Production in an Innovation Economy: The Globalization of Biomanufacturing and Implications for the Geography of Innovation

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1 Production in an Innovation Economy: The Globalization of Biomanufacturing and Implications for the Geography of Innovation Industry Studies Association Pittsburgh, June 1, 2011 Elisabeth Reynolds, Ph.D. Executive Director MIT Industrial Performance Center

2 Motivations for This Research Manufacturing in high wage economies Fragmentation of production process due to globalization of production and trade and vertical disintegration of firms (Gereffi et al, 2005). Hollowing out of the US labor market as middle jobs are lost due to to automation, computerization and offshoring (Levy and Murnane, 2004; Autor, 2007); particular impact on older industrial cities and regions Characteristics of industries in high wage economies Geography of Innovation: firms, regions, economic growth (Feldman, 1999; Gertler, 2005; Macher and Mowery, 2008; Romer, 1984) Tacit vs. codified knowledge (Polanyi, 1958), integrality vs modularity in product architecture (Baldwin and Clark, 2000), product life cycle (Vernon, 1966; Antras, 2005); agglomeration economies (Marshall,1890; McKendrick et al, 2000). Regional Competitiveness Regional innovation systems (Gertler, 2005) 2

3 Research Questions What factors drive the location of biomanufacturing investments? What is the relationship between biotech innovation and production? What is the impact of the separation of downstream and upstream activities on the growth of the industry? How are technological innovations in the industry affecting the biomanufacturing landscape and what are the implications for the geography of biomanufacturing? What are the policy implications, if any, for the US and regions like Massachusetts for retaining and growing the biomanufacturing industry? 3

4 Stylized Facts About Biomanufacturing Biomanufacturing is one of the most complex types of manufacturing Sticky qualities that make it less mobile: Biotech R&D and early stage manufacturing highly integrated Highly regulated; high cost of failure (public health and operation costs) High sunk costs once a facility is built Revolution going on in new technologies and related emerging industries such as tissue, stem cell and hybrid devices While a niche industry, biomanufacturing represents the type of manufacturing that plays to higher-skilled, higher income economies: Approximately 300,000 direct jobs in the U.S. with an average salary of $96, to 80% of jobs held by employees with a BA or higher Highly innovative field with large payoffs if time and costs reduced Biotech historically more vertically integrated than the pharmaceutical industry, however this is changing Companies prefer to control the manufacturing; use contract manufacturers as part of hybrid strategies; Consolidation / licensing in industry; big pharma driving manufacturing 4

5 The Biomanufacturing Process Clinical Trials GMP Facilities Research & Discovery Preclinical Development (Pilot) Phase I Phase II Phase III Commercial Manufacturing 2-3 years 2-3 years DNA thrown over the wall Can we manufacture it? Tech transfer between research and development 6-7 years 4-5 years to build $400-$700m Must begin building before drug is approved Transition From basic research to applied Transition Once FDA approval, can begin testing in humans Transition Scale up for commercial manufacturing 5

6 Biomanufacturing Capacity Worldwide Online and Projected, ( 000 Liters) Currently, excess capacity for commercial production at larger scale; unclear there is excess capacity for smaller scale production Includes only GMP-approved facilities and mammalian cell culture fed-batch and perfusion processes; Includes those facilities that are in planning, construction or validation phases through Analysis: Elisabeth Reynolds, MIT Industrial Performance Center; Data from Bioprocess Technology Consultants

7 Relatively New Entrants into Biomanufacturing are Now in the Top Ten Locations Globally (Projected to 2013) Rank in Biotech R&D: US: 1; UK; 2; Germany:3; South Korea 4; Switzerland 8 Notes: Includes only GMP-approved facilities and mammalian cell culture fed-batch and perfusion processes; Includes those facilities that are in planning, construction or validation phases through Source for Biotech R&D Employment: Hermans, et al, Biotechnology, in Innovation in Global Industries: US Firms Competing in a New World, National Academies Press, 2008.

8 Factors That Influence Location Proximity to R&D Classic product life cycle model: early stage manufacturing nearby and most likely first commercial facility as well Over 80% of clinical facilities and 50% of commercial facilities are within 100 miles of R&D As companies expand, more likely commercial facilities go farther a field Sales and Tax Companies with sales < $500m tend to keep production nearby, whereas many companies with blockbusters will seek out a tax-advantaged location (TALs) Technological Innovations Higher titres, multi-product platforms, single-use technology, PAT/QbD 8

9 Opening Biomanufacturing Commercial Facilities in TALs is a Recent and Increasing Trend Year Company TAL Country Number Facility 2004 Baxter Switzerland Abbott Puerto Rico Pfizer Ireland Amgen Puerto Rico Centocor (J&J) Ireland Lonza (CMO) Singapore Genentech Singapore Lilly Ireland 1 Countries are aggressively pursuing biomanufacturing investments through low tax rates (0 to 12.5 percent, or 0 percent for 20 years); tax breaks ratchet up the more IP involved in the investment. TALs are not the entire story; an equal number of new facilities / expansions taking place in non-tals; sunk costs and economies of scale important

10 Implications for Biomanufacturing and Public Policy Drugs Developed and Launched near R&D Early stage manufacturing near R&D; commercial launch as well, depending on complexity Subsequent production at scale in tax-advantaged location Biosimilars in Asia, Eastern Europe; possibly by big biopharma TALs like Ireland and Singapore focused on moving upstream into clinical production Technological innovations and market developments will create multiple scale up options Fewer facilities with smaller footprint; niche production Cost and timeline for small scale production decreasing Greater flexibility in location and processes better codified Tax Policy as New Differentiator in International Competition US corporate tax rate at 35% compared to average OECD rate of 25% Regional Competitiveness Driven by Innovation and Entrepreneurial Base Innovation ecosystem drives process innovation, operational excellence and expertise with regulatory system 10

Elisabeth B. Reynolds INDUSTRIAL PERFORMANCE CENTER MASSACHUSETTS INSTITUTE OF TECHNOLOGY WORKING PAPER SERIES MIT-IPC-11-001.

Elisabeth B. Reynolds INDUSTRIAL PERFORMANCE CENTER MASSACHUSETTS INSTITUTE OF TECHNOLOGY WORKING PAPER SERIES MIT-IPC-11-001. INDUSTRIAL PERFORMANCE CENTER MASSACHUSETTS INSTITUTE OF TECHNOLOGY WORKING PAPER SERIES Elisabeth B. Reynolds MIT-IPC-11-001 March 2011 292 Main Street, E38-104, Cambridge, MA 02139-4307 617-253-7522