Innovative New Medicines are Key to Economic Growth

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The life sciences industry [herein includes pharmaceutical, biotechnology, diagnostic and medical device companies] plays a critical role in the United States [US] 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 US 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:

Recover its significant initial investment
Reinvest in new drug discovery and development
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.

Life Sciences 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 US 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.