Health reform vs. biotech innovation

A major reason for the high cost of US healthcare is that Americans pay full prices for brand new drugs that are either not available in other countries or (due to monopsony buying power) sold at a vastly reduced price. We have an American pharmaceutical (and now biotech) industry because of this policy, and we get solutions before anyone else, but effectively American consumers subsidize the rest of the world.

Without healthcare reform, one of the biggest healthcare policy questions before Congress would be establishing the policy for generic biotech drugs. Unlike small molecule (chemically produced) drugs, it is much harder to establish the biological equivalence of large molecule biologics (which tend to be protein-based created using recombinant DNA) without conducting new clinical trials.

Of course, generic biotech drug makers do not want to be required to conduct expensive and time-consuming clinical trials. They would rather sell knock-off drugs after patents expire, just as small molecule generic makers did after Hatch-Waxman came into effect.

The government has two hats here. As the safety regulator, it must reduce the chances of unsafe drugs being sold. As the nation’s largest drug purchaser (and antitrust regulator) it wants lots of competition for drugs to push down prices, as Hatch-Watchman has done for small-molecule drugs.

Alas, there is also the little inconvenient problem that if the biotech companies never get monopoly rents, then they won’t get VC investment and won’t develop drugs and probably won’t even come into existence. Large risky investments in innovation (new compound investments are among the riskiest) don’t get made without financial incentives and a supply of capital. (There are academic criticisms of using patents to incentivize innovation, but patents are a much cleaner incentive for pharma innovation than for say software or electronics).

Blogger Gene Quinn of IP Watchdog notes an interesting policy discussion last week on CNBC with two former government officials and the head of BIO (Biotech Industry Organization), the industry trade association. He summarizes the issues succinctly:

[T]he segment is well worth watching and will no doubt dispel the myths and lack of understanding by open-minded individuals who question why the biotechnology industry wanted 12 to 14 years of exclusivity for biologics, when the FTC said zero years of exclusivity would be sufficient, President Obama wanted no more than 7 years of exclusivity and Congress opted for 12 years of protection. Co-anchor Joe Kernan started off the questioning by saying: “How did you get 12 years? Why exclude biotechnology from the cost pressures that everyone else is going to have to live under?”

Surrounded by Republicans, apparently the CNBC host interjected himself to speak for the administration’s position:

Specifically, Kernan said: “it just seems like you are a poster child for the exorbitant costs of treatment and maybe some of the costs we shouldn’t be undertaking and we have to judge where to spend the money.” And people wonder why throughout the health care debate the public has been fighting so hard, despite the erroneous and scandalous labels hurled at ordinary citizens who simply want answers and know the government is lying about so much.

Here, Kernan defines the problem as should we be undertaking the cost of exorbitant treatments? Despite what President Obama and his team say, and despite what Democrats in Congress say, the truth is that the overwhelming majority of health care costs come at the end of life, and the only way to lower costs is to ration care at the end of life, as was suggested by Kernan.

Or, as Harvard economist Marvin Feldstein put it Wednesday: “The Obama strategy is to reduce health costs by rationing the services that we and future generations of patients will receive.”

Patent term is the key policy lever for increasing or decreasing the incentives for new drug discovery: it can make or break companies in this industry (while at the same time, excessive term delays competition that makes readily available).

I hope that the patent issue can be debated outside the context of healthcare reform, because it’s too important an issue to get buried among 1,011 unread pages of the healthcare reform bill.