Magazine Article | January 1, 2016

Can You Afford To Take Biopharma Innovation For Granted?

Source: Life Science Leader
Allan L Shaw - 150px H

By Allan L. Shaw, a five-time public company CFO (e.g., Serono & Syndax) and has served on five public boards, which included the chairing of two audit and two compensation committees.

Notwithstanding biopharma’s immeasurable contribution to society and the promise of delivering many more exciting medicines, the industry remains the favorite whipping boy due primarily to drug pricing. Biopharma continues to serve as the proverbial lightning rod of criticism by politicians, payers, doctors, and patient-consumers, which is ironic given that such fervent disdain and criticism is usually reserved for the industries causing global health problems, such as tobacco, not the industry solving them. As part of this debate, perhaps myopically, there has been a great deal of focus and scrutiny (myself included) concerning the inequity in U.S. drug prices relative to the rest of the world. However, when considered on a macro level, why should the U.S. subsidization of global medicine be any different from other U.S. global leadership roles (underwritten by U.S. taxpayers)?

Arguably speaking, the U.S. drug price premium relative to the rest of the world is simply another form of U.S. aid (e.g., foreign, defense, humanitarian, international organizations such as the United Nations and NATO) that provides much greater benefits to mankind. Unfortunately, the funding mechanism is regressive in nature and much more akin to a sales tax, inevitably placing undue burden on patients and becoming an impediment to optimal healthcare. This dynamic is the heart of a much more fundamental and overarching question: How do you facilitate optimal cost-effective patient access to innovative medicines while providing the necessary financial rewards/incentives to keep the prolific scientific engines running? Particularly, global costcontainment initiatives and the resulting price controls in the rest of the world have put pressure on achieving profitability in the U.S.

While some politicians such as Bernie Sanders may be campaigning that “the pharmaceutical industry has become a health hazard for the American people,” nothing could be further from the truth. There is no denying it — innovative medicines have and will continue to have a profound role in saving lives and impacting the quality of life for millions, not just in America, but around the world. With ongoing advancements in understanding the underlying basis of physiology and disease, we are only just beginning to see the tip of the iceberg, and the outlook has never been brighter. In parallel, U.S. drug prices have already started to succumb to gravitational forces from fundamental reform in the U.S. healthcare ecosystem. The consolidation of pharmacy benefit managers (PBMs) and their increasing purchasing power and the evolving value-based reimbursement system are changing the commercial landscape. This new reality should reward truly innovative medicines while facilitating the extinction of “me-too” branded products. With that said, if European-style price controls were enacted in the U.S., what would happen to the pace and capacity of translating scientific insight into products that deeply impact public health?

“How do you facilitate optimal cost-effective patient access to innovative medicines while providing the necessary financial rewards/incentives to keep the prolific scientific engines running?”

The innovation that leads to effective treatments for diseases that affect public health depends upon a complex and thriving ecosystem that involves basic research in universities and research institutes, drug discovery and development (R&D) in the biopharmaceutical industry, and clinical research in hospitals. R&D is risky and costly; therefore, high financial returns are necessary to induce investment in researching and developing new treatment modalities. So yes, it is easy to characterize U.S. drug costs as “price gouging,” but most of the time, that kind of blanket description severely underestimates all the time, effort, money, and risk that went into developing a pill, injection, or technology. Changes in federal policy that affect the returns of biopharma R&D may have dramatic effects on the investment patterns of the industry. Given this sensitivity to the policy changes, it is important to consider the unintended consequences of the effects on R&D, similar to pulling on a loose string on a sweater. The risk/reward model is the ultimate arbiter in resource allocation (e.g., human and capital). The power of this alignment is best illustrated by the proliferation of drugs targeting orphan diseases, which currently make up approximately 13 percent of global branded Rx sales, a percentage that is growing at almost twice the market rate. It should not be surprising that the favorable risk-adjusted return on such products is driving further R&D investments in orphan diseases.

In my view, it is hardly a coincidence that the U.S. is the epicenter of biopharma R&D innovation. It is all about the U.S. ecosystem, which is second to none with its deep concentration of academics, companies, talent, and capital. These characteristics and their interconnection are fundamental drivers that enable the ecosystem’s capacity to incubate cutting-edge science and create and capitalize companies. In contrast, it is extremely challenging to do likewise abroad, as other parts of the world do not possess the critical mass of resources or investor sophistication (e.g., lack of early-stage capital to fund innovation, smaller pools of talent, a lack of entrepreneurial bench strength). Inevitably, great science remains untapped, and many early-stage players are starved for investment due to deficiencies in their ecosystem. To put this in better perspective, the $450-million round closed by Moderna Therapeutics, a U.S.-based venture-backed company pioneering the development of messenger RNA (mRNA) Therapeutics, was more than all of the VC money invested in the U.K in 2014. In the two-and-a-half years since emerging from stealth mode, Moderna has raised $600 million, 25 percent of what the U.K. biotech industry managed over the past decade. Consequently, this dynamic has contributed to the ever-increasing U.S. migration of foreign biopharmas to access its capital markets and deep pockets of resources to better facilitate growth.

The focus of all stakeholders should be centered on two goals:

  • Establishing a policy framework that incents innovation rather than rewards yesterday’s advances. All available tools should be considered and included, such as vouchers for priority regulatory review, exclusivity periods, and targeted tax credits. Perhaps even consider a tax amnesty to encourage the repatriation of profits trapped off-shore if they are reinvested in R&D (alleviating the need for tax inversions).
  • Enabling optimal patient access to cost-effective innovative medicines. The regressive elements of patients’ higher out-of-pocket costs could be partially mitigated by various forms of rebates and co-pay assistance, including coupons and vouchers for lower-income beneficiaries.

The continued increase in life expectancies should not be taken for granted. It is not an entitlement. Without the appropriate risk/reward incentives, it will be increasingly difficult, if not impossible, to continue the prolific pace of scientific advancement, particularly if the U.S. discontinues its implicit subsidiary of global medicine. It’s always costlier to lead the pack, but the benefits gained from both an economic and humanitarian perspective far outweigh the costs. While one can debate the means to the end, it is important to note that “the end” includes the creation of a very exciting and pioneering scientific machine that addresses unmet medical needs and improves the standard of care for many people globally. Changes to the biopharma risk/reward model should not be done in isolation. Without good health, does anything else really matter? Be careful what you wish for.