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Life-Science Startups Aren't Too Lively, New Study Finds

The profusion of big mergers in pharmaceuticals, such as Valeant Pharmaceuticals International’s $54 billion offer for Allergan (AGN), creates the impression that the life-science sector is booming. But the pipeline of new companies is going dry, according to a new study.

“The precise causes of this decline remain unclear,” says the study released today by Ian Hathaway of Ennsyte Economics and Robert Litan of the Brookings Institution. But what’s certain, they add, is that the sector “requires a regular flow of new [company] formations far in excess of what we’ve seen in recent years.”

Within life sciences, the laggard is the medical device and equipment segment, which the authors say has “been on a secular decline for two decades.” Company formations are down more than 50 percent, and those that are born are creating fewer jobs. The drug and pharmaceutical segment has remained “dynamic,” they write, while the research, testing, and medical-lab segment falls in between.

Drug startups have done well because big pharmaceutical companies are outsourcing their R&D to smaller companies, Hathaway and Litan say. The medical device and equipment segment, they say, may have been hurt by “insurance reimbursement schemes, regulatory restrictions and delays, technological and economic challenges, venture funding scarcity, and competition for talent from other technology sectors.”

Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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