members in 1994 agreed to continue the consortium without further government financial help, except for a $50 million grant by the DoD. Foreign companies have since joined SEMATECH, which became an international consortium in 1999, and other governments have established similar programs -- often on a larger scale with greater political support.
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336 RISING TO THE CHALLENGE initiated a bilateral working group on high technology in 1983 to address trade conflicts. Two years later, the two nations agreed to completely eliminate tariffs on imported semiconductors.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 337 an opportunity to enter the memory market. Creation of a competitive multiple vendor base, in turn, spurred the production of ever more powerful personal and mainframe computers at diminishing cost and fueled the information technology revolution.
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338 RISING TO THE CHALLENGE processes used in very large-scale integrated circuits such as microprocessors. Industry experts say that at some point, the extreme miniaturization of transistors -- the basic building block within an integrated circuit -- results in undesirable quantum effects that inhibit performance of the device.57 Today's most advanced semiconductors contain billions of transistors.58 The Nanotechnology Research Initiative: The NRI, which receives funding through the National Science Foundation and NIST, supports four institutes -- each based at universities -- that pursue high-risk, pre-commercial research on technologies that are likely to result in commercial products within the next decade.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 339 UC Santa Barbara, and UC Irvine. WIN focuses on nano-magnetic circuits, spin wave devices, spin torque logic, and SpinFET.
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340 RISING TO THE CHALLENGE engineering talent are emerging. Decisions on where to build capacity are heavily influenced by government incentives.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 341 Rest of World (10%) Japan Europe (22%)
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342 RISING TO THE CHALLENGE existing plants in Oregon, Arizona, and New Mexico to produce next-generation 32nm chips.70 Capital spending by U.S. semiconductor companies on new or upgraded wafer plants rose by 10.6 percent from 1997-1999 to 2005-2007.71 Yet the portion of total investment in the United States slid from 78.5 percent to 63.9 percent over that period.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 343 rapidly as well, including advanced devices required for weapons systems and telecommunications. Most Chinese wafer fabs are several generations behind those of Japan, South Korea, Taiwan, and the United States.
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344 RISING TO THE CHALLENGE 160 140 Imports 120 100 80 60 Exports 40 Billions of Dollars 20 0 –20 –40 –60 –80 –100 Trade Balance –120 –140 2002 2003 2004 2005 2006 2007 2008 2009 2010 FIGURE 6.4 China trade in integrated circuits, 2002 to 2010. SOURCE: United Nations, UN Comtrade database.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 345 Competition for Financial Incentives The soaring cost of fabricating chips has made financial incentives an important determinant of where new capacity is built. Tax breaks, grants, lowcost loans, free land and other incentives typical defray $1 billion of a plant's cost over a 10-year period.
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346 RISING TO THE CHALLENGE The deal amounted to the largest private-public investment in the state's history.90 Such U.S. state incentives are awarded case by case, however, and remain highly controversial -- especially at a time when budget deficits are forcing states to slash public services.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 347 Even though the dedicated foundry industry is almost entirely based in Asia and is dominated by two Taiwanese companies -- TSMC94 and United Semiconductor Corp.
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348 RISING TO THE CHALLENGE integrated circuits.100 Initiatives include establishment of a science park modeled after the Hsinchu Science and Industrial Park dedicated to design of systems on a chip. Sci-Soft also established six university research consortia in fields such as mixed-signal design, digital IP, electronic design automation, and system on a chip.101 China also is becoming a major location for chip design.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 349 that depend on being able to hire the best and the brightest talent," says the SIA.105 Other nations, meanwhile, are expanding their pools of semiconductor engineers and expanding efforts to woo émigrés back home. India, which has an available semiconductor engineering workforce of 160,000,106 has a number of programs to increase the supply further.
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350 RISING TO THE CHALLENGE companies with no government contributions. Established in 1996, the joint venture conducts precompetitive R&D for production technologies using 300mm wafer equipment.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 351 disks with working transistors, using its second clean room, a new, 3,200-square meter facility. A production ASML lithography system installed in 2006 offered capabilities that at the time were beyond those available at the U.S.-based SEMATECH.
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352 RISING TO THE CHALLENGE ST Microelectronics, Philips, and Freescale folded in 2007,123 the French government has launched an initiative called Nano 2012. Billed as the nation's largest industrial project, the aim is to make the Grenoble region a world center for developing 32nm and 22nm CMOS technologies.124 The program involves nearly €4 billion in funding from the national, state, and local governments for R&D and equipment.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 353 for the original SEMATECH research consortium is widely regarded as a successful experiment and has influenced subsequent public-private partnerships in other U.S. industries and in other nations.
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354 RISING TO THE CHALLENGE 80 U.S. Japan Europe China/Taiwan 60 MegaWatts (Percent)
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 355 6.4 percent in 2010.130 [See Figure 6.6] The future of photovoltaic power generation as a significant source of electric power will depend on innovation in device and process technology which reduces the cost of PV relative to other sources of electricity production.131 Yet the United States has considerable opportunities to re-emerge as a global leader in solar and other clean energies.
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356 RISING TO THE CHALLENGE 45,000 U.S. ROW 30,000 MegaWatts 15,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 FIGURE 6.6 The U.S.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 357 Although there is considerable debate over how soon grid parity can be achieved,139 progress is unmistakable. The cost of installing photovoltaic systems connected to the power grid in the U.S.
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358 RISING TO THE CHALLENGE Germany, for example, mainly due to greater construction efficiencies.145 • Excess global capacity: Explosive growth in the production of solar cells and modules, especially in China, is pushing down world prices for commodity devices.146 While that makes solar power systems less expensive, it is even harder for U.S.-based manufacturers deploying next-generation technologies to compete with low-priced imports using mature technologies. • Dependence on Subsidies: The relatively high prices of panels and installation means that solar power is not yet cost-competitive with fossil fuels for power generation without public subsidies such as feed in tariffs.147 Those subsidies can change due to policy shifts, making demand hard to predict.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 359 consortia of industry, universities, and government agencies may be required. • Lack of technological standards: The market for photovoltaic products remains divided among several competing technologies with different materials and production processes and no industry-wide roadmap similar to the one adopted by the semiconductor industry in the 1970s.
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360 RISING TO THE CHALLENGE processes. A large-scale domestic manufacturing and installation industry for solar power and other renewable energies also is a potential source of millions of new jobs.156 The Industry's Origins Although physicists had experimented with materials to achieve the "photovoltaic effect" of converting light to electricity since the mid-19th century,157 the photovoltaic industry didn't emerge until the U.S.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 361 In 1978, Congress introduced tax credits to spur installation of solar panels and other renewable energy sources as part of the National Energy Act. The following year, President Jimmy Carter proposed a solar strategy to "move our Nation toward true energy security and abundant, readily available energy supplies."161 Measures included installing 350 solar systems on government facilities and buildings, establishment of a Solar Bank, and $1 billion in federal investment in the form of tax credits, loans, and grants.162 President Carter set a goal of the sun meeting 20 percent of U.S.
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362 RISING TO THE CHALLENGE Europe also triggered a surge of venture capital and private equity investment in U.S. photovoltaic companies over the past decade, although they located most of their initial large-scale manufacturing in Asia and Europe.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 363 are at an early stage of development. Commercialization will require much more technology development.170 U.S.
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364 RISING TO THE CHALLENGE struggled in the past year, however, due to plunging prices caused by a dramatic expansion of capacity in China.177 Although a number of U.S. module plants have closed because they could not compete on costs, others have opened or are expanding.178 As of 2009, a study by MIT counted 46 solar-cell manufacturing establishments in California alone, and half of those are in the Bay Area.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 365 in solar power systems for electrical grids. Pike Research predicts utility-scale capacity will surpass 10,000 megawatts by 2016.
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366 RISING TO THE CHALLENGE identify transformative technologies early in the process, and makes it possible for them to grow and mature rapidly, and leapfrog many of the steps along the way." 193 Conditional loans included $1.2 billion to SunPower, and $967 million to AguaCaliete. Finalized loans included $1.45 billion to Abengoa, $1.37 billion to BrightSource Energy, $535 million to Solyndra, and $400 million to Abound Solar.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 367 through information technology and streamlined local zoning and building codes."199 The Challenges Ahead To sustain this positive momentum and enable solar energy to attain grid parity with fossil fuels will require sustained federal support and expanded public-private collaboration, especially given the intensifying competition for global leadership. Following are some major challenges confronting the industry.
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368 RISING TO THE CHALLENGE [See Figure 6.5] As of 2009, Chinese companies accounted for half of Applied Materials' order book for wafer-making equipment and 35 percent of equipment to produce photovoltaic cells, compared to just 5 percent by U.S.-based companies.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 369 100 Percent of Total Shipments/Installations in 2010 80 ROW 60 North America Asia 40 Europe 20 0 Demand Supply FIGURE 6.7 Photovoltaic demand is concentrated in Europe but supply is concentrated in Asia – 2010. SOURCE: Demand: EPIA, Global Market Outlook for Photovoltaics Until 2015, April 2011; Supply: Paula Mints, "Reality Check: The Changing World of PV Manufacturing," Electro IQ, October 3, 2011 and SunPower and First Solar annual reports.
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370 RISING TO THE CHALLENGE by 40 percent in 2011, prompted a group of U.S. crystalline silicon cell and module makers to file a dumping suit with the U.S.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 371 India and China, for example, have announced goals of having 20 gigawatts of installed capacity by 2020, three times more than the entire capacity in the world in 2009.216 Government financial incentives have played a big role in promoting the rapid growth of manufacturing and installation of photovoltaic systems in Europe and Asia.217 Because solar-generated power is more expensive than electricity produced by coal, oil, or natural gas, most governments subsidize solar energy to make up all or part of the cost difference. Also, installing solar-power systems entails high up-front costs with a long-term payoff for consumers and businesses.
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372 RISING TO THE CHALLENGE 45,000 39,529 Annual Capacity Cumulative Capacity 30,000 MegaWatts 2006-2010 CAGR = 54.2% 15,000 6,980 2000-2006 CAGR = 29.8% 1,459 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 FIGURE 6.8 Worldwide annual and cumulative installed photovoltaic capacity, 2000 to 2010. SOURCE: EPIA, Global Market Outlook for Photovoltaics Until 2015, April 2011.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 373 addition, the cost of power is subsidized.223 The Golden Sun subsidy "is so large that it is virtually certain to increase the demand for solar power generation equipment," according to a National Foreign Trade Council analysis.224 As of mid-2011, 294 projects had been approved. In addition to these subsidies, feedin tariff programs have been implemented in districts of Shanghai, Inner Mongolia and Gansu Province.225 China also offers many forms of support to photovoltaic manufacturers.
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374 RISING TO THE CHALLENGE approval.230 China is requiring that at least 80 percent of the equipment for its solar power plants be domestically produced.231 China's policies are the subject of trade friction.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 375 invest $84.5 billion, or 2 percent of GDP annually, over five years in environment-related and renewable energy industries. South Korea also is rapidly expanding domestic photovoltaic production, targeting 5 percent of the world market.238 Hyundai Heavy Industries is building a $200 million plant to make thin-film cells using copper, indium, gallium, selenide materials with France's Saint-Gobain.239 In all, South Korea wants to capture 10 percent of global green technology market by 2020.
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376 RISING TO THE CHALLENGE generating power for each renewable source, depending on the size of the project, plus a profit margin. Purchase guarantees were good for 20 years.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 377 cents in the U.S.250 Also, the photovoltaic industry tends to go from boom to bust. When tariffs are high compared to the cost of building capacity, developers race to build solar power systems.
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378 RISING TO THE CHALLENGE investments and cooperative research in "radical new materials and processes," he said.256 Research to develop new materials that then can be produced in mass volume is expensive and risky, however. The challenge is made even more difficult by that fact that there are few widely accepted standards for materials and production processes.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 379 Stimulating Demand One of the most urgent decisions facing the U.S. is whether to extend tax credits for grid-connected solar installations, which currently are set to expire at the end of 2016.
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380 RISING TO THE CHALLENGE second largest solar producer in the world by 2020, provides a 15-year tax holiday for solar manufacturing profits.263 It will be difficult, and probably unnecessary, for the U.S. to match the kinds of generous concessions to manufacturers offered in nations such as China.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 381 later became First Solar. Manufacturing, however, has tended to move to other U.S.
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382 RISING TO THE CHALLENGE also have extensive photovoltaic programs and collaborate with industry and academia. Photovoltaic research consortia in the U.S.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 383 nations, meanwhile, are organizing efforts to define industry standards. Eric Daniels of BP Solar described standards as "critical in building consumer confidence."280 Conclusion Having ceded the once-dominant position it held in the 1980s and 1990s in the photovoltaic industry to countries in Europe and Asia, the United States has an opportunity to regain global leadership.
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384 RISING TO THE CHALLENGE flow inside a liquid electrolyte mixture between anode and a cathode plates.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 385 the Advanced Technology Vehicles Manufacturing (ATVM) Loan Program to help automakers produce more energy-efficient cars.287 From less than two battery-pack plants before 2009, 30 now have been built or are under construction by the end of 2010.
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386 RISING TO THE CHALLENGE Samsung and Bosch) .292 Another question is whether the U.S.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 387 energy-efficient vehicles is do-or-die for all of the automakers, for the state of Michigan, and for America."298 Decades of experience in mass-producing rechargeable lithium-ion batteries for consumer electronic products such as cell phones and portable computers, however, have given Japanese, South Korean, and now Chinese companies a formidable edge.299 While reliable estimates of production are difficult to come by, in part because of the lack of standard definitions and measurement techniques, the consulting firm GBI Research has estimated that only about 2 percent of advanced batteries were produced outside of Japan, South Korea, and China in 2009.300 [See Figure 6.9] The United States produced only an estimated 1 percent of lithium-ion batteries.301 Large Asian producers also are more vertically integrated and better capitalized than most U.S.
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388 RISING TO THE CHALLENGE 100 Percent of Total Shipments/Installations in 2010 80 60 40 ROW Korea China 20 Japan 0 2002 2003 2004 2005 2006 2007 2008 2009 FIGURE 6.9 Advanced battery production by country, 2002 to 2009. SOURCE: GBI Research, Future of Global Advanced Batteries Market Outlook to 2020: Opportunity Analysis in Electronics and Transportation, January 2010.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 389 decade.304 The government of South Korea has budgeted $345 million for the research and development of high performance lithium batteries during the period 2011-13305. A Korean company, LG Chem, was selected by General Motors in 2009 to supply advanced batteries for the Chevrolet Volt plug-in vehicle306 LG Chem's Ochang factory in Korea, opened in 2011, is the world's largest lithium-ion battery plant for electric vehicles.307 • Japan has launched a number of initiatives to shore up its share of the overall global lithium-ion battery market, which has declined from around 65 percent to 51 percent in the past five years.308 Japan remains the world's biggest producer of lithium-ion cells for vehicles as well as materials such as cathodes, anodes, electrolytes, and separators.309 Panasonic Corp.,310 the industry leader and supplier to Toyota, is investing aggressively, as are Mitsubishi, Hitachi, Toyota, GS Yuasa, Fuji, and Toshiba.
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390 RISING TO THE CHALLENGE deployed across the country to "pave the way for full-scale diffusion."313 The government's Fiscal Year 2010 budget includes ¥3 billion for collaborate R&D by the government, industry, and academia for innovative batteries. • Taiwan seeks to become one of the top three lithium battery producers in the world.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 391 estimated China had 60 lithium-ion battery makers as of 2008, including BYD, Tianjin Lishen, CITIC Guoan MGL, and Shenzhen BAK.320 The government's goal is for Chinese companies to produce enough batteries to supply 150,000 electric vehicles in 2011.321 To give its domestic industry an extra edge, the government essentially requires foreign battery companies to manufacture in China if they wish to sell there.322 • The French Atomic Energy Commission and the French Strategic Investment Fund have formed a joint venture with Renault and Nissan to manufacture lithium-ion batteries. The first plant, a €600 million investment, is to produce up to 100,000 batteries a year by mid-2012 in Flins, France.
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392 RISING TO THE CHALLENGE capabilities to manufacture cells domestically. Dow, A123, and EnerDel acquired or formed strategic partnerships with South Korean manufacturers.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 393 Gioia said it would be five or six years before batteries weighing a more manageable 250 pounds are mass-produced.330 The Growing Federal Role The U.S. government has long supported basic battery research programs.
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394 RISING TO THE CHALLENGE electron battery at Stanford, and high-performance and ultra-low-cost rechargeable batteries at MIT.336 The 2009 Recovery Act grants to 48 cell, pack, and materials production projects marked the federal government's biggest move to directly support domestic battery manufacturing and to create jobs. The Advanced Technology Vehicle Manufacturing program also supports batterymanufacturing projects.337 The Advanced Energy Manufacturing Tax Credit program provides credits that cover 30 percent of investments in new, expanded, or refurbished manufacturing plants producing renewable-energy equipment.338 The Obama Administration has expanded the advanced manufacturing tax credit program to $7 billion.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 395 certain number of zero-emission vehicles and wants the carbon-intensity of all fuels to be cut by 10 percent.342 The Military's Electrification Drive The Defense Department is another major driver of advanced-battery development.
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396 RISING TO THE CHALLENGE Other branches of the military also have an interest in advanced batteries. The Air Force is developing hybrid systems for unmanned aerial vehicles that operate 40 to 50 hours and need thousands of watts of power, for example.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 397 There is general agreement in the industry that the federal government should increase battery R&D through public-private partnerships in order to accelerate advances that will make electrified vehicles viable alternatives to gaspowered cars for the mass market in the near future. Experts also stressed that it is important to increase R&D funding for research into technologies beyond lithium-ion (such as hydrogen fuel cells)
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398 RISING TO THE CHALLENGE Improve Incentives: Federal incentives such as consumer tax credits for purchases of electrified vehicles will likely be required for several more years before the U.S. market is large enough to support fledgling advancedbattery manufacturers.355 Several industry experts suggested the life of such programs be extended.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 399 that the complexity of the supply chain "adds significant cost" to U.S.-based manufacturing and is time-consuming.361 The impressive investment in North American lithium-ion cell production since 2008 has not "been balanced by necessary investment in the supply chain itself," he observed. Conclusion The emerging U.S.
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400 RISING TO THE CHALLENGE National Institutes of Health (NIH)
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 401 Evolution of the Industry The modern pharmaceutical industry is descended from small apothecary shops, principally in Germany, which began systematic production of drugs in the mid and late Nineteenth Century.365 In the United States, during the same era the principal drug companies were wholesaler/producers offering a full line of drugs, many of which were imported from Germany. The embargo of German goods during World War I compelled these companies to enhance their own technical ability to make refinements on existing drug technologies and to develop new drugs.366 While some sophisticated technological centers devoted to pharmaceutical science arose in the U.S., the European industry led in new drug development through most of the Twentieth Century, and as recently as 1980 eight of the top ten drugs were discovered in Europe.367 Economic historian Alfred Chandler observes that during the first quarter of the Twentieth Century a relatively small number of European and American companies developed internal organizational structures permitting the use of science for the systematic discovery, manufacture and commercialization of new drugs.
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402 RISING TO THE CHALLENGE renamed MHS the Hygienic Laboratory and delegated to it the authority to regulate the safety of biologics (technologies such as vaccines produced in animals) , oversight which the laboratory continued until 1972.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 403 microbiological understanding, coupled with the development of techniques of genetic engineering, led to the formation and rapid growth of the biotechnology industry. In 1976, Genetic Engineering Technology, Inc.
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404 RISING TO THE CHALLENGE • A key Supreme Court decision, Diamond v. Chakabarty, expanded the scope of patentable technologies to include living organisms, after which the biotechnology industry "virtually exploded."378 • The U.S.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 405 TABLE 6.2 Branded Pharmaceutical Firms Biotech Acquisitions Year Acquiring Firm Acquired 2009 Roche Genentech 2009 Johnson & Johnson Elan Corp 2008 Eli Lilly ImClone Systems 2009 Johnson & Johnson Cougar Biotechnology 2009 Sanofi-Aventis BiPar Sciences 2009 Bristol-Myers Squibb Medarex 2009 Sanofi-Pasteur Shantha Biotechnics 2009 Sanofi-Pasteur Acambis 2008 Johnson & Johnson Omrix Biopharmaceuticals SOURCE: "Roche Wins Fight for Genentech," The Express (March 13, 2009) ; "Johnson & Johnson Completes Deal with Elan, Acquiring its Alzheimers Assets," M2 Equitybytes (September 21, 2009)
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406 RISING TO THE CHALLENGE TABLE 6.3 Percent Total NCES by Headquarter of Inventing Firm Decade U.S. Europe Japan 1971-80 31 54 15 1981-90 32 40 29 1991-2000 42 49 9 2001-2010 57 33 9 SOURCE: Ross C
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 407 laboratories, which are staffed by around 6,000 scientists supporting the NIH Intramural Research Program (IRP)
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408 RISING TO THE CHALLENGE NIH's annual budgets have been flat since 2009, although it received $10 billion in one-off funding for short term stimulus in 2009-10.391 Its 2012 budget of $30.9 billion was only slightly more than the 2009 level of $30.5 billion.392 Critics charge that the lack of growth in NIH funding will inhibit innovation. The president of the nonprofit group Research America said in 2012 that "we strongly believe a frozen budget for the NIH will flat line medical breakthroughs in the coming years and stifle the business and job creation that begins with R&D.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 409 by the genome projects is expected to produce major benefits in medicine and biotechnology.398 The genome projects have given rise to the field of "omics," involving application of the new knowledge about genes, proteins and other molecular characteristics of living organisms to detect disease, predict how individuals will react to drugs, and eventually to develop treatments. The patentability of various forms of DNA remains murky.399 However, a decade after the HGP and Celera published their drafts, few if any new medicines have been developed based on geonomic knowledge, or "pharmagenomics."400 Premature use of "omics"-based clinical tests at Duke University, and alleged improper alteration of data, has led the Institute of Medicine of the National Academies to establish a committee to develop recommendations for strengthening omics-based research.401 Translational research.
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410 RISING TO THE CHALLENGE developmental efforts which include designating technologies for licensing and commercialization.402 In December 2011, Congress created the National Center for Advancing Translational Sciences (NCATS) under the supervision of NIH to accelerate the development of new medicines.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 411 prices.406 A few orphan drugs have become blockbuster drugs.407 As of early 2011, pharmaceutical companies had 460 orphan drugs under development.408 In 2003 NIH launched the Rare Diseases clinical Research Network (RDCRN) to promote research on rare diseases.
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From page 412... ...
412 RISING TO THE CHALLENGE rather than furthering discovery, our government has forced what I believe is a false choice between sound science and moral values."412 The Dickey-Wicker Amendment remained in force, however, and provided the basis for an unsuccessful legal challenge to NIH guidelines which permitted federal funding of research projects using embryonic stem cells but not for the destruction of embryos.413 Dismissal of the case in 2011 was seen as a decisive victory for NIH, but as one stem cell researcher at Harvard Medical School put it, "I hope we're done for now, but nothing surprises me anymore."414 The politicization of stem cell research has hampered the development of stem cell-based therapies in the U.S. Other countries which encourage stem cell research have captured R&D activity that otherwise probably would have taken place in the United States.415 Korea, not the U.S., introduced the world's first stem cell-based medication, a drug developed by a domestic bio-venture company, FCB-Pharmcell, to help regenerate damaged coronary arteries.416 Challenges While the U.S.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 413 emphasizes the pursuit of proprietary "blockbuster" drugs which generate $500 million to $1 billion or more in annual revenues. Patents on these drugs last 20 years, and given that the time frame from patent filing to market is seven to ten years, the patent holder typically enjoys a legal monopoly on the drug for 10 to 13 years, which can result in huge profits during the protected period.
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414 RISING TO THE CHALLENGE phases take 3-6 years.421 Before a new drug is approved, it must undergo clinical trials in which its potential benefits and risks are assessed based on tests using human volunteers. Of every 250-500 compounds subject to pre-clinical testing, about 5-10 are ultimately submitted to clinical trials.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 415 burden per protocol increased by 54 percent.424 Increasing complexity results in stricter eligibility criteria for volunteers, which has translated into declining volunteer enrollment and retention rates. Over 50 Phase III trials were terminated in 2010 and the number of drugs entering Phase III fell by 55% from the prior year.
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416 RISING TO THE CHALLENGE 70 60 Expenditures (Billions of Dollars)
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 417 budget by about 25 percent during the period 2011-2013.434 Eli Lilly CEO John Lechleiter commented in 2011 that "Our industry [R&D] is taking too long, we're spending too much, and we're producing far too little."435 Chris Viebacher, CEO of Sanofi, observed in 2011 that -- Five years ago people would say the more I spend on R&D, the more shots in the goal I will have, the more successful I will be.
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418 RISING TO THE CHALLENGE & Johnson, Pfizer, GlaxoSmithKline and AstraZenica on suspicion of conspiracy to maintain the prices of their drugs after the patents expired.440 In the U.S. the FTC has denounced pay-for-delay deals for over a decade, although its challenges to such agreements in the courts have thus far proven unsuccessful.441 The Obama Administration has proposed legislation banning pay-for-delay agreements.442 Senator Kohl and Grassley are backing bipartisan legislation to prohibit pay-for-delay deals.443 White collar prosecutions.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 419 TABLE 6.4 Class Action Lawsuits Against Life Sciences Firms on Behalf of Consumers Claiming Injury Defendant Product Allegation Advanced Medical COMPLETE contact Solution caused serious eye Optics, AMO Canada lens solution infections, ancanthamoeba Company keratitis Baxter International Heparin Tainted drug caused several deaths Pfizer Trovan, Rocephin Eleven Nigerian children died after being given these drugs in a human trial Novartis Zelnorm Increase in cardiovascular events by users of the drug Merck Vioxx Heart attacks attributable to drug use Hoffman LaRoche Accutane Several, chronic stomach injuries Pfizer Bextra, Celebex Increase in cardiovascular events by users of the drug SOURCE: "Advanced Medical Optics Sued Over Lens Solution," OCRegister.com (June 5, 2007) ; "Baxter Loses First Heparin Lawsuit," Pharmalot (June 10, 2011)
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420 RISING TO THE CHALLENGE involves complex matters that the committee has not had an opportunity to examine in detail. Stock prices of life sciences firms are frequently volatile and can be affected by disclosure (whether or not authorized)
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From page 421... ...
NATIONAL SUPPORT FOR EMERGING INDUSTRIES 421 TABLE 6.5 Shareholder Class Action Lawsuits Against Life Sciences Firms Year Defendant Product Allegation 2009 Pozen Inc Treximet False or misleading statements about migraine drug candidate, Treximet 2009 Caraco Pharmaceutical various tablets Failure to disclose Laboratories material information re FDA warning letter on drug manufacturing. 2009 Rigel Pharmaceuticals R788 False and misleading statements with respect to clinical trial of a drug, R788 for treatment of rheumatoid arthritis 2008 KV Pharmaceutical Co Makena Failure to disclosure compliance problems with FDA requirements 2009 Immucor Blood reagents Failure to disclose and related compliance problems with equipment FDA requirements SOURCE: Brian Johnson et al v.
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422 RISING TO THE CHALLENGE ruled that Pakistan could grant compulsory licenses on patented drugs for export to third countries that lacked their own manufacturing capacity.453 In March 2012, the Controller of Patents, Mumbai, granted Natco Pharma, an Indian company, a compulsory license for manufacture of a generic version of sorafenib toyslate, a drug developed by Bayer to treat liver and kidney cancer, stating that the drug was "exorbitantly priced."454 Supply chain vulnerabilities. Governments in western countries are pressing pharmaceutical firms to reduce the cost of their products, and one way in which the industry is responding is to move the manufacture of drugs to lower cost countries and to source ingredients from those countries.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 423 Supply chain vulnerabilities arise out of the increasing use of lowercost bulk active pharmaceutical ingredients (APIs) as ingredients in manufactured drugs.
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424 RISING TO THE CHALLENGE TABLE 6.6 Examples of SFFC Medicines SFFC medicine Country/Year Report Anti-diabetic traditional China, 2009 Contained six times the medicine (used to lower normal dose of blood sugar) glibenclamide (two people died, nine people hospitalized)
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 425 Looking Ahead The U.S. pharmaceutical industry continues to pursue growth strategies despite the numerous challenges it confronts.
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426 RISING TO THE CHALLENGE TABLE 6.7 Strategic Alliances in Pharmaceuticals Year Companies Activity 2008 Sequenom, Apply Sequenom genotyping to enhance MetaMorphix livestock DNA screening 2009 PRA International, LSK Joint management of clinical trials in Asia Global Pharma Services, Mediscience Planning 2009 Illumina, Agilent Scalable solution for researchers conducting targeted sequencing studies 2009 Eli Lilly, Cadila Heath Development of cardiovascular drugs care 2009 Johnson & Johnson, J&J acquires rights to Elan Alzheimer Elan immunotherapy program, 18 percent stake in Elan, and links to Elan partners Biogen Idec and Wyeth (Pfizer) 2009 Johnson & Johnson, Develop monoclonal antibodies for Crucell N.V.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 427 Emerging markets. Pharmaceutical markets are growing far more rapidly in emerging economies than in mature markets in the United States, Europe and Japan.467 The pharmaceutical industry will necessarily pursue growth by increasing its presence in emerging markets, particularly countries with large populations and rising standards of living.468 China.
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From page 428... ...
428 RISING TO THE CHALLENGE clinical trials in an extremely efficient manner.473 Pfizer announced in 2007 that it would make Korea a "key research bank for its new medicine development" and invest $300 million over a five year period.474 In 2007, VGX Pharmaceutical Inc., a U.S. firm that specializes in hepatitis and HIV treatments, announced it would invest $200 million to establish its Asian headquarters in Korea.475 Johnson & Johnson manufactures drugs in Korea through a subsidiary, Janssen Korea, which functions as J&J's production base for the entire Asian market.476 Foreign pharmaceutical firms operating in Korea face significant challenges, including pressure by healthcare providers to give suppliers rebates,477 lack of transparency with respect to Korea's pricing and reimbursement of drugs,478 and government pressure on the intellectual property of branded drug firms.479 Biosimilars.
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NATIONAL SUPPORT FOR EMERGING INDUSTRIES 429 in the U.S. and Europe.481 The Patient Protection and Affordable Cure Act, enacted in 2010, establishes a 12 year period of data exclusivity for new biological drugs between the date of FDA approval and the filing date for biosimilar approval based on the innovator's original data, a measure which may inhibit the introduction of biosimilars.
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Key Terms
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