President Trump’s tenure as the 45th POTUS has begun with even more fireworks than most pundits predicted – protests, marches, bans, and lots of other drama. The coastal Twitter/Facebook bubbles are exploding with anger and rage, while the Trump populists in the “other” America are celebrating. Seems like the country has gone crazy.
Crazy also means unpredictable, which is a bad thing for investing. Long-term allocations of capital, especially illiquid pools like venture and private equity, require a some degree of predictability around the rules of the game.
Predictable business environments are critical for a healthy long-term investment climate.
Predictable environments are those were long-term scenarios are definable with some guardrails, and where investments can be made with some confidence about the future regarding the key strategic inputs: product forecasting, capital access, talent expectations, regulatory clarity, tax rates, stable national security, adequate infrastructure, etc…
This is particularly true for R&D-intensive fields like biopharma and venture capital investing, where we take a 10+ year view of the world and make bets around high risk innovation. For us, as with many other long-term sectors, a “predictably good” forward view would certainly be great, but even “predictably bad” is better than the insidious effects of chaotic uncertainty. At least with “predictably bad” policies we can plan accordingly, hedge our forward views, and accommodate a set of potential realities.
Unfortunately, right now, we’re in a climate strongly biased to uncertainty – as it’s unclear where the Trump administration and new Congress will take us on a series of policy issues. They don’t appear to be taking tips from any prior playbook, especially not the “free-market” GOP version. Further, Twitter enables a level of impulsiveness in some that exacerbates the unpredictable. Hopefully, as the dust settles, we’ll begin to have clarity on the business environment we’re in – but hope isn’t a strategy.
Recently, NVCA Chairman and Menlo Partners managing director Venky Ganesan said “If you’re not at the table, you’re on the menu.” This is certainly true. We can’t sit on the sidelines for four years hoping things work out. We need to engage both Congress and the Administration and “focus on staking out positions” of importance to us.
In that spirit, here are seven policy areas that I think are crucial for the health of the innovative biomedical sector over the next decade, especially for early stage biotech investing. Many of the future medicines of the next few decades will depend on the health of the latter. Getting clarity on these will aid in the predictability of various future outcomes for our sector.
None of these issues will be surprising to readers, but given Trump’s meeting with Pharma CEOs today and his comments, it’s a good time to articulate these issues. Importantly, these are my personal views – I’m not speaking for BIO, PhRMA, NVCA, or even Atlas – though most of these issues will resonate with those groups. Apologies in advance for the length; for those unable to tolerate the rambling nature of the prose, just read the boldface for the Cliff Note version.
Seven policy areas:
1. Encouraging drug pricing reform that promotes a healthy innovative biomedical sector. In principle, this means maintaining our market-based pricing model that rewards innovation and reflects the value of medicines; confidence in knowing that future medicines will be rewarded is central to the biopharma sector.
In practice, though, there are a number of reforms needed to address the “astronomical” pricing issue. As a response to the EpiPen crisis in the summer, I’ve previously outlined my thoughts on drug pricing (Innovators vs Exploiters: Drug Pricing and the Future of Pharma). Like others, I’m deeply disturbed by the egregious pricing actions from Exploiter firms, that take advantage of regulatory loopholes to create artificial monopolies and jack up prices. And I’m also disappointed with the irresponsible addiction to high biannual price increases that some Innovator companies have developed over the past decade. I think industry self-regulation is an important part of the solution, and leaders like Allergan CEO Brent Saunders have taken strong positions on this issue. I share Brent’s concept of a “social contract” entirely, which is in line with Roy Vagelos’ view of the industry’s relationship with society thirty years ago. Beyond self-regulation, we need to see a few things, reiterating just three from that August post, to create a long-term sustainable pricing approach:
- Encouraging and accelerating generic competition. Anathema to some in our industry, I’m a firm believer that when acting in good faith and in accordance with patent law, generic competition is a resounding good for our sector. We need to ensure there aren’t artificial monopolies, or stalling tactics (e.g., pay-2-pay, delaying biosimilars), which presumably requires reducing some of the regulations at the FDA to ensure more generic manufacturers and their products are approved. Generic competition reduces prices and makes room for rewarding the next generation of great medicines.
- Increased transparency on how healthcare costs, including drug prices, flow through the system. Actual healthcare costs in the US are opaque, and drugs are no exception. Until these become more transparent, list prices in our sector will remain lightning rods for public outcry. Given the entrenched interests, this may require legislative action.
- Incentives and support for value-based pricing models. Effective drugs deliver enormous value to the system: improving and extending patient lives, keeping our workforce healthier, and reducing the costs of other components of the healthcare system. Creating the right incentives for “value-based pricing” models to emerge will also drive the adoption of personalized precision medicine: getting drugs to patients most likely to respond. Policies to support this approach, and guidelines for how these should be framed, are in discussion now (here).
2. Supporting the FDA’s continued embrace of innovation. Over the past 10 years, many of us believe the FDA has moved from being an obstacle to innovation to being a genuine facilitator. Numerous initiatives and guidelines have enabled this: Critical Path, Accelerated approval, Fast Track, Breakthrough Therapy Designations, etc… Many of these were part of the numerous renewals of the FDA User Fee Act since 1992. While there are certainly specific product examples where I might argue with an FDA position, in general the FDA has embraced the idea of bringing compelling medicines to market faster. From pre-IND guidance meetings through pre-approval Advisory Committees, the FDA has a series of touchpoints with innovators as they develop new medicines. The results are clear: a number of approvals in recent years only spent 4 years in clinical testing, far fewer than the historic average. And over 200 new medical entities have been approved since 2011. The FDA is the world’s leading regulator on many metrics (like speed to approval).
There’s much talk in Washington these days about Peter Thiel’s views and “unleashing the Silicon Valley mindset” onto the FDA. While there’s much to like in some of these ideas (e.g., enabling digital health, better genomic integration into care, technology playing a bigger role in understanding real-world drug performance, etc), the concept of eliminating the bar for efficacy for approval is troubling and fraught with unintended consequences.
First, we already have something akin to this – it’s called the Accelerated Approval Program. Drugs can be approved without clinical efficacy, but with benefits suggested by the right movement in a surrogate biomarker. The approvals under this program are conditional: if future confirmatory trials fail, the drugs are taken off the market. This seems to me to strike a good balance for some diseases with large unmet needs. Efforts to enhance or broaden Accelerated Approvals or related initiatives could be beneficial and are worth considering in a balanced way. But not having some indication (i.e., surrogate biomarker) of a drug’s effectiveness prior to approval isn’t appropriate.
With regard to “right to try” experimental medicines for dying patients, we already have this too. It’s already authorized for the terminally ill under compassionate use by the FDA and is supported by most companies; this is just largely just sentimental legislation rather than a materially different process, and despite passing in lots of states has only impacted a small number of patients (here). Efforts to improve the process would be welcomed, but this won’t fundamentally improve patient outcomes.
Second, a world without efficacy requirements puts both patients and the eventual payor (taxpayers) at risk. Without data on efficacy, understanding the risk-benefit of a new medicine is impossible even for trained physicians, much less so for the majority of patients. Further, who is going to pay for drugs that aren’t proven to work? Without the FDA’s stamp of approval, this bar simply punts the evaluation to the payor world, who will have to enact their own “efficacy inside” metrics for how to pay and price these. And since Medicare is the 800-lbs gorilla of the payor world, the unintended consequence of this supposedly libertarian idea will be more direct engagement of Medicare in explicitly setting price in the US. In a world where patients take medicines, physicians prescribe, and payors pay – it’s not clear to me how a “Yelp for Drugs” version of the FDA, that depends on individuals engaging in a price/value discussion at vast scale, would work. How can “value-based pricing” be established without objective data from clinical studies (including real-world studies)? The plural of a Yelp anecdote is not data. Instead, it’s a slippery slope and ends up looking like the mess in the supplements world: individual consumers reading snake oil testimonials and paying for their own “at risk” pills by judging the crazy claims for themselves. No wonder almost none of the supplements have been shown to definitively add value.
Part of the FDA’s role is to accredit the approval of new medicines with a common standard of efficacy and safety. This standard, along with the EMEA and others around the world, is an important demarcation of medicines proven to add real value to patients – and this standard is a big part of how the healthcare payor system justifies the payments to either insured individuals or collectively taxpayers. Continued FDA reform to facilitate more innovation is a great aspiration, as there are always things to improve, but damaging the FDA’s standard of approval – its weighing of the benefit-risk of any new medicine – would be bad policy.
3. Make American businesses more globally competitive through corporate tax reform. It shoudn’t be news to anyone, but we have the highest corporate tax rate in the world, and we tax ex-US earnings of US headquartered businesses (unlike other countries). This makes US businesses less competitive on the global stage. Reforming this tax rate permanently, enabling the repatriation of both past and future ex-US earnings, will spur investment in US businesses. Capital trapped offshore today can be used to fund R&D, set up collaborations, acquire new products, among other things; by extension, this flow of capital back to the US will be good for the R&D-stage venture-backed biotech sector as a whole.
It’s worth noting that the Irish didn’t have much of a Pharma sector until they created an attractive tax rate, which gave them a competitive advantage. I’m not advocating a race to the bottom on corporate tax rates, but I’m keen to see ours become more competitive. Though I dislike tax inversion deals, I don’t think they are nefarious acts; they are a rational response to an abnormally high and punitive tax structure in the US, as I described when the Pfizer-Allergan deal was nixed (here, creating an unpredictable precedent, I might add). Seems clear that if we made our tax rate competitive with other major markets, we’d fix the inversion issue instantly and make US businesses more competitive with their global peers. As I understand it, the new administration is pushing forward with proposals along these lines.
Another element of tax reform I would encourage the new administration to consider would focus on R&D-stage, loss-making businesses: reforming Net Operating Loss restrictions. Ensuring that R&D-stage companies can take full advantage of the capital they’ve sunk in the ground is important. A market-driven policy here could include “tradable NOLs” from loss-making R&D-stage companies: creating liquidity and funding by selling the tax deductions of their NOLs to larger companies. I’ve been advocating for these since 2011 (here). Further, R&D tax credits have been used elsewhere to good effect (e.g., Australia, Canada, France), and could benefit US-based biotech startups. These are pro-growth, pro-innovation policies that should be embraced in a bipartisan way.
4. Ensuring we are funding the basic sciences to maintain our R&D leadership in the world. Funding for the National Institutes of Health (NIH) is critical to both advancing the basic science required to make the medicines of tomorrow, and to maintain the global scientific leadership of our academic institutions. NIH funding was severely constrained in the past, not even pacing with inflation, and this has creating a challenging funding environment for investigators young and old (here, here). As noted on the NIH website: “From FY 2003 to 2015, the National Institutes of Health (NIH) lost 22% of its capacity to fund research due to budget cuts, sequestration, and inflationary losses.” This needs to be resolved with long-term budget commitments to the NIH and related research institutions: Make American Biomedical Research Great Again.
In addition, in recent years, the NIH budget has shifted increasingly towards translational sciences: discovering and developing new drugs, supporting academic high throughput screening centers, experimental therapeutics facilities, clinical trials, etc… While I think these have been a net positive, I do think the pendulum has swung too far and needs to shift back to basic science in order to ensure that work on fundamental discoveries is adequately supported. Commercial endeavors, like startup biotechs and larger pharma companies, are designed by nature to be translational vehicles for many of these basic discoveries. Lastly, continued support for the principles embedded in the Bayh-Dole Act, which was fundamental to the rise of biotechnology, is critical: it’s the responsibility of those who get funding from the NIH or other groups to ensure their new discoveries are appropriately “technology transferred” into the private sector. It’s the only way that inventions can become marketed innovations. Policies that reinforce this would be a positive for our sector.
5. Reinforce the criticality of strong intellectual property law and its importance in global trade. Patents are the backbone of what we do: without patent protection, we wouldn’t have the innovative pharma sector nor the medicines it has created. We need to maintain and strengthen policies around intellectual property. The patent reforms in 2011-2013 that moved the US from first-to-invent to first-to-file helped to harmonize global patent systems, and were important for removing uncertainties around patent filings (policies making the world more predictable!). As we’ve seen with the recent PCSK9 patent issues, IP can be very contentious – and potentially affect drugs getting to patients. Whatever the specific outcomes of that case are, and I don’t claim to know the details, we do need to ensure that policies and court judgements continue to support innovators and defend the patentability of new discoveries.
And with whatever trade agreements the new administration pushes forward, we should ensure that IP protection is a core part of them. Further, these trade agreements need to better address the differential global drug price issue around patented, branded agents: the US shouldn’t be subsidizing the rest of the developed world (as mentioned here previously).
6. Support a pro-immigration policy for attracting and retaining the world’s best-and-brightest. As this has been the subject of enormous public outcry in recent days, I don’t need to say much here as it’s all been said (here, here). Our sector relies on talent flows from across the globe. A timely January 2017 Nature article, “The new face of US science” highlights that 52% of the 69,000 biomedical researchers in the US are foreigners, either as non-citizens working here or naturalized foreign-born citizens. Our own portfolio is similar: of the biotech boards that I currently serve on, more the 60% of those CEOs are immigrants.
Although the #immigrationban Executive Order “only” targets individuals from six ISIS-linked countries, the principle here matters greatly: we lose the war for talent, and let the terrorist win the upper hand, if we start down the slippery slope of restricting the flow of people into the US inappropriately. The global, diverse nature of our workforce is paramount. Predictable, legal paths for abundant skilled labor to enter the country, as both students and workers, is critical for a sector reliant on global talent pools. Broader pro-immigration reform is also an important broader element of policy.
7. Lastly, if the Affordable Care Act is going to be repealed, it must be replaced with a viable alternative. Regardless of your views as to whether it should be repealed at all, it seems likely that in a Republican-led Congress with a Trump administration this could indeed happen. From a practical perspective, insisting on a simultaneous “replace” will be important so that access to medicines are maintained for those reliant on Obamacare for insurance and those with prior conditions (among other things). I’m not a policy wonk, so won’t weigh into the specifics here, but the biopharmaceutical sector should come out strongly in support of maintaining key elements of the healthcare coverage found in Obamacare.
I have a personal view that we should scrap the employer-based care model entirely as an artifact of 1940s labor laws: an individual market for health insurance, across state lines and with national market competition around the different types of offerings, feels like a far better solution. Coupled with things like HSAs and different coverage plans, we’d see far more diversity in the offerings and experiments in how best to deliver cost-effective health coverage. Further, I’ve always hated the idea of my employer choosing the health plan that was right for me. Lastly, leaving the employer-based model frees up job mobility for individuals wanting to become entrepreneurs or move jobs, but are afraid of losing insurance coverage. Enough of my dreaming though, as getting any consensus on more radical reforms would be like watching a horde of hungry Congressman try to grab a greasy pig.
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Whether or not you agree with the new administration, it’s the current reality that we as a biopharma sector have to deal with it. Trump was elected to make changes by one-half of America, whether the other-half likes those ideas or not. He’s got a Republican Congress to work with, so we should expect a lot to happen.
Because of that, as noted before, we can’t sit on the sidelines.
We should, of course, become more active in our collective civil discourse, and engage publicly around issues of importance to us. Freedom of speech, and of protest, are important rights as Americans – and are also responsibilities when we have issues that deeply concern us.
But we also need our industry leadership to stake out our sector’s agenda, and try to work constructively in Washington to champion policies that will be supportive of the long-term health of the innovative science-based biopharma ecosystem. As others have said, we don’t have to agree with the Trump administration on every issue, but we need to try to facilitate positive policies – especially those with bipartisan support. The above seven policy areas represent my personal view of some of the issues worth staking out related to biopharma. I know many of our industry’s leadership are engaged on a number of these topics, and I appreciate their efforts.
Lastly, it seems good counsel for any new administration, at least from a business strategy perspective, to become predictable quickly – dispel the uncertainty around policy changes and reduce the entropy of government – both of which can drive out long-term investors. Persistent unpredictability would significantly damage US business. Long term resource allocation and risk mitigation, the two critical levers in any business strategy, are much more effective when the future scenarios can be framed with some predictability. The future is never known, but pro-growth environments are almost always ones with low uncertainty and reasonably predictable policies. Hopefully Trump’s advisors are impressing this upon the President (and his Twitter account).
This issue around predictability is especially true for those of us in the venture space trying to create new startups and make long-term illiquid investment decisions. As early stage biotech investors, it’s our job to create and fund new drug discovery startups that we hope will make the medicines of tomorrow. For those companies we launch in 2016, if we’re lucky, we should have positive early clinical data by the next inauguration… what will be world be like then?
It’s up to us to do everything we can to shape it.
