Biotech R&D: The Next U.S. Industry to Outsource?

Merck announced this week that it's opening a new R&D center in Beijing, with 47,000 square feet of labs and 600 employees. And this isn't just for pre-clinical research, but for everything from drug discovery to clinical trials. Reuters reports that Merck isn't the only company ramping up investment in China:

Aiming to take advantage of China's lower costs and supply of scientists, global drug makers, including Pfizer, Abbott and Novartis, have made big investments in Chinese R&D operations in recent years.

Merck, known as MSD outside the U.S. and Canada, will also team up with biotech companies and academic institutions to develop new drugs...

Beijing is home to several of China's top universities as well as the country's food and drug regulator, whose approval is needed for medications to be sold in the country.

Now, on the one hand, this is all to the good. As China and other developing nations like India become more wealthy, and modernize their own R&D base, drug regulations, and improve patent protection, they naturally become more attractive markets for drug and biotech companies.

But this should also be a warning to U.S. policymakers and regulators: the R&D and manufacturing base of the biopharmaceutical industry doesn't have to stay in the U.S. It can - and will - move to other markets that offer a more attractive "ecosystem" for life sciences innovation.

To the extent that U.S. becomes less competitive in the biopharmaceutical sector, we'll lose those high paying jobs and tax revenues. And, to add insult to injury, because the U.S. taxes global profits of U.S.-based companies, American multinational firms are much less likely to repatriate profits generated abroad and reinvest them at home. In short, money and jobs that flow abroad are more likely to stay abroad.

This is exactly the point that former CBO Director Douglas Hotlz-Eakin and I make in our recent City Journal article, Liberating Medicine's New Frontier.

America is, and will likely remain for some time, the global leader in biomedical innovation. Of course, Detroit used to be the automobile capital of the world too.

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