This was originally sent to the Instapundit reagrding his posts on biotech innovation. Since I found it as a comment here, I'm going to take it as being an open letter. I'd be pleased to credit the author if he or she will e-mail me:
"I read with interest your links today on pharmaceutical and medical device innovation, including an article of your which I had not seen before. While what both said is true, it overlooks perhaps *the* major source of innovation in this segment: venture financing of start-ups.
By way of introduction, I run a young biological tools company. Our products will contribute directly to creation of a new generation of pharmaceuticals and of diagnostic tests. At the moment we are funded entirely by NIH, as the venture capital market is moribund. I also serve as a frequent reviewer at both NIH and NSF, on both academic and small business panels, and for a dozen technical journals where research results are disseminated.
These days big pharma does very little research. The innovation comes from the small companies, and those that succeed often acquired by big pharma, or license their drug candidates to them so that the enormous costs of clinical trials are absorbed by the much larger partner.
These small companies live on what can be substantial investment (hundreds of millions of dollars each) by venture capital firms. So the ability of a company to raise money will depend on the VCs being able to generate enough after-tax income for their few successes to fund their failures. Obamacare is squeezing this on both ends. First, the capital gains rate is slated to increase substantially. Second, the revenue potential for the putative new products under whatever form Obamacare takes will undoubtedly decrease. This also affects company value for any potential IPO.
That makes this space a much less attractive investment. Of course companies will still be funded, but they will be far fewer in number and the pressure on them to produce will increase from what is already obnoxious. Since success is partially a numbers game, there will be fewer products that come to market.
No, a company cannot live on grants. A $2 million grant award is a large one, but this is typically the amount that a company raises from venture sources for its *first* funding round (of many). And winning grants these days is really, really challenging: success rates are on the order of 15%. It is nearly impossible to fund a company of any size from grants alone -- only the academics can live on grants since their salary and lab overhead is heavily subsidized by their institution.
I should also note that there are many overhead categories that government grants will not cover, such as intellectual property prosecution. The agency funds the work, and expects you to publish the results, but will not fund obtaining patents. There is a commitment to commercializing new products!
That to me is the major threat to innovation under Obamacare: draining the life blood out of the small-business corpus. That's where the innovation resides, and that's what appears will be hit the hardest."