Achieving Wal-Mart efficiencies in healthcare

Everyone agrees that ACA (Obamacare) is going to fundamentally transform the US healthcare system. That was, after all, its intention — the legacy that Hillary and Bill Clinton sought 16 years earlier and failed to achieve. At the same time, the US system — from pharma companies to providers to insurance to clinicians — was facing its own multi-faceted crisis. The crises were used as a justification for ACA, but for some problems, ACA may have no impact or make things worse.

The “US Health Care Outlook” panel today at KGI examined the likely culmination of this coming storm. The panel featured Pete Clagett (CEO of Express Scripts), Jeff Mason of United Healthcare, Don Jones of Qualcomm and consultant Linda Cullen.

Pullen highlighted the nominal impact of ACA is that the government will be buying more healthcare and thus have more control over supply, demand and pricing. Mason reviewed the dying throes of the traditional US fee-for-service, to be replaced by bundled payment plans (such as capitation — commonly used in California).

Pullin recited the depressing statistics of declining R&D productivity. A simple ratio of gross R&D expenditure to new therapeutics ranges from $3.7b per drug (Amgen) to $12b per drug (AstraZeneca). The industry has $200b of revenues disappearing from expiring patents of 2012-2018.

Their provocative openings spawned an interesting discussion: there will be winners over the next few years whether or not the ACA takes hold. Both public and private payers want cost reductions, so innovators who deliver efficiency improvements have lucrative business opportunities.

Kathy Webster, dean of KGI’s new School of Biopharmacy, asked about the costs of the very sickest. The panelists noted the high burden produced by the sickest of the sick (perhaps top 2-3%) — where the severe (and largely incurable illnesses) require a societal resource allocation discussion. However, the next 3-5% are those with chronic disease, who today are very expensive but offer tremendous opportunities for improved efficiency (and thus attractive margins for the right solution).

My question picked up on one of Pullen’s factoids: that 80% of the global pharmacy profits come from the US. I asked the panel: "what would happen to pharma profits if the US reimbursements were cut to Canada’s levels?” (An increasingly single payer system is a textbook increase in buyer power and thus the ability of the government to force industry to cut prices).

The audience groaned at the question and the flip answer that the profits would go down. However, Clagett noted that while the reimbursement levels for branded drugs are lower than the US, generic drugs are higher. (NB: Canadian provinces pressured generic suppliers earlier this month to take a sizable price cut). Even if reduced reimbursements destroyed current business models, there was a suggesting that new business models might emerge (whether through increased generics or by opportunities for lower cost solutions).

Overall, the general tone — consistent with KGI’s mission — was that market forces, private innovation and competition (to the degree it’s allowed) is most likely to provide sizable improvements in efficiency and efficacy. One example was cited by KGI advisory council member Jamie Danenberg (of Takeda), who noted an NPR report comparing a bargain basement MRI machine to a local hospital: the discount clinic was both cheaper and better.
But perhaps the most inspirational example came from Don Jones. Noting the recent rumor that Wal-Mart was getting into health insurance by setting up a health insurance exchange, he took that scenario to its logical conclusions:

• With their retail locations, they could open in-store clinics (as CVS has MinuteClinic in its locations).
• Their locations (and other services) would offer convenience and efficiency to shoppers that would attract business (cf. MinuteClinic).
• Unlike traditional healthcare companies, they would be consumer-focused rather than patient focused. (Most consumers would rather not be patients — they just want the healthy outcomes)
• They would bring their now operational efficiencies and buying power to the operational of any such business. Their buying power alone could cut capital equipment costs by 50%. (Would you like an MRI scan when you’re done shopping?)

Jones predicted that other pressures to do things better would come from Fortune 500 companies that are bringing healthcare onsite to improve worker productivity. Tech companies are well situated to effect such changes, because they understand the potential of the technology to improve the efficiency of service delivery, such as through mobile apps (on Qualcomm-enabled phones) that do for pharmacy what Amazon (or Pandora) have done to simplify purchasing of other goods.

Overall, it was an encouraging — in fact exciting — prognosis for the US healthcare system. Instead of going down the path of increasing bureaucratization and rationing, we could get improved outcomes at a lower cost. Perhaps if we’re lucky it will even turn out to be true.

Regulation, free speech and health care innovation

Over the centuries, much of the progress in health care has come through experimentation by doctors. The creation of the FDA regulated new therapies, but at least in the US, doctors have been able to try new applications through “off label” prescribing of existing therapies.

Such off-label uses today play an important role in fueling improvements in health care. The father of user innovation, Eric von Hippel, co-authored a paper (Monaco, Ali and von Hippel, 2006) that studied the new applications of therapies approved by the FDA in 1998. They concluded that “Eighty-two (57%) of the 143 drug therapy innovations in our sample were discovered by practicing clinicians through field discovery.” In other words, the majority of new approvals were the result of doctors (not the drug companies) doing experiments.

Recognizing the potential for abuse, doctors still see such off-label prescription as an important treatment option. The American Academy of Orthopaedic Surgeons states:

The American Academy of Orthopaedic Surgeons (AAOS) believes that surgeons may prescribe or administer any legally marketed product for an off-label use within the authorized practice of medicine in the exercise of appropriate medical judgment for the best interest of the patient.

Similarly, the AMA provides this example

An example is a congenital condition known as Kidney Reflux Disease, which mostly affects infants and young children. This disease is caused by improper development of the ureters which leads to a back flow of contaminated urine into the kidneys resulting in an infection. No medications have been approved to meet the needs for effective management of this condition. However, the off-label usage of multiple antibiotics has been shown to be the most effective course of treatment. Left untreated, Kidney Reflux Disease can lead to permanent damage and failure of the kidneys.4

Nonetheless, the FDA has worked to prosecute some cases of doctors or drug companies recommending off-label uses. One famous example involves the drug Xyrem, which was sold by Orphan Medical (a company acquired by Jazz Pharmaceutical in July 2005).

The government successfully prosecuted Orphan sales rep Alfred Caronia for making truthful but unapproved statements. Last month, Caronia got his conviction reversed on appeal — recognizing his free speech rights — with help from amicus curiae briefs by the Washington Legal Foundation and the Medical Information Working Group.

However, the victory came too late for Peter Gleason, M.D., a doctor who was arrested, prosecuted and had his assets seized (preventing him from paying for private counsel). Author Harvey Silverglate wrote about Gleason in a Dec 26 op-ed column in the WSJ:

The ordeal of fighting a federal indictment, a daunting process even for the wealthy, exhausted Gleason, with whom I corresponded when I included his case in a book I was writing about how federal bureaucrats and prosecutors go after innocent defendants for innocuous behavior. He grew increasingly dispirited and finally decided to accept an offer that he felt he could not refuse. He pleaded guilty to a misdemeanor alleging his conspiracy with Orphan Medical and was sentenced to one year of probation and a $25 fine.

But Gleason's career was ruined and his pride decimated. He had difficulty holding a hospital or clinic job, and his medical license was placed into question. He was despondent the last time I spoke with him, and he subsequently took his life by hanging himself.

Friday’s paper brought three letters about the article. One, from a 501(c)3 used this to attack FDA attempts to control physicians:

In recent years Food and Drug Administration officials have engaged in a campaign to control every detail of the practice of medicine by individual physicians. They prosecuted a physician for taking stem cells from a patient on the basis that the cells are a chemical they have the power to regulate—even though they are reinjected in the same patient. Neither you nor your physicians may use your cells in your own body without government permission. Another physician is hounded by the FDA for the use of venal catheters that the FDA has approved without FDA approval of every individual use. Now, when you visit your physician, the FDA always wants to be in the room with you.

A second lamented the use of asset seizure (against Dr. Gleason and others) as a violation of unreasonable seizure. Meanwhile, the third letter defended the FDA’s prosecution of Gleason:

The government was right to prosecute Gleason because he violated the law and people's health and lives were at stake. Xyrem can have serious side effects, and when improperly used can induce comas and cause death, which is why it has a "black-box" warning. Orphan also was prosecuted for promoting Xyrem for dangerous, unapproved uses and pleaded guilty. Jazz Pharmaceuticals, which acquired Orphan, paid $20 million to settle civil and criminal charges.

The third author did not note that she was a partner in a DC law firm, but her Friday op-ed in Forbes (predicting such prosecutions will continue) concluded with this disclaimer:

Disclosure note: My firm represented whistleblowers whose cases were part of several of the settlements mentioned. In addition to the Orphan Medical/Jazz Pharmaceuticals settlement, we had “qui tam” cases that were part of the settlements by Amgen, Glaxo and Pfizer.

When they win, such plaintiff attorneys are paid sizable legal fees. Plaintiff attorney rates typically range from 25-33% but it’s hard to tell since terms tend to confidential. The legal fees for one “whistleblower” case were divulged by a tax case as being 40%, while a dispute in another case revealed as being 43.5% plus expenses.

Forty percent of $20 million is $8 million, and the $20 million settlement is a relatively small settlement for such cases. That’s a lot of reasons for plaintiff attorneys to continue to sue doctors and pharma companies in hopes of punishing them for off-label uses, no matter what the FDA does.


References
Harold J. DeMonaco, Ayfer Ali, Eric von Hippel, “The Major Role of Clinicians in the Discovery of Off-Label Drug Therapies,” Pharmacotherapy Volume 26, Issue 3, (March 2006), pages 323–332, DOI: 10.1592/phco.26.3.323 (or free working paper)

Life science without ethics

One of the things that has struck me about life science researchers, entrepreneurs, teachers and students is the sense of mission — compared to other technology entrepreneurs, it’s not just about the money.

The story of John Crowley (as immortalized by the movie “Extraordinary Measures”) and others fighting to solve rare childhood diseases are particularly good examples of this. (Some of their pricing decisions are controversial, but that’s another issue).

But no industry or line of work is full of saints (not even, alas, the Catholic church). Every industry has its bad apples.

This week Fortune tells the story of four executives of Synthes who plead (in effect) no contest over deaths due to an untested medical implant called Norian. The short version is that Norian is a calcium glue that works well for (and was approved for) arm and skull breaks — because gradually over time it transforms itself into bone.

However, Synthes wanted to go after the larger spine fracture market. The execs used a variety of marketing techniques to try it on humans while bypassing GRAS or FDA qualification procedures (as an off-label treatment).

The problem is that when used with spines, in some cases the glue got into the bloodstream, caused blood clots and killed people almost immediately. And, in fact, this showed up pretty quickly in animal tests. Several employees raised alarms, but top management went ahead anyway.

As intended by the magazine, the story is chilling. We expect this sort of behavior out of tobacco companies (or, once upon a time, out of polluting factories) but not out of FDA-regulated companies selling life-saving products.

I don’t get how this happened, but then I’ve never worked in an organization with a culture as toxic as this one appears to have been. It can’t just be about the money. At some point, perhaps there was the escalation of commitment — the cover-up or fear of getting caught — but surely someone early on thought “we can’t do this” or “it’s not worth the risk” (whether to the patients, companies or the individual employees).

Perhaps it’s just mirroring a broader decline in society’s moral compass (or maybe just a more effective process of rooting out fraud that has always existed at some level). Even so, as an educator we all wonder what we can or should do to prevent, inoculate against or early identify such attitudes and behaviors.

The importance of teamwork

One of the major reasons for the existence of KGI is to span the gap between the academic and corporate views of life science research. We all tend to focus on the nature of the output, i.e. basic vs. applied science. However, as our students discover during their yearlong projects with companies, the way work gets done is also very different.

One area of potential culture clash is the real world importance of teamwork, as highlighted by an article earlier this month in Nature Bioentrepreneur. A few excerpts:

From academic solos to industrial symphonies
Gwen Acton, Alicia Gómez-Yafal & Emily Walsh

Published online: 17 May 2012

Academic researchers often need to stand out to advance, but the corporate world calls for team players. Moving from one world to the other can be a culture shock.
...
Individual project ownership is often encouraged and rewarded in academia, yet this approach in industry downplays the contributions of the team and inhibits key communication required for the success of highly multidisciplinary drug development projects. ... Over the years, we have seen many scientists undermine their careers by trying to do too much on their own.
...
Individual project ownership, and the recognition that follows, is the pillar on which careers are made or lost in the academic arena. ... Competition is indeed the name of the game in academia, and it is arguably not a bad thing. In industry, on the other hand, rapid, nonlinear career evolution is business as usual. Competition is reserved for external parties and has no place within your team. Development of the product, which will bring benefit to the patient, is central. Individual contributions routinely take a peripheral place, and any meritocracy is team based, because drug discovery projects are among the most multidisciplinary projects of all scientific endeavors.

Going solo in this atmosphere is at best a kamikaze approach and definitely career limiting, in our experience. ... Scientists who are not team players are often passed over for roles in startup biopharmaceutical companies. This is because industrial R&D is as much a team- and people-oriented effort as one that relies on an individual with particular expertise. As one venture capitalist (VC) puts it, when selecting startup management, “choose attitude over aptitude”. These views are likely shocking for scientists in academia, but they are widely held in industry.

I am going to recommend this reading for our entering students, particularly those in our PPM program (the world’s first post-PhD master’s program) who have chosen to leave the world of academic science in hopes of finding a corporate position. A graduate professional education is as much about developing norms and expectations as it is imparting specific technical or business knowledge.

Capstone professional education

Today is the biggest day of the year here at KGI, as 88 graduate students present the results of their year-long Team Masters Project. The TMP is the capstone of the KGI experience, allowing teams of 4-5 students to work to meet the needs of a real company.

Realism is the watchword of the TMP program (and KGI more generally). The students work as consultants (with the faculty advisor as the senior partner) to identify and address the needs articulated by their industry liaison. This is not about getting a grade: this is about delivering results that satisfy the promises the team made to their sponsor. Unlike (most) projects in the real world, the deadline is completely immovable, as our students are all planning on graduating and leaving KGI next week.

There are analogous programs in some professional schools, such as the business school context where I worked for 11 years. However, such efforts are usually a single semester and a single course (KGI students treat their TMP as a double class).

This is my second TMP Day, but my first as a KGI faculty member. It’s also a record year for the TMP program, with 19 projects and (for the first time) being presented in parallel sessions. Of the 19 projects, 11 are from returning sponsors — eight of these sponsoring in consecutive years.

I watched three projects during the lead off segment. All three played to KGI strengths: two related to rare diseases and a third to genomic medicine.

For Pfizer, the team compared the regulatory approval processes for orphan and non-orphan drugs that were approved over a ten year period. After examining regulatory disclosures for 95 drugs to treat conditions of hematology, pulmonology, endocrinology, neurology, they found that the orphan drug trials had fewer trials and number of trial participants — but the time required for clinical trial and regulatory approval were similar. The study is expected to be published in the Clinical Pharmacology and Therapeutics Journal.

For Sigma-Tau, the student team examined the direct, indirect and intangible costs for a rare childhood disease, totaling over the direct costs were over $5 billion. After adding up medical and other quantifiable costs, they used social media to contact parents of patients to better understand the impact of the disease on these children and their families.

The project for Express Scripts/Medco considered how (or whether) this pharmacy benefits manager should leverage the opportunities to create new business around whole genome sequencing. Considering both the feasibility and attractiveness of these opportunities, they evaluated three ways of generating revenue from customers — in oncology, pharmacogenomics and preventative care — as well as business models based on selling the data for other purposes (such as pharma research).

This year I’ve been advisor for two projects from beginning to end (the first faculty member to do that).

Presentation by Clear Springs project team

The first team to present analyzed the feasibility of building an open pond algae farm for the 18,000 acres of Florida land owned by Clear Springs Land Company. The biofuels industry is a potentially huge market, but this requires hundreds of millions of investment in unproven technology to compete with commodity oil prices. After reviewing the literature, talking to experts, working with a specific technology provider and attending an algae conference, my team concluded that it would be possible to get a positive NPV (over 10 years) by selling biodiesel and aquafeed from the algae cultivation.

This afternoon will bring my second team, who have compared R&D processes in four Fortune 500 companies and a large government lab. From 73 interviews, they created a six-step model of the innovation journey: opportunity recognition, idea generation, idea crystallization, consensus building, management approval and implementation. This project was a rare one in that it was sponsored by Eli Lilly, but the full findings are being shared with participating companies and members of the Industrial Research Institute. (They also expect to publish a summary in Research-Technology Management, the IRI journal).

Other sponsors this year included Abbott Medical Optics, Amylin, BioMarin, City of Hope, Gilead, Life Technologies, Monsanto and Tecan.

Once the final reports are submitted next week, the students are done. But for the sponsors, TMP director and (soon) faculty advisors, the process for next year is just beginning again.

Practical uses for DNA sequencing

Although we at KGI focus on genomic sequencing as an antecedent to the Brave New World of genomic medicine, in the mass market it’s probably best known for “Finding Your Roots.” However, the LA Times (and the Boston Globe before it) report on a much more direct impact on the average consumer: fish fraud.

As the Times reports

Tests on seafood sold at Los Angeles sushi bars, restaurants and grocery stores have revealed that more than half is not labeled correctly, [Oceana] a nonprofit organization is reporting today.
…
The U.S. Food and Drug Administration prohibits so-called species substitution. Still, the practice remains prevalent. Consumer Reports found that 18% of seafood samples its researchers collected from retail stores and restaurants on the East Coast last year was mislabeled. A 2011 investigation by the Boston Globe reported that 48% of the fish it collected from Boston restaurants, grocery stores and seafood markets was sold with the wrong species name.

FDA spokesman Douglas Karas said the agency is working to determine how often, or at what point in the supply chain, fish substitution occurs. Most of the seafood fraud complaints the FDA receives come from consumers at the retail level, Karas said. The FDA is conducting a yearlong DNA test of about 800 fish collected across the nation.
…
In the L.A. samples, red snapper was misidentified 100% of the time, DNA tests showed. Tilapia and pollock were popular substitutes, the report said. Dover sole was discovered to be Asian “sutchi catfish” or common sole, and white tuna was often actually escolar, a snake mackerel with known diarrheal effects. The fish has been banned in some countries.

Sushi restaurants had the highest incidence of mislabeling in L.A., the study found. Oceana reported that 87% of the samples of 10 types of fish it took from 21 sushi eateries were not correctly identified.

All of the red snapper sushi sampled was mislabeled. Half of it was tilapia. Eighty-nine percent of the white tuna sampled at sushi restaurants turned out to be escolar.

Samples of yellowtail sold at sushi restaurants were often Japanese amberjack. Flounder was frequently sold as halibut, and sea bream was substituted for sea bass.

As someone who loves sushi and seafood more broadly, this is distressing. Sea bass is perhaps my favorite fish entrees, while I usually have yellowtail and other tuna when I eat sashimi.

This does seem like technology will allow us to solve a problem of economic fraud — minor as it may be.

Biotech business reading list

On behalf of my employer, today I did an online recruiting seminar for KGI — aimed at prospective master’s students who have an undergraduate science background and were interested in our business programs. On one slide, I list the various industries we serve — biotech, pharma, medical devices, diagnostics — as well as a few areas beyond human health, like biofuels.

One student asked about learning more about life science industries. As an economic historian, I’m big on business histories, so I said I would recommend some books. (A half dozen of the participants asked for my list.)

When the webinar was over, I went to my office bookshelves and looked at what was there. It turns out they’re all about the biotech industry. I also went down the hall to visit our resident expert on biotech industry history, Steve Casper, to see what he had that I don’t. Together I came up with a list of seven books — most of which assume little or no prior knowledge of the industry or its science.

One book stands alone: From Alchemy to IPO. The first book about the business of biotech, it summarizes the key developments in the 20th century biotech industry, including histories of Genentech, Amgen, Genzyme and the Human Genome Project. Yes, it’s now more than a decade old, but nothing provides such a complete picture of the industry for those without any prior understanding.

Another book — Science Business — offers what may be the definitive view of the economics of the biotech industry. Harvard Business School professor Gary Pisano tries to explain why biotech is so hard, and thus why most biotech companies can’t make money. (It’s the most advanced of the books and thus probably not the best choice for someone without a business background).

Two books are about Amgen, the SoCal biotech company with closest ties to KGI (they’ve hired 1/6th of our graduates). The Amgen Story is a coffee table book and authorized history of the company’s first 25 years. Perhaps a more useful source is Science Lessons, the memoir by Gordon Binder of his years (1988-2000) as Amgen CEO.

Surprisingly, only one book has been written (so far)about Genentech, the company that converted the Cohen-Boyer patent into a new industry. The newest book on the list, Genentech: The Beginnings of Biotech documents Genentech during the 1970s and 1980s, based on UC Berkeley’s unprecedented archive of interviews with early California biotech pioneers.

Steve had two books that I didn’t. One is The Billion Dollar Molecule, a story of the successful efforts by Vertex to develop therapies for AIDS and hepatitis C. (I guess this is biotech’s version of The Soul of a New Machine, sans Pulitzer).

The one he highly recommended is Invisible Frontiers, an early book that documents the race between Harvard, UCSF and Genentech to clone the gene that would allow synthesis of human insulin.

The only one I’ve read so far is From Alchemy to IPO. I won’t be able to make a dent in the list this semester, but I’m going to take some for my long trips this summer.

References

1. Cynthia Robbins-Roth, From Alchemy to IPO: The Business of Biotechnology, Cambridge, Mass.: Perseus, 2000.
2. Gary P. Pisano, Science Business: The Promise, the Reality, and the Future of Biotech, Boston: Harvard Business School Press, 2006.
3. David Ewing Duncan, The Amgen Story: 25 Years of Visionary Science and Powerful Medicine, San Diego: Tehabi Books, 2005.
4. Gordon Binder and Philip Bashe, Science Lessons: What the Business of Biotech Taught Me About Management, Boston: Harvard Business Press, 2008.
5. Sally Smith Hughes, Genentech: The Beginnings of Biotech, Chicago : University of Chicago Press, 2011.
6. Barry Werth, The Billion Dollar Molecule: One Company's Quest for the Perfect Drug, New York: Simon & Schuster, 1994.
7. Stephen S. Hall, Invisible Frontiers: The Race to Synthesize a Human Gene, Redmond, Wash.: Microsoft Press, 1988 (originally published in 1987 by Atlantic Monthly Press, and also published in 1996 by Genentech and most recently in 2002 by Oxford).