That’s right. I hate to be the bearer of bad news, but there are no apps for treating Parkinson’s either. Or ALS. Or Alzheimer’s, or one of a large number of other diseases I could name and you don’t want to have. Numerous pharma and biotech companies have created more than a hundred different apps, but none of them are going to cure you. They simply provide patients or healthcare providers with product information or tools for tracking disease status or drug compliance. And unless current trends reverse themselves, there may be fewer new investments to find treatments for any of the diseases mentioned above in the foreseeable future.
Why? Because developing new drugs takes a long time and costs a lot of money, an outlay that is said to be doubling every six years. As a result, the pendulum appears to be swinging away from investing in the riskiest, early stage sector of this industry. The situation is even worse for so called “neglected diseases.” Investors who are looking for yields beyond those available in the equity and bond markets often look at start-ups, hoping to get in on the ground floor of the next Apple or Amgen. Despite this, a recent report on venture capital investments in biotech startups revealed a precipitous decline in early stage investments in these companies.
Why are VCs turning away from putting money into early stage biopharmaceuticals? The most likely explanation: they’ve had a difficult time making money in this sector over the past decade. There’s a limited pool of investment money, and many VCs can put these funds to work in one of the more highly favored industries these days, such as software development. Opportunities include mobile phone apps, social media sites, and cloud computing and backup solutions.
I can see the attraction of investing in these areas. A couple of caffeine-fueled programmers toiling away in a cut-rate workspace can crank out the code for a software project in a few months. If it works out, terrific. And if it doesn’t, the expense wasn’t great, they’ve “failed fast,” and it’s time to move on to the next investment opportunity. Let’s keep in mind, however, that funds poured into developing the latest smartphone app is money that’s not going towards developing treatments for cancer or other serious diseases.
There’s nothing inherently wrong with creating software products. The work is a decent way to make a living, pays a very good salary, and provides value to customers. A venture capitalist’s primary focus is making money, and if I were one of them, I’d probably be putting money into this sector as well. However, as Christian Chabot, CEO of Seattle-based Tableau Software, recently observed “One of the great tragedies of the modern technology industry is that a majority of the world’s most brilliant and talented people, many of them computer scientists, have spent the last 15 years working on projects that are primarily about getting people to click on more ads, or put more stuff in their shopping cart.”
Many people believe they can’t live without the latest app or gizmo, but their views on what matters most are likely to change rapidly when they get bad news in the doctor’s office. The total amount spent in the U.S. each year on biomedical research (which includes drug development) appears to be dwarfed by what is expended on developing software. In 2004, U.S. businesses spent around $250 billion on software development, far greater than the approximately $100 billion spent on all biomedical research (not just drug development) by government and industry groups combined in 2007. And with all due respect to the programming gurus, creating new drugs is a significantly more difficult (and expensive) undertaking.
While both software and genetic engineers need top of the line computer gear, lab researchers also need a significant amount of expensive equipment and consumable supplies. Biology is one of the most complex fields imaginable and there are no shortcuts. Genes and the proteins they encode must be examined in great detail, preferably on both a case-by-case basis as well as a systems biology approach. While it is relatively easy to fix mistakes in computer code, there is, as yet, no reliable way to repair errors in the genetic code (i.e. DNA) that are frequently found within the cells of patients.
I’m not saying that programming isn’t valuable to the general public. In fact, achieving success in cutting-edge genomics research these days is going to depend on having excellent software to analyze the Big Data that is rapidly accumulating in our server farms. It really comes down to the choices we make as a society and what we value most. Do we really need more variations on FarmVille and Facebook? Wouldn’t we be better off investing more money trying to create the medical miracles we’ll wish for when our personal forecast reads mostly cloudy with a chance of death? Fighting disease isn’t just a good investment in our health; it’s also an excellent investment in our economy. Cancer, for example, has a major impact on the American financial system. A recent study showed that some 3.3 million workers are diagnosed with cancer each year, which results in some $7.5 billion in lost productivity.
So how do we incentivize the marketplace to invest more in drug development? As with many aspects of our national fabric, your answer may reflect your political inclinations. Conservatives will look to private industry for answers, while liberals may turn to a government-sponsored solution. Independents might seek salvation in both camps, and libertarians would argue that there’s no need to incentivize anything in a free market. Let’s compare and contrast some different approaches that might serve to increase the number of valuable medicines to see where we stand.
Let’s start with the conservative angle. In our free enterprise system, people with significant financial resources seek out opportunities ordained by the Holy Trinity of capital investment: High yields, rapid returns, and low risk. Investing in early stage biopharmaceuticals is clearly a very risky business. Although it can produce substantial monetary returns (because drug patents lead to monopoly pricing), it is exceedingly difficult to come up with novel drugs that are both demonstrably safe and effective. Only about 8 percent of drugs that enter clinical trials actually wind up being approved by the FDA and marketed. Getting a “rapid return” on invested funds in this sector generally requires an acquisition or IPO event, and IPOs have been tough to come by in recent years. Maybe traditional venture capital funding, as it currently stands, is not the best vehicle for assuring the development of a steady stream of new medicines.
Other private sector options abound. Big Pharma has been investing in a variety of approaches focused on resuscitating their waning fortunes. These include funding their own investment arms as well as establishing a large number of alliances with academic research institutions. They’ve also joined forces recently to form TransCelerate Biopharma, a non-profit organization whose mission is to develop innovative solutions to clinical trial problems faced by all of their members companies. New approaches to tackling dreaded diseases are not just the realm of drug manufacturers. The University of Texas’s MD Anderson Cancer Center estimates that its Moon Shots program to reduce cancer deaths may cost upwards of $3 billion in the first 10 years. Those funds will come from “institutional earnings, philanthropy, competitive research grants and commercialization of new discoveries.” Non-profit charities and disease organizations also remain a force in the voluntary sector, including the Michael J. Fox Foundation for Parkinson’s Research and the Cystic Fibrosis Foundation (who helped pave the way for the new breakthrough CF drug ivacaftor [Kalydeco] in partnership with Vertex Pharmaceuticals).
Let’s turn to the government side of the equation. Federal funding comes from agencies such as the National Institutes of Health, the Defense Advanced Research Projects Agency, and Small Business Innovation Research grants. Most of the money that the federal government spends in this area has traditionally been focused on basic, not applied research, but an increased emphasis is now being placed on translational research programs. Make no mistake: this has been money well spent, for the data generated by the thousands of research grants funded year after year forms the solid foundation upon which most of the applied work that follows has been built. State agencies, such as the California Institute for Regenerative Medicine and the Cancer Prevention and Research Institute of Texas (currently mired in serious charges of political cronyism) have committed billions of dollars to both basic research as well as translational medicine. Traditionally, however, the government has not been the key player in drug development, which resides in the skilled hands of pharma and biotech companies.
John W. Gardner once wrote “The society which scorns excellence in plumbing as a humble activity and tolerates shoddiness in philosophy because it is an exalted activity will have neither good plumbing nor good philosophy: neither its pipes nor its theories will hold water.”
Let me recast this in the light of my current theme:
“The society which scorns investing in drug development (because it is both costly and risky) at the expense of investments in mobile phone and social media applications will produce few novel and helpful medicines: its citizens, however, may be too distracted by their electronics to care.”
So how do we go about incentivizing investments in drug discovery? I’ve suggested a few possibilities in the past, including legislation that provides special tax breaks for long-term biopharma investments as well as government funded cash prizes for cures. Others have suggested selling Biomedical Research Bonds to the public as a way of raising funds. Both the public and private sectors need to be involved in this process. With healthcare taking up an increasingly large portion of the nation’s GDP and contributing to our ever-increasing deficit, the government cannot afford to bear this burden alone. I believe a healthy dialogue between all of the interested parties, especially patient advocacy groups, is likely to come up with a wide spectrum of interesting and actionable proposals. Feel free to share an idea in the comments section below.
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