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.

Incentives for innovation

This week my friend Kevin Short (former guest lecturer on drug discovery in my technology strategy class) introduced me to several healthcare blogs. The most interesting was “In the Pipeline” (referring to drugs under development) by Derek Lowe, a Ph.D. chemist who has worked for various pharma companies. Its average posts are as substantial (if not more so) than my longer posts, and it has the sort of dry humor that I enjoy.

There was a lot to enjoy. As an academic social scientist, I liked “Run! Anthropologists!” about the (decade-old) practice of hiring anthropologists to study corporate culture. As a former journalist, I relished how he skewers bad gonzo journalism in a visit by a wanna-be Hunter Thompson to the Genentech plant in Vacaville (about 80 miles north of Silicon Valley). Gonzo journalism is about 30 years out of date: at least imitating Hemingway (rather than Thompson) has some lasting value.

But the article most relevant to this audience bears on a core theme of this blog, the incentives for innovation. As someone whose business card says “innovation and entrepreneurship,” I think there is no more fundamental issue than who and why does someone develop important new innovations?

In the posting, Dr. Lowe talks about European Union efforts to stimulate more drug innovation. He quotes from a speech by Günter Verheugen, a commission official looking at pharmaceutical industry policy, acknowledging (very obliquely) the conflicting goals of containing prices and providing incentives for innovation.

After he praises EC for considering providing more financial incentive for European drug discovery, Lowe wonders whether that’s the major effect, instead pointing to cultural differences:

Perhaps I think this way because I used to work for a European company, and now work in Cambridge (home of a zillion startups). But I've long thought that there's a different attitude to research and development in this country, a greater willingness to try odd ideas and to put money behind them. I'm not saying that you don't find innovation in Europe, because you certainly can. But I think that innovators have, on the average, an easier time getting funded and being taken seriously over here. It’s not a huge difference, but it's a steady one, and it's been compounding over time.

In classical political and economic theory, the two issues are inherently related — encouraging risk-taking either reflects (or is reflected in) economic policies. The problem with such neat theorizing are the counterfactuals.

In the past decade, California has become one of the most redistributionist states in the country, and yet remains probably the most risk-taking. Cambridge (Mass.) is located in an even more redistributionist state, one that more than 20 years ago was dubbed “Taxachusetts” and yet still has the best concentration of biomedical research universities in the country. So will entrepreneurs continue despite regulation and taxation? Is there a lag effect? Or are the universities so important that California will always beat out Nevada, Arizona (or Utah) in entrepreneurial formation?

So as with any policy question, advocates on each side can only guess what would happen with a policy change. Would more generous payment for European drugs encourage innovation, or would it require a sea change in work attitudes and risk taking to make something happen? And will it ever matter if the Wild East (of Chinese coastal regions) boasts both low wages and high rates of industry growth and entrepreneurial opportunity, or if India becomes the preferred Anglo-American outsourcing venue for more than just I.T.?

Technorati Tags: biotech, EU, IP policy, industrial policy

Building an Open “Cyberinfrastructure”

Monday and Tuesday I was at an NSF-sponsored conference at the National Academies of Science and Engineering. Because it’s in DC, it has had a real mouthful of a name: “Designing Cyberinfrastructure for Collaboration and Innovation: Emerging Frameworks and Strategies for Enabling and Controlling Knowledge” until they realized it was a distraction and shortened it.

The title and the cyberinfrastructure jargon made it sounds more intimidating than it was: although participants were expected to use the cyberinfrastructure buzzword (tied to an NSF program of the same name), it contained an interesting assortment of 12-minute talks about real problems of openness from a cross-section of views. Based on their printed bios, the 47 scheduled speakers came from academia (44%), government (US plus UK plus OECD, 26%), companies (17%) and nonprofits (13%).

Most of the talks related directly to IT, although a few focused on IP and innovation issues related to the sciences (mainly biopharma).

Major Themes
There were three major themes:

• The Need for Cyberinfrastructure. Why do we need cyberinfrastructure? After releasing the Atkins report in 2003 — named for the blue-ribbon panel led by Dan Atkins — the NSF was already sold on the idea. This part was mainly an introduction for the rest of us that haven’t been thinking about the problem.
• How Infrastructure is Different. The dictionary defines infrastructure as shared facilities necessary for economic activity. Many of the speakers offered intriguing examples of how infrastructure enables research, innovation and economic activity.
• Partitioning Between Public Good and Private Gain. My own talk fit in this category, as did the many talks about the IP system. It was clear that infrastructure is not the same as taxpayer-supported: the government pushed rural electrification and telephone deployment (or the Internet) even though facilities were owned by private firms.

As Yogi Berra would say, this was like dejà vu all over again. Organizer Brian Kahin noted that the issues of cyberinfrastructure today resemble those of 1994 with plans for the NII (a term that Al Gore and other policy wonks were then using to refer to what became the Internet). Then at Harvard’s Kennedy School, among his various efforts Brian hosted a 1996 conference and published a 1997 book on global NII policy, which is where I first met him. The issues of creating a digital communications infrastructure are similar to those of a decade ago: architecture, implementation, funding and use.

What’s different is the scale of data transmission and storage required for things like patient trials, medical imaging and digital astronomy. Mark Ellisman of UCSD (founder of the Biomedical Informatics Research Network) talked about 5 petabytes (that’s about 5 million gigabytes) for a single 3D image of a rodent organ. Imagine what movies would require.

What Was Interesting
It’s hard to capture 16 hours of meetings into 750 words, which is why I have separate posts on IP (coming soon), a general question of “what is open,” and my own talk about open standards/open source/open innovation.

My favorite talks were (in no particular order)

• Siobhán O’Mahony (Harvard) and Fiona Murray (MIT), with 2 interesting case studies of how private innovation is getting more public and vice versa. They concluded that there’s a need to create boundary organizations if resources (technology, IP, other assets) is going to be distributed between shared (public) and private interests.
• Shane Greenstein (Northwestern), excerpted from his in-progress book on the history of the U.S. internet service provider (ISP) industry. He talked about how individual (often small) firms performed economic experiments, and how these economic (i.e. business) innovations spread and thus were cumulative across the industry.
• Steve Jackson (Michigan): once an infrastructure is created, there is an “inside,” an “outside” and often “orphans.” Certainly the decisions made in creating the infrastructure define winners and losers.
• Brett Frischmann (Loyola Chicago) talked about how infrastructure is a sharable generic input into a wide variety of output, and how the value of infrastructure is actually realized downstream by consumers of outputs.
• Sara Boettiger (PIPRA) whose talk I mentioned earlier.

Carl Cargill (Sun) also spoke forcefully about how the standards system is broken, while others talked about the issue in less apocalyptic terms. Because standardization is a central issue of openness in the IT industry, I’ll summarize these arguments later.

The slides for some of the talks have been posted and more will be posted later in the week. The individual papers are likely to end up in an online journal in a few months.

Technorati Tags: biotech, infrastructure, intellectual property, Internet, open standards

Is Open a Process or an Outcome?

One of the themes of this week’s conference is defining “open.” The word “open” means different things to different people. Our host, institutional entrepreneur Brian Kahin, joked that not only should we put quotes around “open,” but perhaps we should increase/decrease the number of quotes to indicate our uncertainty over the term.

A key question for “ “ “ open ” ” ” - ness is the question of whether it is a process or an outcome. As I noted in my own paper, this ties back to the research on organization behavior, which has found that workers perceive two types of “ “ fair ” ” outcomes: procedural justice (process fairness) or distributive justices (outcome fairness).

(Of course, open-ness could just be a hollow marketing slogan, as the example I cited several years ago of the OpenVMS proprietary operating system. This was best captured at the conference by J.C. Herz, a videogame industry analyst (and DoD consultant) who had the best one-liner of the conference, likening “open” to a magic flavoring: “We will sprinkle a little ‘open’ on it and people will eat it.”)

Today, from the realm of biotech IPR came a dramatic example of these two types of openness. The occasion was the talk by Sara Boettiger of the Public Intellectual Property Resource for Agriculture (PIPRA). The PIPRA is an interesting animal — a Rockefeller Foundation-funded nonprofit created to help manage and disseminate the IP of university and public sector agricultural researchers — based at UC Davis. There is an obvious public good of having taxpayer-supported agricultural research be used to improve crop yields in developing countries.

Boettiger used the hypothetical example of the perfect AIDS vaccine to illustrate the gap between what I call openness in process and outcome. Suppose someone discovers the vaccine, and puts it in the public domain? It would still require millions of dollars to produce and administer that vaccine to the [more than 500 million] residents of sub-Saharan Africa.

She then briefly summarized how this was handled with the polio vaccine, whose inventor, Jonas Salk, famously told Edward R. Murrow “There is no patent. Can you patent the sun?" Boettiger showed that it took a considerable amount of private money from the National Foundation for Infantile Paralysis (created by FDR, now known as the March of Dimes) to fund the research and manufacturing, as well as volunteer efforts (with schoolchildren as subjects) to conduct and analyze the trials.

Such nonprofit funding and volunteer effort are appropriate for something of such urgent and noble purpose. For more prosaic purposes, we have the volunteer efforts of creating Wikipedia. But of course the vast majority of innovation resources available in our economy are generated by firms reinvesting their profits for their own private gain. (It’s called capitalism, folks).

Ironically, thanks to the quasi-monopoly of the not-very-open Windows standard, there will be nonprofit money to distribute that AIDS vaccine when the time comes.

Technorati Tags: biotech, intellectual property, open standards