|
There is an industry well
known for being immune
to swings inherent in the business
cycle. This sector's companies
can regularly return double-digit
profit gains, year in and
year out, regardless of overall
economic conditions and is often
sought by investors as a safehaven
on Wall Street because of
dependable earnings growth.
This same industry commonly
pays average salaries that generally
reach twice the State's
overall average wage. This sector
also routinely spins off new
companies or takes equity stakes
to infuse capital to biotech
startups as frequently as it
consolidates in an era of merger
mania. This industry group,
moreover, has some of the most
potent direct job and earnings
multipliers of any industry in the
State and is a powerful engine of
growth when it is aligned with
academia, government, and free
flowing venture capital. Most
importantly, this sector, as a
matter of course, saves numerous
human and animal lives and
makes difficult living situations
more than just bearable. Naturally,
the topic of above discussion
is the drug manufacturing
sector of the Nutmeg State.
The Metamorphosis
The sector is specifically
defined as Standard Industry
Classification (SIC) 283 - Drugs.
This group comprises establish-
ments principally engaged in
manufacturing, fabricating, or
processing medical chemicals
and pharmaceutical products.
This classification also includes
firms working in the grading,
grinding, and milling of botanicals.
But increasingly in Connecticut,
SIC 283 - Drugs means
value-added research and development.
The State's traditional
manufacturing sub-component of
the chemical industry is phasing
out some of its on-going mass
production processes and concentrating
on the specific creation
of patented compounds
which have higher profit margin
protection over time. This in turn
leads to more emphasis on the
acceleration of drug research to
discover these prospective compounds.
Nowadays, most of the
employment growth in this sector
is coming from increased laboratory
research, clinical trial development
expenditures, and patented
compound fabrication. The
focal point is now on the drug
"pipeline", which leads to future
revenue streams with high profit
margins on patented pharmaceuticals,
not the low-margin bulk
chemical production that can be
duplicated cheaper somewhere
else.
An example of this would be
the former making of penicillin,
caffeine, and citric acid in the
State. These compounds evolved
to become almost bulk commodities
that are now generally produced
off shore so that companies
can compete on cost with
other players in the basic production
of these products. Once
a patented drug loses its exclusivity,
the profit margins suffer
quickly, and it is no longer
efficient to produce such compounds
in Connecticut where a
skilled and educated workforce
demands wages among the
highest in the nation. So, drug
companies are re-evaluating their
operations here to take advantage
of Connecticut's intellectual
capital to boost profit margins.
Additional circumstances
have also facilitated the increased
focus on R&D in Connecticut.
Technology advances
have allowed research scientists
to screen many more prospective
compounds in a shorter amount
of time to gauge the bio-activity
of certain substances. This
provides a much larger array of
prospective reactive compounds
for further investigation. Consequently,
more scientists are
needed for this research. This
falls right into play for
Connecticut's highly educated
workforce (which has among the
nation's highest percentages of
college degrees per capita). With
more prospective substances as
candidates for drug patents, the
State is also benefiting from the
clinical trial development and
marketing aspects involved. In
the near future, especially with a
planned Pfizer expansion in New
London that will be engrossed in
clinical trials, the development
and marketing aspects of the
drug sector will expand in Connecticut. Bringing drugs to
market is as important to the
bottom line as discovering them.
Environmental regulation and
heightened corporate citizenship
apparently have also helped
redirect this sector's objectives.
Pollution control efforts, both to
meet DEP and EPA requirements
and company ethics provisions,
have instigated a shift to cleaner
production processes that in turn
has led to more automation in
production. Fewer people are
now involved in the actual production
of drugs in the State, yet
overall employment levels have
grown, with the employment
need being redirected to research.
Research and development
is fundamentally less
polluting than bulk chemical
production and this will reduce
emissions, especially of elements
like nitrogen, that have had a
negative effect on Long Island
Sound.
Furthermore, State research
and development tax incentives
were formerly only favorable for
the truly large companies, but
now they have been extended to
more companies with much lower
R&D spending thresholds. The
benefits of these tax incentives
will spread to smaller companies,
further boosting research in this
sector and in biotechnology in
general.
A Viagra To The Economy
One science advocacy group
(CURE) estimates that over 55%
of the State's pharmaceutical
industry (SIC 283) employment is
now already involved with R&D.
This percentage will undoubtedly
increase as laboratory space
shortages are being addressed in
a resourceful manner and employment
is projected to grow by
better than 25% by 2006, to
about 11,900 from 9,300 at the
end of 1997. Planned drug
company laboratory expansions
along with a new major clinical
facility already under construction
will lead this growth, indicating
the emphasis on research.
Pfizer in Groton and Bayer in
West Haven, a couple of wellknown
pharmaceutical companies,
are currently in the forefront
of laboratory and clinical
research space creation in the
State. Besides adding more lab
space, drug companies take
equity stakes, buy marketing
rights to prospective compounds
from biotech firms,
and set up joint partnerships
that really provide almost a
quadruple-boost to employment
in the State. There are
already some unique relationships
in existence
between drug companies
and the State universities
(Pfizer-UCONN) for example,
and with Yale
University in particular.
Health centers will also
play a pivotal supporting
role in research and are
essential for clinical trial
programs and evaluations.
The drug sector certainly
impacts various areas of business
activity as exhibited by the
direct-earnings and job multipliers
of better than 2.20-to-1 for
earnings ($'s) and better than
3.33-to-1 for employment (number
of jobs). Obviously, these jobs
are worth keeping and are the
ones a state should promote.
These jobs have also shown that
they stick around during times of
recession. Connecticut already is
a national hotbed for drug manufacturing
employment along with
New Jersey and Pennsylvania.
For a national perspective, look
at Connecticut's total nonfarm
employment. While Connecticut
has just 1.3% of the nation's
nonagricultural jobs, its drug
sector with about 9,200 positions
in 1997, makes up over 3.5% of
the nation's 260,300 drug sector
jobs.
Nutmeg Panacea
The future of this sector looks
bright in Connecticut, with many
positive developments assisting
growth down the road. The State
has targeted the sector as part of
the high technology industry
cluster, providing support and
incentives as a catalyst to further
advance job creation, facilitate
company expansion, and attract
other pharmaceutical firms to the
Nutmeg State. Industry-wide
trends are also very favorable
and they include a more industry
responsive FDA and the full
realization that drug research is
really the engine of growth for the
sector. Companies are putting a
higher percentage of revenues
back into R&D as compared to
the early 1990's. At Pfizer, almost
16% of sales went into R&D in
1997 (almost $2 billion, with
about $1 billion being spent at
the Pfizer Central Research
facilities in Groton), up from 11%
of sales in 1990. There is also the
emergence of the focus on
lifestyle drugs, like Viagra, that
are in so much demand from the
aging baby-boomers. These new
drugs now enhance day-to-day
life more than they cure a particular
disease, opening up vast
opportunities for new products.
Increased research activity is
also being applied in the area of
drugs for animals. In addition
more federal government research
dollars are now inclined
to go to non-military areas like
national health instead of into
defense. Finally, the increasing
prevalence of CRO's (Contract
Research Organizations), which
have the critical mass to conduct
large clinical trials for drug
companies, could also assist in
the creation of high-paying job
opportunities in the State as
drug companies often have more
prospective drug candidates than
they can handle. They are already
farming out more R&D to
biotech firms and may eventually
subcontract some work to the
CRO's. In the future, a
similar seeding of research
and testing firms
is expected to grow
around Pfizer's announced
expansion on
New London's waterfront.
There appears to be a
dynamic unfolding in
this industry that summons
the need to be on
the cutting edge of drug
exploration. This important
industry sub-group
has changed its processes
to build more on intellectual
capital than physical capital.
The State of Connecticut has
recognized this and is providing
an improved research environment
to retain and attract firms
in this prime employing sector.
Common sense tells us that
these research jobs fit well with
Connecticut's demographic
makeup that includes a bettereducated
labor force, higher per
capita incomes, and an aging
population. Also, as a smaller
state with slower but controlled
growth, Connecticut needs jobs
with potent direct multipliers to
help further spread economic
gains. One eighteenth-century
scientist, Benjamin Franklin,
would have noted that fostering
research growth could make the
State as well as its drug industry,
healthy, wealthy, and a whole lot
wiser.
Connecticut's merchandise
exports, which had slipped
0.3 percent in the first quarter,
were up 1.5 percent through
the second quarter of 1998 from
the same period last year. U.S.
exports through the second
quarter were up only 0.8 percent.
Connecticut's largest export
industry, transportation equipment
was up 13.7 percent;
instruments were up 5.9 percent;
and rubber and miscellaneous
plastic products were up
4.9 percent. These gains were
offset by decreases of 2.8 percent
in industrial machinery;
11.9 percent in electronic
equipment; 3.3 percent in
chemicals; 23.6 percent in
fabricated metals; 29.4 percent
in primary metals; 19.4 percent
in apparel; and 9.1 percent in
paper and allied products,
among the top ten export
industries.
Connecticut's largest trading
partner, Canada increased
imports of Connecticut products
3.1 percent, while exports to
Asian countries overall fell 11.8
percent. The dollar value of
exports to all Asian countries
represented 21.8 percent of
Connecticut's total exports.
Among Connecticut's top ten
export destinations, exports to
Mexico were up 10.0 percent,
along with exports to France, up
100 percent, Germany, up 10.7
percent, and the Netherlands,
up 17.2 percent. Exports to the
United Kingdom were down
16.4 percent. Exports to all of
Connecticut's top ten trading
partners were up 7.0 percent.
Commissioner James F.
Abromaitis of the Connecticut
Department of Economic and
Community Development announced
that Connecticut communities
authorized 976 new
housing units in August 1998, a
23.2 percent increase compared to
August of 1997 when 792 were
authorized.
The Department further indicated
that the 976 units permitted
in August 1998 represent a decrease
of 24.7 percent from the
1,297 units permitted in July
1998. The year-to-date permits
are up 20.8 percent, from 6,279
through August 1997, to 7,586
through August 1998.
"Housing permits continue to
show strong, steady growth
through August," Commissioner
Abromaitis said. "More good news
is the fact that the housing sector
experienced an increase in most of
Connecticut's major cities, namely
Bridgeport up 33 units, Hartford
up 52 units, and Stamford up 62
units compared with the same
period last year."
Reports from municipal officials
throughout the state indicate that
Fairfield County with 56.6 percent
showed the greatest percentage
increase in August compared to
the same month a year ago.
Middlesex County followed with a
50.0 percent increase.
Fairfield County documented
the largest number of new, authorized
units in August with 260.
Hartford County followed with 214
units and New Haven County had
147 units. Danbury led all Connecticut
communities with 56
units, followed by Stamford with
54 and Winchester with 49.
The Connecticut coincident
employment index paints
a picture of continuing growth for
the Connecticut economy. The
coincident index has followed a
strong upward trend for nearly
the last three years, unlike its
weaker upward movement during
the initial phase of the current
expansion. The Connecticut
leading employment index,
however, provides a less-clear
vision of the future. The leading
index has also been on an upward
trend, albeit with less
strength and with more ups and
downs around this slower trend.
The relative strength in the
movement of the two indexes is
illustrated by their growth rates
over the last year - the coincident
index rose by 7.3 percent
while the leading index increased
by only 1.4 percent.
The coincident index, a
barometer of current employment
activity, reached another new
peak with the release of (preliminary)
July data. The increase in
the coincident index results
entirely from the fall in the
unemployment rate from 3.8 to
3.4 percent. The other three
components each generated
small negative signals on a
month-over-month basis.
The leading index, a barometer
of future employment activity,
backed off slightly for the
second consecutive month. The
June decrease in the leading
index was largely a result of the
higher initial claims for unemployment
insurance. The July fall
emerged as a result of lower
Hartford help-wanted advertising
and a higher short-duration
unemployment rate.
A reversal in the direction of
movement of the leading index
for three consecutive months
generally precedes a change in
the direction of the economy by
six months to a year. As a consequence,
future movements in the
leading index need close monitoring,
since they will signal future
movements in the Connecticut
economy.
In summary, the coincident
employment index rose from 89.2
in July 1997 to 95.7 in July
1998. All four index components,
once again, point in a positive
direction on a year-over-year
basis with higher nonfarm employment,
higher total employment,
a lower insured unemployment
rate, and a lower total
unemployment rate.
The leading employment
index rose from 89.8 in July
1997 to 91.1 in July 1998. Four
of the five index components sent
positive signals on a year-overyear
basis with a lower shortduration
(less than 15 weeks)
unemployment rate, higher
Hartford help-wanted advertising,
higher total housing permits,
and a longer average work week
of manufacturing production
workers. The other component
sent a negative signal on a yearover-
year basis with higher
initial claims for unemployment
insurance.
SOURCE: Connecticut Center for or Economic Analysis, University of Connecticut. Developed by Pami Dua [Economic Cycle
Research Institute; NY,NY] and Stephen M. Miller [(860) 486-3853, Storrs Campus]. Campus]. Kathryn E. Parr and Hulya Varol [(860) 486-3022, Storrs Campus] provided research support.
Return to Top
|