Perverse incentives that encourage unethical waste

If you had a federal agency in charge of getting scientific discoveries commercialized, wouldn’t you want them out talking to industry?

So when the agency is NIH, what do they do? Thanks to the 2005 NIH ethics rules, they are discouraged from collaborating with industry.

Derek Lowe writes

The reason I'm talking about all this is that I've heard of instances where people from NIH have refused (or felt as if they have had to refuse) invitations to give talks in industrial settings, because they feared conflict-of-interest problems. This seems perverse, especially for an agency that's talking about getting heavily into translational drug research. That'll have to lead to numerous contacts with industry, I think, in order to be much good at all. So how will the NIH manage that if the drug industry is seen as contaminating their Purity of Essence?

and then in the comments “JAB” replied:

As an NIHer, I pretty much agree with Derek that we're actively discouraged from interacting with industry by the current ethics rules. Formal consultancies were prohibited several years ago, and I don't believe that's changed. Most of my colleagues shy away from anything that might require ethics office approval. It IS possible to give a simple seminar at an industrial site, with prior approval, and I know of folks who do so. Formal collaborations under a CRADA are permitted, but that's two orders of magnitude more work to set up.

I don’t want to minimize the importance of being as blameless as Cæsar’s wife, or the very real problems of any private entity (whether business or activists) illegally influencing government decisions.

That said, the idea of — on the one hand — pressuring (or exhorting) collaboration between government, industry and university scientists to collaborate — while on the other hand adding red tape to make that nigh impossible — is just crazy. Crazy.

And while i understand the central role NIH plays in funding, evaluating and disseminating medical discoveries, they’re not the FDA. It’s one thing to say we don’t want regulators mingling with dirty industry — it’s another to say researchers can’t actually go out and promote real translational research.

It’s not clear how to fix the problem without re-opening the same problems that led to the 2005 rules in the first place. In any endeavor, government regulation and red tape comes along because of a bad apple (or barrel or orchard) that (often) leads to overreaction in the other direction. So eliminating the rules is begging for trouble.

Still, once upon a time the government had rules about de minimis benefits. Is providing someone free lunch in a cafeteria — rather than spending $25 in labor to reimburse a $10 meal cost — really going to lead to unethical outcomes? Some of this is just common sense.

The problem is that some of the outside lobby groups really don't want close industry-government collaboration. (The group pressuring NIH director Francis Collins seems to fit into this category, led by all the usual suspects).

To me, it seems unethical to waste taxpayer money with excessive regulation, delay necessary therapeutics and diagnostics, and even perhaps lead to people dying who didn’t need to.

But then, much as David Friedman points out in his economics primer Hidden Order, people focus on the direct benefit of a given government intervention (e.g. preventing one case of fraud) but not the indirect costs (wasting thousands of person-hours of labor for compliance).

Buying biotech firms to kill them

(Cross posted from the Engineering Entrepreneurship blog)

At #IndustryStudies2011 this week in Pittsburgh, I heard an interesting talk about what happens to biotech startups after they are acquired. Panos Desyllas of the University of Manchester presented his study (with two Manchester co-authors) of UK biotech firms acquired 2006-2010 by non-UK companies.

The team studied in depth six acquisitions, interviewing executives from both sides of each transaction and also analyzing five years of trailing patent data. They also traced what happened to the key scientists after the merger by noting their affiliations in subsequent patents.

From this data, they came up with a simple (but useful) 2x2 typology: are the two firms similar in technology and are they similar in capabilities?

The firms might be exploring different technological frontiers. Or the acquired firm might have something that the acquirer does not — or vice versa — whether it be UK marketing by the acquired firm or global marketing by the acquirer. The (plausible) intuition is that complementary acquisition is more likely to create ongoing value than a more directly competing one.

The typology worked as predicted. In the case of acquisitions where both the technology and capabilities overlapped, the buyer closed the acquired company, keeping only an IP expert or two as a temporary consultant to transfer the tacit knowledge.

In discussion during and after the session, we discussed the case where the buyer bought a rival with the sole purpose of killing it. This happens all the time, and in some ways it seems like a special case with an utterly predictable outcome.

The other case I brought up was when the acquisition starts out as being complementary — but the acquired firm gets killed anyway.

In April, Cisco killed the Flip camera line that it bought for $590 million in 2009. Pure Digital founder Jonathan Kaplan was sorry to see Cisco knife his baby rather than put it up for adoption, particularly when it remained profitable.

The other example (from the life sciences industry) was Biogen Idec, billed in 2003 as a merger of equals between two biotech startups, Boston-based Biogen and San Diego-based Idec Pharmaceuticals. However, the failed merger brought the closure of the former Idec operations in San Diego last November, and the layoff of some 300 employees (including a close personal friend).

During Desyllas’ session, we discussed whether the closure was a good thing or a bad thing for the local economy. In true Schumpeterian fashion, the creative destruction makes available skilled talent to the local economy for other ventures. On the other hand, some off the displaced workers may never have a similar opportunity again.

But in the end, we agreed that the pattern proved a familiar point: companies get sold when the owners want to sell — usually when they want liquidity for an illiquid investment. Whether the founder (such as Kaplan) or the venture investors, once the company is sold all bets are off.

Where are the heroes of pharma research?

Since accepting my new position with Keck Graduate Institute and switching my industry orientation from ICT to the life sciences, I’ve been struck by the difference in how the two sectors are treated in popular culture — particularly drug discovery, whether “big pharma” or the scrappy biotech startups.

One metric is news articles. When I pick up my copy of Business Week every Friday morning, there will be three or four articles about the major computing, communications or other electronics companies, but many weeks nothing about pharma, big or small. Reading the Wall Street Journal or the New York Times (back before they started charging) suggests a similar pattern.

It’s even more pronounced with books. The weekend brought news of the death of Tom West, a longtime engineering manager for Data General. Most people have forgotten his name, but every computer engineer of my generation read about his success creating the Eclipse minicomputer in The Soul of a New Machine — the book that both created Tracey Kidder’s reputation and also the first to apply “new journalism” to study a complex engineering design problem.

I own at least three bookshelves of memoirs and histories about PC, software, Internet and other ICT companies. (I say at least three because some are in boxes and some are mixed in with other books). These books were written in the past 30 years — since the IPOs of Apple and Microsoft made these firms a household name — and include at least 10 Apple books and 5 each on IBM and HP. (Some of these books are on companies that were never consumer brands, including DEC is Dead, Long Live DEC about the once-great Digital Equipment Corp.)

However, when I went to find similar books about drug discovery companies in the San José public library, almost nothing was to be found. In fact, the only book held by more than one branch was Poison Pills: The Untold Story of the Vioxx Drug Scandal, which as the title suggests is a one-sided “exposé” about Merck & Vioxx.

Along the same lines, watching CNN in an airport waiting lounge — the only time I ever watch CNN — today I saw a similar breathless exposé about allegedly FDA lax approval processes. In this case, the guests were a couple of geriatric contributing editors of Vanity Fair, who wrote an article (“Deadly Medicine”) about Avandia, arguing that prescription drug deaths mean that the FDA standards are too lax.

From the TV interview was no evidence that either man knew anything about small molecule drug discovery, PPAR ligands, risk assessment or the steps necessary to gain a Ph.D. in any of the life sciences. In contrast, before my friend Randy Stross wrote Planet Google, he’d lived in Silicon Valley for decades and written six other books, including a biography of Steve Jobs.

One would reasonably assume this sort of media coverage impacts legislative and judicial decision, class-action lawsuits and even the career intentions of high school and college students. The folks that create privacy-invading breakthroughs like Google and Facebook are lionized while people who try to save lives are (often) demonized.

One notable exception was the 2010 movie “Extraordinary Measures,” based on the memoir of serial entrepreneur John Crowley about his efforts to find a cure for Pompe disease. As one promo put it:

An uplifting, inspirational drama, chronicles John Crowley, the man, who defied conventional wisdom and great odds, and risked his family's future to pursue a cure for his children's life-threatening disease.

Of course, any success of the movie is due more to Brendan Fraser in the lead role with two cute ailing kids, and of course Harrison Ford playing a cross between Harrison Ford and Scottie (“I’m givin’ it all aye got, captain!”).

So are the companies that produce therapeutics and diagnostics as evil as one would think watching CNN or browsing books in the personal health section of Barnes & Noble? If not, what can be done about it?

Lost in translation

Any big pharma CEO or shareholder would love to see a stronger link from basic research to the bottom line. But it’s not something that can be achieved via administrative fiat.

Writing at the WSJ Health Blog, Shirley Wang reports

When former NIH head Elias Zerhouni ran the $30 billion federal research institute, he pushed for so-called translational research in which findings from basic lab research would be used to develop medicines and other applications that would help patients directly.

Now the head of R&D at French drug maker Sanofi, Zerhouni says that such “bench to bedside” research is more difficult than he thought.

When Dr. Zerhouni tried to make Sanofi more like a nimble small biotech, he found it didn’t work because (as the WSJ put it) “small biotechs are no more successful than large drug makers at coming up with new drugs.”

Blogger Derek Lowe remarks that Zerhouni “was, in all likelihood, living in sort of a bubble at NIH.” And, Lowe suggests, knowledge of how to fix this is more likely to be found in an industry veteran than a government refugee.

On the one hand, Lowe notes that current NIH head Francis Collins wants to create a new NIH translational research institute. On the other hand, Wang cites its earlier posting, in which the ex-head of Merck said NIH is not well suited for translational research and instead should stick to basic science.

BTW, Lowe and Wang don’t seem to understand “open innovation” is or why Zerhouni is recommending it.

Defining open innovation is much easier than fixing the difficulties of pharma commercialization. A definition can easily be found with Google and there now are a large body of research, an online community and blog on the topic.

Spending on millions on lottery tickets

The recent difficulties of big pharma creating new blockbuster drugs are well known in the industry. Every time they bring a compound to trials, they’re placing a multimillion dollar bet that it will both be effective and also will make it through (increasingly difficult) FDA approvals.

However, these same sort of gambles also apply far upstream, when a new molecule, new technique or even basic science is being pursued by university scientists.

In his blog (In the Pipeline), Derek Lowe today highlights an example of this from the 1980s — one that brought a Nobel Prize in physiology.

He quotes from the new book Adapt by Tim Harford, as summarized in a recent Slate article.

In 1980, Mario Capecchi applied for a grant from the U.S. National Institutes of Health. . .Capecchi described three separate projects. Two of them were solid stuff with a clear track record and a step-by-step account of the project deliverables. Success was almost assured.

The third project was wildly speculative. Capecchi was trying to show that it was possible to make a specific, targeted change to a gene in a mouse's DNA. It is hard to overstate how ambitious this was, especially back in 1980. . .The NIH decided that Capecchi's plans sounded like science fiction. They downgraded his application and strongly advised him to drop the speculative third project. However, they did agree to fund his application on the basis of the other two solid, results-oriented projects. . .

What did Capecchi do? He took the NIH's money, and, ignoring their admonitions, he poured almost all of it into his risky gene-targeting project. It was, he recalls, a big gamble. If he hadn't been able to show strong enough initial results in the three-to-five-year time scale demanded by the NIH, they would have cut off his funding. Without their seal of approval, he might have found it hard to get funding from elsewhere. His career would have been severely set back, his research assistants looking for other work. His laboratory might not have survived.

The problem is, he did exactly what NIH didn’t want him to do, and its process was designed to screen out. Again quoting Harford:

The NIH's expert-led, results-based, rational evaluation of projects is a sensible way to produce a steady stream of high-quality, can't-go-wrong scientific research. But it is exactly the wrong way to fund lottery-ticket projects that offer a small probability of a revolutionary breakthrough. It is a funding system designed to avoid risks—one that puts more emphasis on forestalling failure than achieving success.

Both Lowe and Harford praise the Howard Hughes Medical Institute — in other words a foundation that can take big risks with its own money.

Once upon a time, big rich R&D intensive companies existed to take these sort of risks. In one 20 year period, AT&T invented the mobile phone, the transistor, error correction codes, solar cells, transatlantic telephone cables, the laser and the communications satellite. While the reconstituted AT&T is now a duopoly, the old Bell Labs is long gone.

A long time ago, big pharma made the great breakthroughs. More recently, they let university professors create biotech startups and then bought them. But now such startups look like a bad bet for VCs, and a new financing model is badly needed.

We don’t know who will fund the next round of great breakthroughs. By their nature, we don’t know what they are or where they will come from. Perhaps if we’re lucky, the new tools for computational biology and chemistry will reduce the time and costs of making such discoveries — reducing the amount of money that scientists have to beg for and improve the odds of getting it.

A new way to fund drug discovery?

In the past decade, two failings of the modern drug discovery have become apparent. First, the major pharma companies are unable to develop new drugs as successful as the ones going off patent.

This has been a major theme of Derek Lowe in various posts in his blog “In the Pipeline”. For example, in a November 2010 posting, he lists the commonly know problems: “lower rates of success in discovery, higher costs, patent expirations, etc.”

The other is that the biotech startup model is beginning to fizzle out. Whether or not the current science will make commercially successful biologics, the idea of creating a new company to develop a few compounds — ending with a successful IPO — hasn’t worked for many years. (It doesn’t help that the IPO market has closed overall for bio and non-bio startups alike.)

Into the breach steps Duane Roth, onetime industry executive and entrepreneur who now heads San Diego-based Connect. Roth gave a webinar April 27 where he discussed the problem and some ideas of how to solve it.

Roth’s suggestions were based on a paper he did with former Warner Lambert executive Pedro Cuatrecasas that was sponsored by the Kauffman Foundation and summarized in Roth’s op-ed last year in Xconomy San Diego.

Roth was pessimistic about the prospects for both traditional pharma and the newer biotech model. He said that the IPO market “is never coming back for pre-revenue companies,” stretching out the return for startups and their investors. Today, only one major biotech startup remains independent — Amgen — while both Genentech and Genzyme have become subsidiaries of big pharma.

Instead of the traditional vertically integrated model, Roth argues that the industry needs to separate out a new role in the value chain: a product definition company. In this model, the federally funded research institute (i.e. a university) would license discoveries to the PDC, which would prescreen these for the product development companies (which might also have the distribution channels to bring these products to market).
In this division of labor, the product definition company spends $3-5 million per discovery to characterize it and attempt to develop a prototype. The drug development companies are the ones that do the clinical trial and hope to bring it to market.

The difference in this new model is that the PDC quickly studies the possible compounds and then sells them. There are no 10 year waits for IPOs — quick exits for the winners and returning the compounds to the universities for the losers.

From his vantage point at Connect, he’s watched the mobile industry (led by Qualcomm) make a similar dis-integration between chip designers, contract fabricators and handset makers.

As a longtime strategy professor, I can think of few examples where industries naturally changed themselves and many where industry inertia prevent long-needed reforms. (Think of the record industry.) Thus my question to Roth was: how do we get there from here?

Roth thinks big pharma will invest in and support such companies. He also hopes that angels could fund some companies, given the relatively small capital needs and quick returns.

I feel more pessimistic. This sort of model requires creating a market — buyers, sellers, price and quality measures — and it seems like today’s market is spotty at best. I can imagine that CROs could try to do this product definition, but be unable to get a fair price from potential buyers. Or they might get to greedy, hoping for a later sale at a higher price rather than handing off the compound to a firm that can bear the cost and risk of clinical trials.

Still, there’s no denying the cracks in the current model. During its heyday, US firms were the winners in both big pharma and most notably for biotech startups. The industry — and universities and the country — need to find a 21st century model that will take advantage of our home court advantages: university science, risk capital, and a large affluent domestic market.

Too many PhDs?

IT and other engineering companies talk about a shortage of skilled technical talent. However, Derek Lowe and his “In The Pipeline” blog this week talks about the converse case — too many PhDs in the life sciences, tied to a recent article in Nature News called “The PhD Factory.”

Of course the incentives are all wrong: many science professors want postdocs to help them with their research and teaching, without regard to their abilities to find career jobs after graduation. The problem is particularly bad in Japan and China, where the government has intervened to increase the supply in excess of market demand.

But the US and Europe are not much better. Compared to 30 years ago, half (if I understand their statistics) as many US PhDs are getting real academic jobs. In contrast, Germany is working to find PhDs jobs in industry.

Other solutions are being tried. The accompanying article, “Rehinking PhDs”, talks about an alternative developed at the Keck Graduate Institute. One of the Claremont Colleges, KGI is offering a business-oriented masters (the Postdoctoral Professional Masters) for life science PhDs who’ve given up on bench science and want to go into senior management or creating a startup. The careers blog of Science published interviews on Feb. 4 and Feb. 11 with PPM alumni who were very satisfied.

If any of these efforts cause American PhD programs to become more practical in their orientation, it’s money well spent. With government funding of pure research declining in relative importance, even the most research-oriented scientist must increasingly consider practical applications or at least science that might have such applications.