US, EU seek to stifle biotech exits

A novel antitrust strategy by the Biden Administration’s Federal Trade Commission and the EU is seeking to end an acquisition by Illumina that would accelerate the availability of a cell free cancer screening. More seriously, if widely adopted, it would make it much harder for successful startups to exit — and thus for them to raise money and be formed in the first place.

Ironically, the government agencies are seeking to block Illumina from paying $8 billion to buy back  Grail, its own spinoff company. As the WSJ editorial board concluded Friday:

Government Race Against a Cure

In 2016 Illumina formed Grail with the goal of developing a blood test that could detect DNA from cancer cells before people show symptoms. A year later Illumina spun off Grail. This let Grail raise venture capital to finance large clinical trials while Illumina focused on building its other businesses.

Fast forward four years. Grail’s technology can now reliably detect 50 cancers at early stages with a simple blood draw. While the tests aren’t 100% accurate, the false positive rate is less than 1%, which is lower than for mammograms and PSA prostate tests. Grail’s technology can also detect the 12 most deadly cancers with 60% accuracy and has the potential to reduce false cancer diagnoses and invasive screenings while increasing early detection of aggressive cancers.

Grail was considering an IPO last fall to raise $100 million when Illumina made a more attractive offer. Illumina says its regulatory expertise can accelerate the commercialization of Grail’s technology. Biotech startups often struggle to obtain regulatory approval and insurance reimbursements.

The argument is virtually unprecedented: most mergers (since the Teddy Roosevelt days) have been fought based on horizontal combination in restraint of trade, while Illumina is a strategic supplier to Grail (and also supplies to other firms).

What seems particularly disreputable is that the FTC is seeking to kill the merger without allowing a court to rule on the merits of its arguments. Instead, the FTC is hoping to harass and stall the applicants until the Dec. 20 expiration of the agreement.

The reality is that little companies develop new technologies, but can never scale as quickly as a big company. The June 3 editorial suggests that Grail’s competitors are fighting the merger to slow Grail’s rollout and let them capture more market share.

Meanwhile, the EU is asserting authority over a transaction (between US firms) for which they have no jurisdiction because Grail has no operations there. As the WSJ wrote on May 29:

The change in European policy marks an effort by the commission to adapt its antitrust enforcement to a fast-changing marketplace where companies can expand with great speed, including through the acquisition of pivotal smaller businesses, the commission has said. Its March policy guidance changes nothing in the letter of the law but fundamentally changes how it is interpreted.

Potential red flags for merger review now include almost any deal done by a tech giant; almost any deal in a highly innovative sector, such as pharmaceuticals; a deal that might trigger complaints from third parties; and high-price acquisitions of companies with little revenue.

“It raises a lot of questions and uncertainty,” said Salomé Cisnal de Ugarte, a partner at law firm Hogan Lovells in Brussels. “It can affect every transaction.”

Finally, beyond the policy issues are the sheer scope of transactions on the global economy. Illumina is a $3.4 billion/year company, not even on the Fortune 500 (#687). Meanwhile, Amazon ($420b), Google ($182b) and Facebook ($86b) dominate their respective segments — in a way no oil or car company ever did — and continue to stifle competition at every opportunity. A decade from now, which intervention will make the most difference to society and the vibrancy of the economy?

The two experimental drugs that treat COVID-19

The FDA today announced it is working with private companies to bring two previously approved therapies to approval as treatments for #COVID19, the coronavirus first detected November 17 in Wuhan, China. Both are being tested for efficacy in humans, as part of the normal (but now highly expedited) process for seeking FDA approval.

One is remdesivir, the Gilead antiviral developed for use against Ebola and Marburg, both exotic filoviruses with case fatality rates of about 50% (vs. about 0.7% for COVID19). The National Institute of Allergy and Infectious Diseases (NIAID), the division of NIH that funds research on infectious diseases, is sponsoring its own randomized clinical trial using remdesivir against COVID-19 that has been given to 250 patients already.

The other is chloroquine, used since 1949 as an anti-malarial. It has long been known to work against SARS coronavirus, the closest prior pathogen to COVID-19. It works against a wide range of viral and bacterial pathogens — including Ebola — by inhibiting cellular entry. With remdesivir, it has already been tested in China against COVID-19.

Mikhail Shilman, my coworker (at KGI) and cofounder (at our startup) issued a statement about these two approvals:

The FDA decision this morning to fast-track approval chloroquine for treatment of COVID-19 coronavirus shows the potential for previously approved drugs to be deployed quickly to treat emerging infectious diseases that can rapidly infect an entire community or nation.

Chloroquine, an anti-malarial, has been safely used for 70 years around the world. The FDA has policies to encourage the repurposing existing drugs because it is quicker and lowers the risk of unexpected adverse effects. It is also a drug that is already being mass produced and is simple to manufacture, and thus can be quickly scaled up unlike complex large-molecule therapies.

Coronaviruses attack epithelial cells within the lungs. It can be life threatening because once it is inhaled, the infection inflames and swells the lungs in a way that makes it increasingly hard to breath. We thus need an orally administered drug that can be distributed in our system to reach and protect organs like lungs.

As we showed in our 2015 paper in Nature Scientific Reports, chloroquine is one of only two quinoline drugs that protects cells against certain types of viral and bacterial pathogens. It blocks the entry of these pathogens into the cell, including Ebola and SARS coronavirus, by binding to and inhibiting the function of the host Cathepsin protein, which mediates the uptake of these pathogenic agents into human cells. While we have not tested COVID-19 coronavirus, it is believed to work the same way as SARS and MERS coronaviruses.

Of the two drugs, chloroquine is the weaker of the two, better tolerated and better suited for treatment for the several weeks necessary for the body’s immune system to clear a virus such as COVID-19. The other drug, amodiaquine, is much stronger and better for immediate threats but has the potential for side effects if taken for longer periods; that is why I’ve been working to develop amodiaquine for inhaled anthrax, which kills the majority of patients in a matter of days.

Recent research has shown that chloroquine is effective against COVID-19 samples in the lab. Bayer said today they are donating three million chloroquine tablets for use as a COVID-19 treatment. Given the urgency of the pandemic and the proven safety of this drug, it is now appropriate to test chloroquine as a way to protect or treat high-risk populations.

Market Realities

Some of the coverage of the COVID-19 crisis has asked why the US doesn’t have a treatment for this coronavirus and why the government is taking so long to bring one to market. The two reasons are the regulatory process, and the perception of market demand.

Well, the reason is that it typically 7-10 years after discovery of a drug to get it approved. DiMasi, Hansen, & Grabowski (2003) estimate the mean duration of a Phase 1 safety study as 1.8 years, a Phase 2 efficacy study as 2.1 years, and a larger scale Phase 3 study at 2.5 years. So that is 6.4 years, not counting the 2-3 years before that to justify getting into humans, and the 12-21 month delay (depending on therapeutic area) waiting for FDA approval (DiMasi, Grabowski & Vernon, 2004).

While the FDA allows off-label use of approved drugs, and compassionate use access when there is no standard of care, our society (like any other) expects a rigorous, multi-year process to prevent sale of unsafe or ineffective products.

The other issue is the commercial reality. The DiMasi et al (2004) study estimated that on average, clinical trials for an antiinfective drug took $362 million and lasted 10.3 years.

As the CEO of a (tiny) pharma company, it’s hard to make a case for pursuing a scientifically feasible drug unless a) it’s a big market or b) someone else (government, foundation) bears the risk.  I know for sure that I won’t get venture capital to fund my trials unless investors think there is a good chance of achieving sizable revenues — particularly given the 11% clinical success rate for all human therapeutics (DiMasi et al 2016).

So when there’s an epidemic, under normal circumstances firms will have something approved long after it’s over. If no one (or almost no one) is sick any more, there’s no market for treatment. However, insurers and public health authorities are willing to buy a vaccine so the disease doesn’t come back again.

Finally, even if approvals are accelerated, it takes time to be able to manufacture a drug at scale with FDA-approved quality standards. Repurposing existing drugs are the only ones likely to be ready for widespread usage this year. Thus, we should be excited by this good news, and the increased sense of urgency by the government to encourage further investment in deploying these therapies.

When tech entrepreneurs attack science

One of the most remarkable trends in science-based entrepreneurship is the recent explosion of fake meat companies.

I saw my first fake meat company in 2015 at the graduation event for the first class of startups at the IndieBio accelerator in San Francisco, doing egg whites. Now leading companies like Impossible Foods and Beyond Meat have landed their fake hamburger in fast food chains.

At breakfast yesterday with my boss’s boss, he remarked that some of the burgers are actually quite good, and we agreed that (someday) it has the potential to be a trillion dollar business. This seems to be one of the rare examples where the outrageous predictions by tech entrepreneurs of creating a huge new market might actually be true.

Adoption Paths

The initial pioneers may grab decent exit values, and the long-term future of replacing meat seems compelling. California alone spends 6 trillion liters of water a year on alfalfa alone (feed for cattle and horses), not counting other states, and the water for pig slop and chicken feed. Meanwhile, cow farts play a non-neglgible role in increasing greenhouse gasses. And there is also a sizable niche of the populace that either refused to eat meat, or even wants to deny others the right to do so.

It’s not clear when it will become a trillion dollar market: as I showed in my 2014 paper in the Journal of Technology Transfer, California firms created the solar industry but flamed out because they got into the market 20-30 years too early. Competing with commodity electrons is a tough adoption curve: very few people voluntarily choose to pay 50% or 100% more than market prices for a commodity, although Germany and California show that politicians can force their voters to do so and (mostly) get away with it.

What I didn’t realize until I thought it through is that meat has an easier adoption curve, with a wide range of niche markets that can be sustained at premium prices. You have affluent people who don’t eat meat — or, even better, recently gave up meat — as well as environmentally conscious customers who would like to avoid meat. You have people who are willing to give it a try, out of curiosity. And — as the burger joints have demonstrated — the B2B customer (distribution) is willing to try a niche product to raise average selling prices.

Thus, as the product gets better and the prices get lower, these firms can establish and grow their beachhead in the food market, carving off ever-larger segments of the market. Funded by Sand Hill Road and led by ambitious entrepreneurs, some will hold off for Facebook-style IPOs, but many of the weaker players will be bought up by ADM, ConAgra, Hormel and the like — providing bottomless capital to spur innovation and adoption. (The entry barriers are low enough that Tyson Foods is launching its own product directly, rather than by acquisition).

We Need Science

However, to fully displace meat, there are major technical challenges to be overcome, both in quality and cost. I supervised a student project to research synthetic organs — a more demanding applications — but still getting the texture right will require both science (new insights) and engineering (new applications) to create a quality product at a competitive price.

Thus, I was struck by the decision of one fake meat company to attack GMOs to win market share. Yes, the CEO is a 24-year-old recent Berkeley grad who’s never worked in a company. Yes, her bachelor’s degrees are in toxicology and environmental studies rather than molecular biology or chemical engineering. But the company does have one PhD (food science) in its leadership, so they presumably are doing actual science.

It reminds me (and not in a good way) of the various surveys that showed the gap between what the public thinks and what scientists (writ large) think about GMOs, including a 2015 survey that said 37% of the public thought GMOs are safe vs. 88% of scientists.

More troubling is that the certainty of these opinions seems inversely proportional to actual knowledge. As the NY Times wrote on Monday:

In a paper published early this year in Nature Human Behavior, scientists asked 500 Americans what they thought about foods that contained genetically modified organisms.

The vast majority, more than 90 percent, opposed their use. This belief is in conflict with the consensus of scientists. Almost 90 percent of them believe G.M.O.s are safe — and can be of great benefit.

The second finding of the study was more eye-opening. Those who were most opposed to genetically modified foods believed they were the most knowledgeable about this issue, yet scored the lowest on actual tests of scientific knowledge.

In other words, those with the least understanding of science had the most science-opposed views, but thought they knew the most. Lest anyone think this is only an American phenomenon, the study was also conducted in France and Germany, with similar results.

So I get that trust in authority has been declining since the 1970s. I get that we have many people who don’t understand — or have the time to personally verify — scientific research. And, as Orwell predicted (and Goebbels proved), people are easily persuaded to believe lies if they are repeated often enough in the mass media.

Still, why would companies that depend on scientists to create their products help promote such lies? Isn’t the benefit of saving the planet enough, without having to rely on junk science for the purpose of virtue signaling? And if companies that depend on science attack science, what are the implications for K-12 and university science indication, science policy and the idea of using facts — rather than emotion - as the basis for making science policy?

Complexity, risk and uncertainty

We unexpectedly lost a close family member over the weekend, who was in the ER and then had such a massive internal hemorrhage that they couldn’t save him. The ER doctor said it wouldn’t have been as severe — and implied that he might not have died — if he hadn't been on warfarin.

All weekend I have been thinking that while the risk of bleeding is a well known side effect — one he and his doctor willingly accepted — if only he hadn’t taken this medication we would still have him with us.

But then this morning I realized I had it all wrong. As an economist, I should know better — this is just another version of Bastiat’s broken window fallacy. We can see the death by internal bleeding at age 86; we can’t see the heart attack or (worse yet) disabling stroke that might have been prevented at 80 or 84.

This highlights the hubris of mankind’s attempts to understand the most complex organisms in creation – ourselves. Yes researchers try and should continue to try to do better, to extend life and continue to reduce the mortality and morbidity of major illnesses. But nonprofits using marketing slogans like “abolish cancer” are dishonest at best and fraudulent at worst, following in the footsteps of the politician who 45 years ago promised to win a “war on cancer” to distract from his losing a war overseas.

The reality is that we are generations if not centuries away from really understanding how it all works and how to prevent or repair many common fatal or disabling diseases. The doctors on the front lines— like 18-year veteran I met in the ER Saturday night — are painfully aware as to the limitations of what we know. In the meantime, there are trade-offs and risks in life — in clinical trials, with new drugs, with old drugs — and all we can do is improve the odds rather than hope to know what is “best” in any given situation.

Pricing is only a symptom of drug company woes

Drug companies have been in the news a lot this year. Valeant and Mylan (with the EpiPen) made themselves whipping boys (or girls) through their self-inflicted PR debacles. Next Tuesday, California citizens will vote on an initiative by anti-pharma activists (aided by a failed presidential candidate) who seek price controls for 12% of the drug purchases in the state.

This morning’s WSJ reminds us that none of this controversy changes the stark reality of the drug business: since the Hatch-Waxman Act was passed in 1984, most* drugs have a narrow window to generate profits from their R&D before they lose their pricing power due to a flood of generic competition — and for the largest product categories, they will face competition prior to patent expiration.

Heard on the Street

Big Pharma Sales Need a Booster Shot​

By CHARLEY GRANT

Wall Street Journal, November 2, 2016, C14

The coming election has pharmaceutical investors feeling anxious. But this earnings season has highlighted a more solid reason for worry about the sector: Sales of key blockbuster drugs are slowing down.

This year has been one to forget for the industry. Political risk surrounding the high cost of health care has contributed to the trouble: The Nasdaq Biotechnology Index is down nearly 30% since a furor erupted over high drug prices in September of last year.

Price pressure has been among the reasons sales are weaker.

The article lists a number of examples of such competition:

• More products (and thus greater price competition) for hepatitis C treatments
• Disappointing revenue growth for Ibrance (breast cancer) and the Humira and Enbrell anti-inflammatories
• Slowdown in diabetes sales
• Price resistance for new cardiovascular drugs

It then concludes:

A basic truth of drug development is the nature and timing of economically significant breakthroughs can be hard to predict. Today’s slow patch doesn’t mean that the industry has become worse at developing blockbuster drugs.

But investors tend to prefer companies with easily predictable growth prospects. And it isn’t clear what new drugs can generate growth in the near future.

Even in areas where there have been discoveries, the outlook may not be great. A number of companies have developed impressive immunotherapy drugs to treat cancer, but that is a crowded field with lots of competition. And since these drugs are new, just how many cancer patients this class of drugs can help isn’t yet known.

In other words, pharma faces the same challenges they have always faced: attractive markets attract competition, buyers exploit competition to reduce pricing power, and then they have to develop new compounds to replace those going off patent. If a firm doesn’t address such problems year in and year out, its revenues, profits and market cap will collapse. We needn’t cry for Big Pharma, but neither should we underestimate the magnitude and complexity of their challenges.

In many ways, the free market works better for expensive drugs than for healthcare services. Payers and providers are organized enough to bargain for better prices from manufacturers, and the overhang of generics (the “Better than the Beatles” syndrome) forces manufacturers to produce markedly better outcomes to justify proprietary prices.

Meanwhile, in the U.S. our third party payer system (a side-effect of WW II wage controls), provider networks and high switching costs mean that patients rarely have pricing information, quality information or purchase alternatives to bargain based on price or quality. In single-payer countries, patients have less choice than public school students (who at least have charter, private or home school alternatives).

*PS: For technical and regulatory reasons, large molecules do not yet face generic competition because biosimilars are not generics. It seems likely that this will eventually change, but for now an expired patent on a biologic is worth a lot more than an expired patent on a small-molecule drug.

UC's biggest drug bonanza - ever?

On Friday, UCLA announced it had sold rights to the prostate drug Xtandi (enzalutamide). The sale could make the drug University of California’s most valuable biomedical patent family — ever.

UCLA, the inventors and its partners will receive $1.14 billion cash (plus future payments) for the drug from Royalty Pharma. This IP investment company owns stakes in various blockbuster drugs, including Humira, Remicade and Lyrica. It is Royalty’s biggest deal since the $3.3 billion it agreed to pay in November 2014 for royalties on Kalydeco.

In August 2005, San Francisco-based Medivation licensed Xtandi from UCLA and received US regulatory approval in September 2012. Medivation relies on Japanese pharmaceutical giant Astellas Pharma to distribute the drug worldwide. Its 2015 10-K states

Under our collaboration agreement with Astellas, we share equally with Astellas all profits (losses) related to U.S. net sales of XTANDI. We also receive royalties ranging from the low teens to the low twenties as a percentage of ex-U.S. XTANDI net sales. 

The drug has generated more than $3.4 billion in sales through December 2015. According to the 10-K statements, the global sales totaled $1.9 billion in 2015 and $1.06 billion in 2014. Its US sales were $392.4 million in 2013, and its US (i.e. only) sales in 2012 were $71.5 million.

Medivation’s 10-K states

We are required to pay UCLA (a) an annual maintenance fee, (b) $2.8 million in aggregate milestone payments upon achievement of certain development and regulatory milestone events with respect to XTANDI (all of which has been paid as of December 31, 2015), (c) ten percent of all Sublicensing Income, as defined in the agreement, which we earn under the Astellas Collaboration Agreement, and (d) a four percent royalty on global net sales of XTANDI, as defined. Under the terms of the Astellas Collaboration Agreement, we share this royalty obligation equally with Astellas with respect to sales in the United States, and Astellas is responsible for this entire royalty obligation with respect to sales outside of the United States.

UCLA and Medivation have had at least two lawsuits over the terms of this agreement. According to the 10-K, UCLA has accused it of not paying the 10% sublicensing royalty. Earlier, Medivation sued (unsuccessfully) to block UCLA’s licensing of a related compound to Aragon Pharmaceuticals.

UCLA received $33 million for multiple prostate cancer patents in FY 2013-2014 — the highest in the University of California that year. But 4% of $3.4 billion thus far should be worth about $136 million beyond the $1.14 billion for a total of $1.275m. This would not include “potential additional payments” from Royal Pharma, or revenues from the Aragon license.

As best I can tell, the most lucrative patent in University of California history. Many of us assumed that the previous winner was the family of three Cohen-Boyer patents, which created the biotechnology revolution through recombinant DNA, and allowed Herb Boyer to co-found Genentech. These patents expired in 1997; the best estimate I’ve seen (Feldman et al 2007) places the total licensing revenues from those patents at $255 million, split between Stanford (Cohen) and UCSF (Boyer). This total does not include the $300 million that Genentech paid (after years of litigation) to City of Hope — a LA-area cancer research hospital — for related discoveries.

Finally, what is often not remarked is that at most US universities, royalties are shared with the inventors. The inventors in this case Michael Jung of UCLA,  Charles Sawyers (then a Howard Hughes Medical Institute researcher at UCLA, now at Sloan Kettering). The USPTO lists 8 granted patents jointly authored by the two men, including two (8,445,507 and 8,802,689) explicitly about prostate cancer therapy.

According to the UCLA patent policies, UCLA keeps 50% of patent royalties, 35% goes to the inventor and 15% goes to the inventor’s lab (which for Jung is the chemistry department). The Royalty Pharma press release says:

By virtue of patent and licensing agreements administered by UCLA, the campus, the researchers and Howard Hughes Medical Institute shared a royalty interest in worldwide net sales of Xtandi. UCLA owns 43.875 percent of the royalty interest.

Using the math, 43.875% of $1.14 billion is $500 million, but UCLA says it will receive $520 million. (I contacted UCLA PR reps to clarify but so far haven't heard back). It may be that the $520 million includes both the $500 million and about $17 million (15% of $1.14 billion) for its chemistry department.

Still, this implies that Howard Hughes will receive about $70 million but the institute has not posted any mention on its media web page. And this leaves over $500 million to be split by the two lead inventors, other named inventors and possibly (as provided by UCLA policies) non-inventors who contributed towards development of the invention.

Preparing the 21st century healthcare industry

Bob Curry, Ph.D.

As KGI prepares the strategic plan that will take it to its 25th anniversary, the members of the KGI community are being challenged to imagine where we need to be 2022 to continue to prepare cutting-edge graduates who will work across the healthcare value chain.

During a post-dinner exercise Wednesday night, we were encouraged to consider a map of imminent changes in healthcare suggested by Bob Curry, who is chairman of our Board of Trustees, a veteran VC, and now CEO of Perceptimed.

Based on this experience, Bob suggested four megatrends that KGI should consider:

1. Growth in the science of diagnostic, prognostic, and monitoring tools will be explosive and be increasing paired with drug and procedure usage.
2. Drugs will become every more customized to treat highly defined cohorts as characterized in the discussion point above. This will change both the nature of drug discovery and of clinical trail design.
3. Healthcare will be delivered by a broader, integrated team of professionals than has been the traditional norm. Pharmacists and clinical diagnosticians will be teamed with physicians and nurses in staffing the healthcare system.
4. Hospital systems and health insurance companies, as we currently recognize them, will disappear and will be replaced by 50-100 integrated care organizations to cover the entire U.S. (e.g. 50-100 Kaiser-like organizations).

The first two points appealed to our scientists in the room, who (since our 1997 founding) have been thinking about genomic and personalized medicine. The third point relates to those interested in clinical care delivery, particularly our pharmacy school which trains its PharmD students to work in teams with MDs and RNs. The final point ties to the business side — our group within KGI — and the changes brought by ACA (Obamacare), both pushed by the strong patient incentives for adverse selection and pulled by incentives for Affordable Care Organizations.

Based on this, the 70+ trustees, faculty, staff and students at nine tables generated a series of ideas. From their ideas — and my own observations — I see four important trends:

• The importance of big data and data analytics. This is not just for analyzing genomic data for personalized medicine, but for patterns of clinical and other bioinformatic data for efficacy, drug-drug interactions, and other healthcare outcomes.
• New types of healthcare providers and business models for funding them. 
• Increasing importance of healthcare economics. Whether it’s HMOs, ACOs, capitation models, bundled pricing, or other approaches, we are moving away from a fee-for-service and dollars-per-pill model toward outcomes-based compensation.
• New regulatory approaches to deal with these changes.

Some of these trends were building and accelerating over the past two decades. (I've been with one HMO for 30 years). Others were accelerated by the ACA. Still others (the destruction of insurance companies) were not among the announced goals of the ACA, but may be its inevitable outcome.

Barriers to Innovation in US Healthcare

This week I’m at #WOIC2015 (World Open Innovation Conference 2015) in Santa Clara. I am program chair for this the second annual conference, which was organized by the Garwood Center at the Haas School of Business at UC Berkeley.

This morning, the opening panel for the second day was on open innovation in healthcare within (and across) ecosystems.

• Sangita Reddy, Co-Managing Director, Apollo Hospitals Group
• Amir Dan Rubin, President and CEO, Stanford Healthcare
• William Bonfield, CMO, OptumHealth division of UnitedHealthcare
• Pramod John, CEO and Co-Founder of Oration

Pramod John, William Bonfield, Amir Rubin, Sangita Reddy

The session opened with a keynote by Reddy, daughter of cardiologist Prathap Reddy (who founded the chain in 1983). The company has 57 hospitals (7 with US accreditation), 2,500 pharmacies and numerous doctors and outpatient clinics.

She talked about how the company used frugal innovation to provide solutions both to India’s middle class and poor. For example, the company has created a national telemedicine program that has touched 36 million patients. To support that, it’s created a device for remote testing of vital signs, and is working on a device for diagnosing malaria (and other parasite) infections.

Perhaps the best example was open heart surgery. Apollo has done 150,000 surgeries with a 99.3% success rate — and an average cost of $4,000. Yes, compared to the US it has lower labor and pharma costs. However, the clinicians pioneered a process (and clamp) to allow 89% of the surgeries be done as beating heart surgery — saving the machine that oxygenates the heart, the process (and risk) of starting/stopping the heart, and the longer recovery period.

Several speakers noted that the U.S. is still the gold standard for the newest, most advanced, most complicated cases. As Reddy said, “Advanced healthcare in the United States guides advanced healthcare in the rest of the world,” and speakers expressed concern about any changes that would eliminate the spillover values that provides for global medicine.

The U.S. problems are both in the incentives and the inefficiencies (including rent-seeking) in the current system. (Rubin faces specific challenges of real estate and labor costs in Silicon Valley, with nurses drawing $160k/year vs. $50k nationwide). As Bonfield remarked, the success of the system keeping people alive longer means there are more patients living with (expensive) chronic conditions.

On the inefficiencies, John argues that the biggest opportunity is in pharmaceutical distribution. Drug prices are rising while medical procedures are relatively flat. He estimated that 20% of the $400b annual pharma costs are wasted in the distribution channels, through pharmacy benefit manager (PBMs) and retailers. Using the website GoodRx.com, he offered examples of the same (generic) statin drug having more than a 5x range of retail pricing in a specific local neighborhood.

Not surprisingly, John has a tool to facilitate search for lower drug prices. Although it could be used by the uninsured or those with high deductible plans, their target is medium-sized firms that self-insure their pharmaceutical expenditures.

As the person who (successfully) pushed for KGI’s healthcare economics and drug pricing classes, I asked about the incentives. It’s great if I can save drug costs, but if it doesn’t budget my monthly premiums, I’m not going to bother. As one speaker notes, Singapore spends less than almost any developed country on healthcare (4.6% in 2013) through high deductibles and incentives for consumers to reduce their own costs (as you would on any other good).

Still, it was good to see suggestions of bottom-up innovation that have a real chance to bend the cost curve in a way that top down mandates cannot.

Accelerating life science startups

On Thursday, I attended the Indie Bio SF Demo Day, a coming out party for 12 companies in its San Francisco accelerator.

SOSVentures, the sponsor of Indie Bio (which has a second site in Cork, Ireland) believes this is one of the first life science accelerators.

As with a life science incubator, the accelerator requires provide startups with shared wet lab space. However, following the accelerator model pioneered by Y Combinator, the accelerator provides mentorship with a fixed term of residency.

The 12 companies applied in January, joined in February and marked their coming out Thursday with a pitch and exhibition to the press and potential investors. The 12 companies are:

• ABioBot (Raghu Machiraju, CEO): lower cost, higher reliability lab automation
• Affinity Wulfrun (Anil Bagha, CEO): improved column for manufacturing monoclonal antibodies
• Arcturus BioCloud (Jamie Sotomayo, CEO): cloud hosted recombinant DNA experiments
• ArkReactor aka Sensa.io: inexpensive bioreactors
• BioLoom (Jennifer Kaehms, CEO): biomaterials for skin repair
• Blue Turtle Bio (Adham Aljahmi, CEO): oral administration of enzyme replacement therapy
• Clara Foods (Arturo Elizondo, CEO): synthetic egg whites
• Extem Bioscience (Mardonn Chua, CEO): high throughput stem cell production
• Orphidia (Aron Rachamim, CEO): point-of-care lab-quality assays from a single drop of blood
• Pembient (Matthew Markus, CEO): synthetic rhino horn to supplant poaching
• Ranomics (Cathy Tie, CEO): genomic database for oncology diagnostics
• ZymoChem (Harshal Chokhawala, CEO): higher yield synthetic petrochemicals

TechCrunch profiled 11 of the 12 companies in their report of the demo event, while three of the companies were profiled when Co.Exist toured the IndieBio lab in April.

Talking to the entrepreneurs, all were indoctrinated in the "lean startup" philosophy. At least one of the companies has already done a “pivot.”

Consistent with that, each of the firms was trying to get to market with the minimum possible cash. Several of the companies have revenues already, and at least two hope to be cash flow positive within the next year. Several of these are tools companies — a business model that is quick to cash flow positive — while the one therapeutics company is targeting orphan diseases which offer a quicker and less expensive regulatory pathway.

No incentives, no innovation

I have been teaching innovation management for more than 15 years at three different schools. In most cases, I kick off the course with a discussion of the incentives for innovation, a topic of particular interest to Berkeley economists such as David Teece and the late Suzanne Scotchmer.

The fundamental idea is that innovation is risky in many ways: the innovator doesn't know if the technology will work (technological uncertainty), whether the market will value it (market uncertainty) or whether the innovator will be able to hold off imitators and other competitors long enough to make a profit (appropriability and ompetitive uncertainty).

As with any other gamble — whether investing early-stage companies or lottery tickets — the innovation winners have to pay above-normal returns to cover the partial or total losses from the losers. Business is an experiment, and if you don’t compensate for the risk, then entrepreneurs, managers and investors will avoid risk. (We can debate the magnitude or the approach to providing incentives — as Scotchmer and others have done—without denying the inexorable need for such incentives).

Of course, outsiders only see the winners of the lottery or the IPO jackpots. They don’t see the dry wells, the failed companies or the other investments that fail to pan out. So the big success of blockbuster drugs attracts attention (and populist attacks) from those who don’t factor in the cost of failures. In many cases, this is due to economic ignorance — innovation costs or economics more generally — and in some cases this ignorance is willful.

Forbes columnist (and former Pfizer R&D head) John LaMattina attacks such ignorance in his February 3 column “New York Times Op-Eds Misleading Regarding The Biopharmaceutical Industry.” The column is balanced and thoughtful, allowing for the basis of most of the criticisms while decrying the economic ignorance (willful or otherwise) beyond the criticism.

In the category of willful ignorance has to be that of economics Nobel Laureate Joseph Stiglitz, a “frequent” critic of the pharma industry (and, IMHO, capitalism more broadly). Let me briefly except LaMattina’s comments on the Stiglitz op-ed:

1) “In generics friendly India, for example, Gilead Sciences, which makes an effective hepatitis C drug, recently announced that it would sell the drug for a little more than 1% of the $84,000 it charges here.” – Actually, “generics friendly India” really means that India has its own rules when it comes to intellectual property (IP) and often refuses to recognize legitimate IP positions.
…
2) “Overly restrictive intellectual property rights actually slow new discoveries by making it more difficult for scientists to build on the research of others and by choking off the exchange of ideas that is critical to innovation.” – This is a stunning misrepresentation of the R&D process in the biopharmaceutical industry. For any investment to be made in R&D, be it the 3 person start-up company or a Big Pharma, the promise of a financial return must exist. An absolute requirement for these investments is having sufficient IP to justify that a project, if successful, will provide such a financial return.
…
3) “As it is, most of the important innovations come out of our universities and research centers, like the NIH, funded by governments and foundations”. – As I have said in the past, these contributions are very important in the search for new medicines. But Stiglitz, like many other critics, is either ignorant of the amount of R&D carried out by the biopharmaceutical industry or chooses to minimize that the industry’s applied research is what converts nascent ideas and discoveries to the breakthrough medicines that are continually generated by the industry.

I would be naturally sympathetic to LaMattina’s criticisms due to my free market bias, which stems both from my first experience as an entrepreneur, what I’ve learned studying technological innovation for the past 20 years, and of course what I’ve also learned teaching students how to run innovation-related businesses.

However, his three criticisms have particular salience now that I’ve co-founded a new (pharmaceutical) startup that is a spinoff of my current employer. It is (as he says) a 3-person startup, bootstrap funded for now, trying to bring a breakthrough therapy to market.

My two co-founders and I are working nights and weekends — alongside our regular jobs — to raise funds, validate the science, and try to get something approved by the FDA. We wouldn’t be working so hard (#2) unless there was some possibility of a big return at the end: hypothetically, if we’re each putting $10,000 worth of effort into it each year, then if we have a 10% chance of success then we’d each want a $100k+/p.a. return (actually more given due known entrepreneurial optimism biases).

Of course, we wouldn’t have started down this path without IP. We have to talk to the government, CROs, CMOs, potential investors, industry execs and others to make our idea feasible. We are a tiny company with no full-time employees and minuscule resources: almost anyone we talk to is better equipped to bring this to market than we do. All we have is an idea, a vision and the (patent pending) IP that we hope will allow us an exclusive to bring this to market (if we can overcome all the uncertainties).

Finally, we have thought long and hard about commercialization. Even if every NIH or other government grant goes our way, we’ll have certain regulatory, manufacturing, distribution and (yes) IP costs that won’t be covered by government grants. These costs are far beyond what we can bear personally, so unless the potential returns are attractive enough, we won’t get the equity investment necessary to bring this therapy to market.

The Stiglitz ignorance (or misrepresentation) is depressing but utterly commonplace, particularly among economic populists. But sometimes these populists can see the light.

In the 1970s, there was no more outspoken populist among national political figures than George McGovern (1922-2012), the South Dakota senator and 1972 Democratic presidential nominee. After retiring from the senate, he opened a hotel in Connecticut and found out firsthand how little politicians know about business risks.

As McGovern wrote in a June 1, 1992 Wall Street Journal op-ed (quoted in a 2011 Forbes article):

In retrospect, I wish I had known more about the hazards and difficulties of such a business, especially during a recession of the kind that hit New England just as I was acquiring the inn’s 43-year leasehold. I also wish that during the years I was in public office, I had had this firsthand experience about the difficulties business people face every day. That knowledge would have made me a better U.S. senator and a more understanding presidential contender.
…
We intuitively know that to create job opportunities we need entrepreneurs who will risk their capital against an expected payoff. Too often, however, public policy does not consider whether we are choking off those opportunities.

So there is hope for intelligent people who get out of the Ivory Tower (or the Beltway) to try to make a living in the real world. McGovern was a man of modest means — a modern-day Harry Truman — trying to put away money for retirement. Millionaire politicians and academics are unlikely to leave their comfort zones, but there’s still a chance for skeptics to experience this epiphany.

Nascent biotech entrepreneurs

In between days of the Stanford Big Data in Biomedicine conference, on Thursday night I attended the finals of the Oxbridge Biotech Roundtable Onestart Americas business plan competition. I posted my thoughts over on my Engineering Entrepreneurship blog.

Stone age EHR

Today was my first #bigdatamed conference data at Stanford Medical School, which is hosting a three day conference on Big Data in Biomedicine. (I wasn't able to come Wednesday but watched two sessions on the live webcast).

I first learned of the conference last year from Atul Butte (@ajbutte), who I met when he presented at the 2012 Open Science Summit. My impression from Atul (and watching the webcast last year) is this is a bunch of computational biologists who’ve replaced their wet labs with databases (or nowadays, cloud computing accounts), in search of the next great lead to be found on their computer screen.

Certainly the first two panels yesterday fit that pattern (the first moderated by Butte). So did the after-lunch keynote by former UCSD professor Phil Bourne, creator of the PDB (protein database): a few months ago, Bourne joined NIH as its first-ever associate director for data science, reporting directly to NIH Director Francis Collins.

Translating from Science to Practice

But today the conversation broadened (as one slide put it) from the "science of medicine (biomedical research)" to the "practice of medicine (healthcare)". In other words, from faculty to the clinicians, and from universities (few industry scientists were present) to hospitals and clinics.

Some of the differences were as expected. Drug discovery researchers are at the bleeding edge of the science, and then after 5 or 10 or 15 years of drug development (animal models, clinical trials, regulatory filings, manufacturing, marketing etc.) the product finally shows up in the hands of doctors. Similarly, researchers are hoping to add to their journal publications while providers are trying to improve clinical outcomes — and increasingly under pressure to do so at higher efficiency (of both time their time and the amount spent on tests and treatments).

For clinicians, HIPAA privacy rules limit dramatically what and how data can be used and shared. Researchers have institutional review boards, but also face HIPAA restrictions. The NIH helpfully makes available a brief (16-page) note on researchers should interpret the interaction of IRB and HIPAA privacy constraints. (As it turns out, both clinicians and non-clinical researchers at the conference complained that HIPAA places unrealistic limits on combining data from differing sources to render an assessment of a given patient's health).

Proprietary vs. Open Platforms
At some point, it was inevitable that participants would discuss where the patient’s clinical data resides. Ten years ago, it was in paper charts, but now the ACA has strong incentives and penalties to store it in an electronic health record or EHR. (The administration’s healthcare IT czar says don’t call it an “electronic medical record”).

It was also inevitable that someone would ask: if we are compiling personal genomic data for patients, how will that data be made available for the clinical benefit of that patient? By one estimate, a patient’s EHR runs less than 100 megabytes while whole genome data (I’m told) runs into the gigabytes. As David Watson (ex Kaiser CTO, now at Oracle) said on today’s opening panel, medical images (such as MRI scans) are stored external to the EHR; will that happen with genomic data?

More seriously, how will such data be phased into operational systems? On the same panel, Jim Davies (CTO for England’s 100K genome project) suggested that existing EHRs would need an abstraction layer that would allow new data types to be added on, i.e. the way that apps, plug-in modules and extensions are added to other modern software systems.

However, today the EHR vendors (except for VistA) as proprietary as mainframe platform companies of the 1960s. Even Kaiser — which in 2010 had the largest private EHR implementation to date — is highly dependent on a proprietary vendor (Epic).

Proprietary control of the platform means high switching costs and other proprietary control of the customer, and so (I predict) this is something that none will relinquish unless forced to. We have a technical solution, but not a market solution. And the ACA penalties for EHR non-compliance mean that no provider can credibly defer or set aside EHR adoption until one provides the necessary openness.

So we know where we need to go, but it’s not clear how we get there. Two Harvard researchers — Zak Kohane and Ken Mandl — have proposed a way forward, and the following year won $15 million from HHS to implement their Smart Platforms project.

However, the plan seems to think that either vendors will see openness as being in their own interests or that customers will organize to demand openness. As someone who’s studied IT openness for 15 years, I can say that openness is almost always instituted by the weakest player (e.g. a late entrant), and right now I don’t see an obvious candidate in the EHR market.

WIthout such openness, health care providers are stuck with healthcare IT systems without third party add-ons. This is not just pre-app store, but pre-IBM PC, pre-Apple II, vertically integrated platforms with little if any choice to extend or change their systems. In other words, EHR systems are stuck in the stone age (1960s) of the digital computer era, with little prospect for improvement.

The next wave of life science startups (and entrepreneurs)

On Wednesday, KGI held a major public event for the finals of our business plan competition. This year (as with last year), the competition was tied to our business plan class, which was first offered in Fall 2003, for our third graduating class of MBS students. Also like last year, the class was team taught by me (as the business guy and course coordinator) and Mark Brown, a KGI grad and senior scientist at a local KGI spinoff company.

This year we had 17 MBS students and 8 (PhD-educated) PPM students across seven teams. The students worked with four external sponsors (plus KGI) to develop detailed business plans — product, sales, marketing, operations and financing — for the patented invention provided by (in most cases) the university technology transfer office.

The teams included therapeutics, research tools/services and a medical device:

1. Elegans Therapeutics: a novel treatment for asthma (California Institute of Technology)
2. Insituomics: improved visualization of RNA transcripts (California Institute of Technology)
3. Click-Brains: software that analysis neurological MRI scans (Children’s Hospital Los Angeles)
4. Klondike Therapeutics: improved therapy for anthrax (Keck Graduate Institute)
5. Cardiovascular Cell Source: improved quality supply for endothelial cells (UC Merced)
6. Mucotherapeutics: therapy to clear mucus for COPD (UC Merced)
7. Innovfusion: improved epidural infusion pump (BioFactory Pte. Ltd)

We had the most amazing panel of judges, who were all directly involved in launching, funding and/or running life science startups:

• Robert Baltera, a director of the San Diego Venture Group, former CEO of Amira Pharmaceuticals until its acquisition by Bristol-Meyers Squib, a 17 year Amgen veteran (and a KGI trustee)
• Craig Brooks, angel investor, head of two current life science startups (BCN Biosciences, Biostruxs) and a 19 year Amgen veteran who formerly worked for Procter & Gamble
• Robert Curry, partner of Latterell Venture Partners, former general partner of Alliance Technology Ventures, former faculty member at the University of Delaware (and chair of the KGI trustees)
• Stephen Eck, vice president of Astellas who previously worked for Eli Lilly and Pfizer, a board-certified hematologist/ oncologist (and a member of the Board of Advisors of the KGI School of Pharmacy)
• James Widergren, a former senior VP, group vice president and treasurer of Beckman Coulter, angel investor (and a former KGI trustee)

From the discussion, the judges were most intrigued by one project, and so it was not surprising when Dr. Curry announced that Insituomics was selected as the winner of the competition. Several of the judges expect that the Caltech technology will enable the next generation of diagnostic instruments. Runner up was Mucotherapeutics, which spent three months translating an in vitro scientific discovery into a viable product.

Head judge Bob Curry with the winners of KGI’s 2014 business plan competition:
Jagan Choudhary, Jixi He, Ashi Jain and Melanie Ufkin 

Entrepreneurship is the lifeblood of any high-tech industry, including biotechnology and the related life science industries that have arisen over the past 30 years. Being entrepreneurial — and applied — are two of KGI’s core values, that we try to embody in our programs, courses, events, faculty and students.

Mark and I want to thank all the judges, the university sponsors and of course our student entrepreneurs for all the hard work that made this event possible.

Someday putting doctors out of business

In the KGI business class today, a student idly asked “when will computer replacing doctors in diagnosing patients?” Another student said “never”.

It's pretty clear that technology will reduce the labor-intensity of medical care, and also shift some tasks from expensive high-skill people to inexpensive low-skill people. Look at how cars were made by Gottlieb Daimler, Henry Ford, Toyota in the 1970s and then today.

Computers will over the next 20-40 years replace some or all of the role of doctors in diagnosing conditions. It’s too labor intensive and expensive not to become a target. The question is not if, but when, where first and how fast.

The claim will be that it's intended to improve consistency and accuracy, but the real reason will be cost. Claimed improvements in quality — such as for patients who lack access to a specialist for diagnosis — could be used to overcome the opposition of highly educated, compensated and organized physicians.

The initial push thus will come from an organization that both has scale economies and a record of innovating to save pennies. My prediction is that the first major use in North America will fall in one of three categories:

• US government, probably the Veterans Health Administration
• An HMO, almost certainly Kaiser Permanente; or
• A provider serving rural areas, most likely the First Nations and Inuit Health Branch of Health Canada.

Biotech not like other high tech

In teaching, research and talking to industry professionals, I am often tempted to refer to “high technology” industries, “technology startups” and the like. This would tend to emphasize the commonality between IT and biotech.

And then there are days like Friday, when I’m reminded that biotech — and human health more generally — is completely different.

The occasion was an event on pharmaceutical quality, organized by KGI’s student chapter of the Parenteral Drug Association, a professional organization concerned with drug quality and safety issues.

The students invited three industry speakers.

First up was Susan Weber of Baxter introduced us to the principles of Quality by Design, i.e. start from a quality goal and work back through the entire design, development an production process. The ideas are more than 20 years old, but apparently have recently have begun to influence pharmaceutical manufacturing in the US.

The second speaker was Marsha Hardiman, a consultant for Concordia Valsource. After showing a stunning video by the American Society for Quality on the consequences of quality failures, she summarized the regulatory and process failures of the New England Compounding Center that have led to 64 deaths so far. Nothing illustrates the difference between a bad drug and a bad iPhone app.

The final speaker was James Sesic of Amgen, talking about the challenges of maintaining regulatory compliance for drugs sold in more than 100 countries.

This was the real eye-opener. We all know about the need for drug companies to spend years and hundreds of millions of dollars to get the first NDA or BLA approval. Sometimes we talk about getting the second approval — e.g. in Europe or Japan after the US. But I’ve never heard anyone talk about the rest of the world.

How does a company like Amgen handle approval in dozens of countries? The richest countries have their own large-scale regulatory systems (US, Japan, Canada, Europe), the smallest grant approval after certified approval from one of the major regulators, while a range of countries attempt to form their own regulatory judgements without a lot of resources.

On top of that, regulatory approval is required for any major change in the production process. Normally this discourages companies from making major changes, but if there’s a major improvement in the process — or the company needs to comply with new regulations — it will go through the process.

One example is getting approval to shift manufacturing to a new factory. The company will have to apply for approval in dozens of countries and cannot sell drugs in country X from the new factory until regulatory agency X has approved such production.

If a drug has several deliver modalities — concentration, IV vs. injection, etc. — then when multiplied by the disparate languages, marking requirements and other national regulations, a single blockbuster drug could be sold in 100s of SKUs. Double that with separate SKUs from the old and the new factory.

When it takes 4-6 years for all the countries to approve the change, then an Amgen needs to keep track of all those 200? 500? SKUs (for one drug) to know which SKU is legal to sell in one country.

Contrast this to the rollout of the latest iPhone, a product that (unlike software or PCs) must satisfy strict government and operator requirements to be sold in a given country. Apple launched the iPhone 5c in 10 countries in September, added 60 countries between October 25-November 1, and expects to have more than 100 countries by the end of the year (i.e. in less than 4 months).

The process of global drug regulation seems pretty inefficient, and we pay for this inefficiency through higher costs (or lack of access by smaller countries to non-blockbuster drugs). It would be nice if we could develop a drug regulatory system where the first review is highly rigorous but the remaining process is streamlined so that drug companies spend their money on development (and safety), not SAP and paperwork.

Administration: 93 million will lose existing health insurance

From Forbes, October 31:

Obama Officials In 2010: 93 Million Americans Will Be Unable To Keep Their Health Plans Under Obamacare
[by] Avik Roy
…
It turns out that in an obscure report buried in a June 2010 edition of the Federal Register, administration officials predicted massive disruption of the private insurance market.
…
Section 1251 of the Affordable Care Act contains what’s called a “grandfather” provision that, in theory, allows people to keep their existing plans if they like them. But subsequent regulations from the Obama administration interpreted that provision so narrowly as to prevent most plans from gaining this protection.

“The Departments’ mid-range estimate is that 66 percent of small employer plans and 45 percent of large employer plans will relinquish their grandfather status by the end of 2013,” wrote the administration on page 34,552 of the Register.
…
The Departments’ mid-range estimate is that 66 percent of small employer plans and 45 percent of large employer plans will relinquish their grandfather status by the end of 2013,” wrote the administration on page 34,552 of the Register. …

Another 25 million people, according to the CBO, have “non group and other” forms of insurance; that is to say, they participate in the market for individually-purchased insurance. In this market, the administration projected that “40 to 67 percent” of individually-purchased plans would lose their Obamacare-sanctioned “grandfather status” and become illegal, solely due to the fact that there is a high turnover of participants and insurance arrangements in this market. (Plans purchased after March 23, 2010 do not benefit from the “grandfather” clause.) The real turnover rate would be higher, because plans can lose their grandfather status for a number of other reasons.
…
As to the number of people facing cancellations, 51 percent of the employer-based market plus 53.5 percent of the non-group market (the middle of the administration’s range) amounts to 93 million Americans.

The Myriad decision

The Supreme Court on June 13 issued its decision on Association for Molecular Pathology v. Myriad Genetics. The case was of great interest because we covered it in class this semester. To understand the case, I read more than a dozen articles or commentaries on the decision: in addition to the decision itself, the most useful were a same day report by Jason Rantanen of the PatentlyO blog and this week’s analysis by John Conley of the Genomics Law Report.

The case centered on Myriad’s discovery of two genes (BRCA1 and BRCA2) linked to a greater inherited risk of breast cancer. In an opinion written by Clarence Thomas, the Supreme Court held unanimously that Myriad was not allowed to patent isolated DNA but was allowed to patent composite DNA (cDNA).

As the slip opinion reported:

At issue are claims 1, 2, 5, 6, and 7 of U. S. Patent 5,747,282 (the ’282 patent), claim 1 of U. S. Patent 5,693,473 (the ’473 patent), and claims 1, 6, and 7 of U. S. Patent 5,837,492 (the ’492 patent).

and specifically whether these claims are patentable under 35 U. S. C. §101::

§ 101 - Inventions Patentable:
Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.

The difficulty of the case (as with any patent case the Supreme Court is willing to accept) is trading off two conflict policy goals. As Thomas wrote:

patent protection strikes a delicate balance between creating “incentives that lead to creation, invention, and discovery” and “imped[ing] the flow of information that might permit, indeed spur, invention.”

From the opinion, it’s clear that this case sets a key precedent for DNA patenting, building upon the seminal Diamond v. Chakrabarty (1980) and last year’s Mayo v. Prometheus.

Diamond v. Chakrabarty was the first case to allow DNA patenting, in this case for a new organism created by GE microbiologist who created a new oil-degrading microbe. In retrospect, it doesn’t seem controversial at all, but the case was narrowly decided by a 5-4 margin, with the two conservative judges joined by three swing justices (vs. the four liberal justices).

Last year, in the Prometheus case, a unanimous SCOTUS held that “Laws of nature, natural phenomena, and abstract ideas are not patentable.”.

Despite efforts by Myriad to argue otherwise, in this case the court agreed with plaintiffs that isolating DNA corresponded to “laws of nature”. In this regard, they seemed heavily influenced by the opinion of William Bryson, the dissenting justice in a 2-1 decision favoring Myriad at the U.S. Court of Appeals for the Federal Circuit.

However, all three appeals justices (and all seven SCOTUS justices) agreed with Myriad’s argument that the cDNA is manmade and thus entitled to patent protection. As Thomas wrote:

the lab technician unquestionably creates something new when cDNA is made. cDNA retains the naturally occurring eons of DNA, but it is distinct from the DNA from which it was derived. As a result, cDNA is not a “product of nature” and is patent eligible under §101…

What was particularly instructive was the final (III) section of Thomas’ opinion, which begins: “It is important to note what is not implicated by this decision.” If DNA patents are invalid, two related patent areas are not.

Myriad did not assert any method claims: if it had, it appears the court would have upheld them. Similarly, the case did not consider any applications (of the unique DNA knowledge Myriad developed). As appeals justice Bryson noted, Myriad both “was in an excellent position to claim applications of that knowledge. Many of its unchallenged claims are limited to such applications.”

What is unresolved is the business impact of this decision. On the one hand, Myriad’s lead attorney told Bloomberg “We have a very strong patent estate around the BRCA test,” protected by 24 patents. However, as Bloomberg (and others) noted, the plaintiffs and many other private and university entities will be offering BRCA-based tests. Presumably these competing approaches will test the validity (or effectiveness) of Myriad’s patent barriers.

A second key issue is how the decision will impact university research, Rantanen (writing at PatentlyO) suggests two possible outcomes:

In terms of the effects on my friends here at the University, I can see at least two consequences. First, it may allow researchers more freedom to engage in whole-genome sequencing because they won't need to deal with a multitude of isolated DNA patents for individual sequences. On the other hand, because early-stage research on newly discovered DNA sequences cannot be patented, it may encourage companies - and perhaps universities - to pursue greater secrecy over those early stage discoveries. Social research norms may cut against this - particularly in universities - but there may be some increased pressure, particularly at the margins, towards secrecy of potentially valuable inventions.

Finally, there is some question as to how long the cDNA distinction will last. Forbes quoted biochemist and IP attorney Brenda Jarrell as disputing the court’s finding that “cDNA is not a product of nature.” When this argument is made in a future case, it’s possible that the justices will reconsider where they have drawn the line between nature and invention.

That points to the final (and best) part of the entire Slip opinion, the concurrence by Antonin Scalia:

I join the judgment of the Court, and all of its opinion except Part I–A and some portions of the rest of the opinion going into fine details of molecular biology. I am unable to affirm those details on my own knowledge or even my own belief.

Although Scalia relied on the same distinction between natural and manmade used by the other eight justices, he did not feel qualified (nor necessary) to deliver a two page tutorial on molecular biology. Some would count this as an all-too-rare example of humility by any member of the high court.

Spurring innovation for a system that doesn't want it

This morning I watched the #bigdatamed conference at Stanford via webcast. (I was out of town earlier in the week, presenting my own talk, and couldn’t attend the conference in person.)

The session I watched was entitled “Big Data Opportunities for Healthcare Startups,” part of a larger conference on “Big Data in Biomedicine: Driving Innovation for a Healthier World.” The panel consisted of Ori Geva (Medial Research), Vicki Seyfert-Margolis (MyOwnMed), Risa Stack (GE Healthmagination), Warren Hogarth (Sequoia Capital) and moderator Chris Longhurst (Lucile Packard Children’s Hospital).

It’s no revelation to say that healthcare startups face huge regulatory barriers that drive up both costs and capital requirements. It’s hard to imagine — other than perhaps a defense company — a more regulated industry the USA. (And, as I showed in a 2008 study, aerospace communications allowed market entry by some underfunded entrepreneurs who later gave us Qualcomm).

It’s also no revelation that most stakeholders — patients, doctors, taxpayers, the government, insurance companies — would like better outcomes at a lower cost, but have different perspectives on how to do so.

Notably, former Kleiner Perkins exec Risa Stack cited last week’s published lament by healthcare IT entrepreneur Jonathan Roth about the difficult of bringing innovation into the healthcare system. She cited his three barriers:

1. Healthcare consumers don’t shop. … With hardly an exception, patients can’t shop for healthcare. Why compare prices if you have no choice? Caregivers can’t shop for healthcare either. Few doctors know the true cost of tests and treatments they refer patients to. The setup leaves caregivers with little incentive to differentiate themselves by embracing innovative care delivery practices.

2. The biggest buyer stifles innovation. The government is the biggest buyer in the healthcare market. In fact, it represents more than half of all healthcare buying in the U.S. Unfortunately, the big spender has not prioritized supporting innovation, but rather minimizing the scenario of maximum regret: the audit, the lawsuit, the death. This compliance burden breeds risk-averse behaviors among healthcare providers, not creativity. Furthermore, the government rewards caregivers for a narrowly defined set of activities, limiting their appetite for innovation and thus for entrepreneurial services and technology.

3. Service, quality, and competitive pricing aren’t rewarded. By and large, doctors continue to be paid based on how many services and tests they provide. Here and there, they are also paid for reporting some data. They are not commonly incentivized to compete on price and quality, and there’s no obvious way to display that information for shoppers.

While Stack thought high-deductible plans might make patient more cost-sensitive, she offered no hope on the other two.

In her talk, former FDA official (turned healthcare social media entrepreneur), Vicky Seyfert-Margolis, noted the pressures coming to the system for greater real world effectiveness. For example, right now oncology drugs are tested for late stage cancers that have failed chemo (with benefits measured in terms of 3 month survival) rather than earlier in the process. Since her husband helped get Obama re-elected, I was not surprised at her optimism about the effect of the Affordable Care Act and Accountable Care Organizations. However, Stack noted that ACOs would tend to increase patient switching costs and decrease choice (which by the way would exacerbate Roth’s concerns).

Still, there was one glimmer of hope. Given HIPAA, the one party that could actually do something to enable patient data availability for better outcomes is the patient him/herself. There are important technical and economic barriers to overcome, but also potential payoffs.

As VC Warren Hogarth noted, this would be an improvement over the current system, where patients (for example) give their tissue to a hospital for (say) a cancer test and then the hospital controls who and how that sample is used. The technical problem, noted Ori Geva, is how will the data be made available in a portable way so that the patient can share it on other platforms.

Several panelists noted the opportunity (and challenge) was what’s in it for the patient. On the one hand, patients [likely an unusually motivated subpopulation] opt in to sharing their data on Patients Like Me. Many patients also want to be treated as co-managers of their own data or (as Seyfert-Margolis noted), the household “chief medical officer” (i.e. mom) does so on behalf of the family.

One challenge is that (as noted) patients don't shop. Another is the (realistic) fear that medical groups, insurance companies or HMOs will use the data to reduce choices for patients in the name of cost containment. (I have no problem with Kaiser choosing cancer treatment A over cancer treatment B based on my genotype, but I start to get pissed when they tell me I can’t have a diagnostic because I’m “low risk”).

On the one hand, the normal way of getting something through the system is to appeal to payers. If entrepreneurs can find a way to directly appeal to patients — as have 23 & Me, Patients Like Me and the various quantified self efforts — perhaps this will create other opportunities for innovation that don’t require winning the end-to-end cooperation of the entire system.

Saving animals, dooming people

Earlier this month, neurobiologists in Milan had their lab broken into in a deliberate attempt to slow their research.

As the Wall Street Journal reported:

The lab was targeted because its work, like just about every other medical advance and effort of our time, involves mice. Hundreds of small, cute, furry mice, which in this case had been genetically modified for protein mutations meant to model, as [Dr. Michela] Matteoli puts it, "what goes wrong in the synapse."

The animal-rights crowd decided it had better plans for the mice. So on Saturday five members of Italy's "Stop Green Hill" group (initially formed to protest a nearby dog-breeding facility) broke into the Milanese lab and "occupied" the area housing 800 animals, mostly mice but also some rabbits. They chained themselves by their necks to the facility's doors, Ms. Matteoli says, ensuring that any attempt at forced entry by the police could "harm them really seriously. They could kill them, break their necks."

The researchers lost mice, and others were scrambled such that it was impossible to associate a specific animal with a given experiment. The damage is estimated to cost a year of work and hundreds of thousands of euros. The research is intended to develop drugs “that might arrest neuron destruction in Alzheimer's patients, or avoid the synaptic dysfunctions apparent in autism.”

Columnist Anne Jolis concluded:

[C]onsidering the zealousness of the people who have a problem with their work, Ms. Matteoli and her colleagues may hit on the cure for Alzheimer's before they convince any "Stop Green Hill" types that studying the caged mice and bunnies is worth it. Even Ms. Matteoli, polite to a fault, admits that she has been "impressed" with some of the "really completely crazy" online comments about news articles on the lab attack.

"One guy wrote that you should only study mice if you're developing medicine for mice. I mean, this is the level of—it's very hard to understand." Here's hoping she doesn't try too hard—and can get back to her regular work soon.

I realize I’m a species bigot, but I never got why people valued primitive animals over human life. (Dolphins and chimps I understand — at least up to a point.) The advances will come too late to help me, but perhaps they could help my in-laws (in another decade) or people of my generation (in 30-40 years).

The biopharma industry will continue to have these sorts of problems unless it can find a way to persuade the public of the necessity of their research and research methods. The anti-capitalist, anti-science challenge seems greatest in Europe, but the U.S. is far from exempt.

Myriad: does it matter?

Today marks the Supreme Court hearings in the Myriad patent case. It is no exaggeration to say this is the most closely watched life science patent case in more than a decade.

In one sense, the case has the potential to be as significant as Diamond v. Chakrabarty. That is the 1980 Supreme Court decision that (to quote a 2005 review) “held that a live, man-made microorganism is patentable subject matter” under the patent code.

There is more than a little posturing on both sides. The patients’ rights, open IP crowd is promulgating op-eds in the Washington Post and Los Angeles Times asserting that no company “should own our DNA”. Not surprisingly, the news pages of the New York Times are promoting sympathetic stories on the anti-IP crowd.

In response, the CEO of Myriad Genetics submitted an op-ed to Forbes and letters hoping to rebut these op-eds. The argument is summed up by the title of the Forbes piece: “We're Not Patenting Your Genes, But Our Research.”

We used the HBS case on Myriad in my Innovation Management class at KGI this semester. The students really enjoyed it. It provided very interesting discussion questions at the intersection of genomic medicine, patent law and public policy. It didn’t hurt that this is a high-profile unsettled question of the law.

For the legal issues, a great place to start is the PatentlyO blog. For example, a December 3 article listed the conventional wisdom among legal scholars. A February 11 article lists the questions to be addressed by the two parties:

1. Are human genes patentable?
2. Did the court of appeals err in upholding a method claim by Myriad that is irreconcilable with this Court's ruling in Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289 (2012)?
3. Did the court of appeals err in adopting a new and inflexible rule, contrary to normal standing rules and this Court's decision in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007), that petitioners who have been indisputably deterred by Myriad's "active enforcement" of its patent rights nonetheless lack standing to challenge those patents absent evidence that they have been personally threatened with an infringement action?

The arguments on each side were highlighted in an August 17 summary of the appeal at the Genomics Lab Report, as well as a blog posting the same day on Derek Lowe’s “In the Pipeline” blog.

However, probably the most interesting article was in my Sunday morning paper here in San Diego, by Bradley Fikes, the longtime biotech reporter who’s one of the few North County Times reporters after it was acquired last year by the San Diego Union. His lead on the Union story captures it all:

No matter which way the Supreme Court rules on the Myriad Genetics BRCA breast cancer gene test patenting case, the importance of such patents is diminishing over time. Biotechnology is moving beyond patents derived from naturally occurring gene sequences. The most important biotech patents nowadays are becoming synthetic gene and RNA sequences, proteins and other indisputable contrivances of human ingenuity.

The article highlights the important pioneering efforts of Craig Venter (now in San Diego) who competed with the Human Gene Project.

In the long run, will Myriad matter? The experts consulted by Fikes think not, for two reasons. First, the relevant patents are expiring and thus at some point won’t be enforced anyway. Second, the IP strategies of biotech companies are getting more sophisticated, emphasizing synthetic organisms rather than isolated DNA strains from natural organisms. Meanwhile, as the New York Times reports, Myriad’s latest business model is using trade secrets for its database.

So in the end, this may be tempest in a teapot. In a decade or two, the industry will have moved on, and the patent lawyers will need something else to debate.