Healthcare Reform vs Innovation and Growth?

By Michael D. Becker, Janet L. Dally, and Jeffrey Martini, Ph.D.

The life sciences industry [herein includes pharmaceutical, biotechnology, diagnostic and medical device companies] plays a critical role in the U.S. economy. Innovative new medicines developed by life sciences companies provide better patient outcomes, improved quality of care, increased life expectancy, and lead to economic gains.

Currently, the strengths [e.g. innovation, quality of care] and weaknesses [e.g. gaps in healthcare coverage, high costs and inefficiencies] of the U.S. healthcare system are the subject of great debate. During this period, it is essential for all parties involved to place the importance of medical and scientific innovation at the forefront of the conversation. New medicines should be viewed as investments in the future, not only in patient health – but also in economic recovery and growth.

For example, in 2006, University of Chicago economists Kevin Murphy and Robert Topel reported that from 1970 to 2000, gains in life expectancy added about $3.2 trillion per year to national wealth, with half of these gains due to progress against heart disease alone [1]. Looking ahead, they estimated that even modest progress against major diseases would be extremely valuable. A permanent one percent reduction in mortality from cancer alone has a present value to current and future generations of Americans of nearly $500 billion and a cure would be worth about $50 trillion.

Drug manufacturers and patents

While the cost of prescription medicines is one of the centerpieces of the ongoing healthcare reform debate, according to the Pharmaceutical Research and Manufacturers of America, or PhRMA, they represent only 10 percent of the total healthcare costs [2]. Further, PhRMA cites a study that predicted how improving the use of blood pressure-lowering medicines would result in 89,000 fewer deaths and 420,000 fewer hospitalizations annually – saving more than $15 billion a year in health care costs. As such, discussions should focus less on the costs of prescription medicines and more on inefficiencies in the remaining 90% of the healthcare system.

When a new life science product reaches the market, it is patent-protected for a defined number of years based on the type of drug, disease indication, and medical need. During the period of patent protection, drugs can be sold at an appropriate price where the life sciences company hopes to:

1. Recover its significant initial investment
2. Reinvest in new drug discovery and development
3. Provide adequate returns for its stakeholders

The originator’s ability to accomplish these three objectives is largely dependent upon sufficient patent protection. When the patent protection of a branded drug expires and generic versions enter the market, the profits for the branded drug are eliminated. This puts pressure on the originator to maintain a robust pipeline of new product candidates, which supports a continual cycle of selling new, innovating medicines and replacing less effective ones. Accordingly, healthcare policy must continue to reward scientific innovation instead of decreasing patent life on new technologies – especially biologics.

Patent protected?

Aside from patent length, the Federal Circuit’s In re Bilski standard for patentable subject matter could also have widespread negative implications for life sciences companies that rely on patent protection for biological, diagnostic, and personalized medicine methods that utilize biomarkers or other correlations between a genetic or physiological predisposition and disease-susceptibility or likelihood of treatment success. If the Supreme Court fails to overturn the decision of the U.S. Court of Appeals for the Federal Circuit in Bilski v. Doll, uncertainty over existing and future patents will stifle investment in these areas and cause significant volatility in the stock prices of affected public companies.

As leaders of medical innovation, newly formed, pre-revenue stage life science companies are an integral and often undervalued aspect of bringing new medicines to the market. As such, any changes in patent law, healthcare policy and health economics should carefully consider the ramifications on this fragile segment of the life science industry.

Biopharma industry a job creator

Beyond better patient outcomes, improved quality of care, and increased life expectancy, emerging life sciences companies play a vital role in job creation. In a recent Wall Street Journal [WSJ] report, 14% of total new hires between 1993 and 2008 were from newly formed businesses [3]. Life sciences start-ups require highly skilled positions with advanced degrees and often offer higher salaries. A report from Ben Franklin Technology Partners, a state-backed venture capital firm, indicated that high technology investments [including life sciences] from 2002-2006 created 32,800 jobs that would otherwise not have existed and with salaries 33% higher than other industries [4].

Some lawmakers have acknowledged the importance of these emerging life sciences companies and their impact on the U.S. economy and medical innovation. For example, the Biotechnology Industry Organization [BIO] reported that the Therapeutic Project Tax Credit Amendment was recently added to “America’s Healthy Future Act of 2009.” The amendment, offered by Senator Robert Menendez [D-NJ], would reimburse small biotechnology companies with 250 employees or less for a portion of their therapeutic development activities, including hiring scientists and conducting clinical studies.

Raising capital

Creative solutions, such as the Therapeutic Project Tax Credit Amendment, are critical in view of the fact that research-intensive life sciences companies must raise hundreds of millions of dollars during a decade-long period to bring new products to market. The costs to develop a drug are continuing to increase at a tremendous rate, reaching about $1.4 billion in 2006 [5]. Accordingly, any discussion about reducing the cost of prescription drugs must start with ways to decrease the financial burden and amount of time required to bring new products to the market.

As costs continue to increase, life sciences companies require access to larger amounts of capital to fund drug development. This reduces the number of venture capital [VC] transactions, while increasing the requisite size of each one. To illustrate, a total of $361 million was invested by VCs in Series A life science transactions during the second quarter of 2009, up slightly from $345 million in the comparable period of 2008. However, the total number of Series A deals was down from 31 deals in the second quarter of 2008 to 22 in the comparable period of 2009 [6].

Industry investment in doubt

The complexities of early stage life science companies coupled with uncertainties in the future healthcare landscape are proving difficult for VCs and other life science investors. As an investor in risky, high-tech opportunities, financiers must be able to achieve a significant return on those companies that do succeed to be able to account for the high number of failures and high costs of development. The successful exit of these companies is largely dependent upon the size of the market opportunity and the length of patent exclusivity.

If the valuation of early stage life sciences companies is decreased through pricing pressure, changes to patent protection, more rigorous FDA requirements [larger and longer clinical trial requirements for approval and post marketing surveillance], or overall uncertainty, the model of life sciences investing will not be sustainable. Together, decreased company formation and reduced access to capital for life science companies will lead to fewer new and improved medicines of the future.

America must understand that innovative new medicines are priced according to their scientific complexity, significant development timelines and costs, and the need for stakeholders to realize a return from their investments. In an environment where innovation is expected to lead economic recovery, the leaders in healthcare policy must find the right balance between continuing medical innovation and reducing healthcare costs.

1. Murphy, Kevin and Topel, Robert (2006). “The Value of Health and Longevity.” The Journal of Political Economy, 2006, 114(5), pp. 871.
2. Pharmaceutical Research and Manufacturers of America [PhRMA]. “Platform for a Healthy America: Why Health Care Reform? Why Now?”
3. Wall Street Journal article by Tuna, Cari (September 29, 2009). “Sharp Drop in Start-Ups Bodes Ill for Jobs, Growth Outlook”
4. Pennsylvania Economy League (January 2009). “A Continuing Record of Achievement: The Economic Impact of Ben Franklin Technology Partners 2002-2006”
5. Pharmaceutical Research and Manufacturers of America [PhRMA]. “Profile 2008 Pharmaceutical Industry”
6. OnBioVC. “Trend Analysis – 2Q09”

Disclosure: no positions

Comments

[rrbatch:]

I fully agree with the contention that innovation in medicines and medical devices needs to be encouraged, but not with tax breaks or subsidies. The industry's profit motive is sufficient to continue realization of life-extending therapies.

As a productive 74-year-old with six heart artery bypasses, and sustained with moderate-cost drugs to regulate blood pressure, cholesterol, and blood sugar, I consider myself living proof that modern therapies can extend life. So why do we still consider our working capabilities to end at age 65 or 67? Let's recognize that normal life expectancy is now 75, and extend the eligibility for social security and pensions to that age. Retirement at age 65 was written into law in 1935, when that was the normal life expectancy.

The real waste is retirement of government employees after 30 years of service with full pension benefits, often in their mid-fifties. The cost is already bankrupting states like California, and will impact others until politicians have the guts to rethink their promises to provide retirement benefits while people are still in their prime working years.

Oct 13 12:39 PM

[414555:]

> The real waste is retirement of government employees after 30 years
> of service with full pension benefits, often in their mid-fifties.
> The cost is already bankrupting states like California, and will
> impact others until politicians have the guts to rethink their promises
> to provide retirement benefits while people are still in their prime
> working years.


Myth: Public pension benefits are excessive and a drain on the public.
September 23, 2009
Fact:
The average CalPERS pension is about $25,000 per year. Half of CalPERS retirees receive $16,000 per year or less in benefits. Unlike the private sector, many CalPERS members do not receive Social Security, making their CalPERS pension their sole source of pension income, other than savings.

Fact:
Seventy-eight percent of CalPERS retirees receive $36,000 per year or less. School pensioners in the CalPERS program receive on average $1,079.00 a month.

Fact:
Only 1 percent of the nearly half million CalPERS retirees receive annual pensions of $100,000 or more. Many are retired non-unionized or specialized skilled employees or other high wage earners who worked 30 years or more. Many served in high-level management positions.

Fact:
CalPERS pensioners help stimulate the economy. A study found that pension income to 674,000 CalPERS and CalSTRS retirees generated an economic impact of $21.1 billion to the State’s cities and counties. The economic footprint of retiree spending rivaled that of the hotel and accommodations industry of the State in 2006. In all, California public retirees put back $2 into the economy for every $1 they receive in pensions.

Oct 13 01:47 PM

[414555:]

Myth: Government pensions are paid by taxpayers.
September 23, 2009
Fact:
Retirement benefits are paid from the CalPERS pension fund, which is a trust fund that can be used only for payment of member benefits and related expenses. Historically, almost 75 cents of every dollar paid in pensions come from investment returns, not tax dollars.

Members contribute a fixed amount into the fund. The rest comes from employers’ contributions and investment income. CalPERS uses this money to pay for benefits and its administrative expenses.

Investment returns have brought in income to CalPERS of over $200 billion in 20 years; employers’ income has been about $56 billion, and members, through payroll dedications, have paid in $34 billion.

Oct 13 03:08 PM

[414555:]

Myth: Police and firefighters retire at age 50 with 90 percent of pay.
September 23, 2009
Fact:
Our records indicate that over the last seven years, safety workers who retired at age 50 with 30 years of service represented 1 percent of all those retired. The reason very few ever would receive this level pension is that they would have had to start working age 20 to earn 30 years. Most start their safety careers at age 27, 28, or 29.

Twelve percent of all public safety members are subject to the 3 percent at age 55 formula. They would need 37.5 years of service at age 50 to get 90 percent, and would have had to start working at age 12.5 to earn 37.5 years. And 7 percent of all public agency safety members are subject to the 2 percent at age 50 formula. They would need to have 45 years of service at age 50 to get 90 percent, and would have had to start working at age 5 to earn 45 years.

Oct 13 04:02 PM