The Reason Why Google Doesn’t Want to be in Biotech Should Concern You…

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biotech regulation

We’re used to tech innovations at a break neck pace. Think about for a second that the first iPhone, which was really the first consumer smart phone, first appeared in 2007! Since then this little device has steadily evolved to change how we communicate, created a new genre of social media that has slain whole governments, and has enhanced our lives in countless ways. Yet, the pace of innovation in healthcare, when it comes to real changes in our lives, has progressed like a tortoise to the iPhone’s hare.  The reason would be a surprise to most Americans, but the fact that the other largest tech company on earth, Google, wants no part of biotech should concern every living human. In addition, a deal cut this week to save healthcare dollars should concern every investor who has money in biotech.

Sergey Brin’s recent quote is telling. When asked if Google had plans to put more investment in healthcare (because it’s in pretty much every other market sector from robotics to self-driving cars), he said:

“Generally, health is just so heavily regulated. It’s just a painful business to be in. It’s just not necessarily how I want to spend my time. Even though we do have some health projects, and we’ll be doing that to a certain extent. But I think the regulatory burden in the U.S. is so high that think it would dissuade a lot of entrepreneurs.”

Brin was referring to a genetics start-up that Google backed called “23 and me”. The company wanted to offer cheap genetic testing with the goal to drive the technology to your smartphone. Imagine one day, your smartphone loaded with your genetic code, warning you that the drug you’re about to take has a 76% chance of harming your liver based on your genetics? However, the FDA killed 23 and me before it ever got close to that point. 

These biotech regulation moves over the past 5 years have convinced many tech investors (who are the richest humans on earth), that biotechnology is a very risky place to put your money. Unlike tech, where all you need is a game changing idea and the perseverance and capital to see it through, in biotech there’s a regulatory burden that seems at times arbitrary and capricious. However, those few brave souls who did venture money in biotech have a new development this week to contend with-the trends in health insurance begun by the A.C.A.

What happened? Gilead Sciences developed a single pill that can cure 95% of hepatitis C patients in 8 weeks. The company spent hundreds of millions getting FDA approval. The alternative is a clunky and side effect laden regimen of pills sold by a competitor. However, because the older pack of pills is dirt cheap compared to Gilead’s new FDA approved solution, ExpressScripts (a discount pharmacy manager that makes deals with major insurers) just cut an exclusive deal to provide the cheaper alternative to the masses, leaving Gilead to compete in a consumer market with a price point manufactured by a regulatory apparatus that ensures the company financial ruin.

The academic and pharma minded set have always dismissed the arguments that the regulatory equation was killing innovation in medicine. They argue that while it’s true that innovation may be delayed, with enough money and time, breakthrough drugs will find their way through the FDA regulatory gauntlet. However, what these interests haven’t accounted for is what just happened to Gilead’s drug. The ACA (a.k.a. Obamacare) has dramatically pushed up the costs for delivering care by mandating certain coverages and placing the world’s most expensive machine for delivering medical care at the heart of the program-the American Hospital. Insurance companies who are existing right now off government subsidies to keep prices low, know that in 2017 those government handouts are going away. The only way they can keep premiums from skyrocketing is to begin to cut deals now with companies like ExpressScripts for drugs that run pennies on the dollar. So in the end, getting your better mousetrap through FDA guarantees that your new drug will be costly, but if it’s evolutionary  instead of revolutionary, it’s dead in the water in today’s insurance reimbursement environment.

The other side of this financial coin is of course what all of this economic activity is about-patients. Most patient advocacy groups have bought hook, line, and sinker the concept that once a blockbuster drug gets through the FDA gauntlet, it will be widely available to them to treat their incurable or difficult to treat disease. The lessons of Gilead argue otherwise. Here a more side effect laden (in this case very nasty life changing side effects) drug protocol was chosen for insurance reimbursement over a drug with far fewer side effects. Without that coverage, millions of Hepatitis C patients will never be able to access Gilead’s better drug. This trend will continue. Patient advocacy groups now need to understand that their access to breakthrough drugs will be severely limited because of the regulatory costs meeting a unprecedented shift in American healthcare economics.

Which biotechs are the most vulnerable in today’s market? Cell therapy companies producing cell drugs. As I’ve blogged before, while skinning a cat in a different way than traditional small molecule drugs, cells in a vial will be crazy expensive. Because most of the cell drugs that we’ll see companies manufacture will be only marginally better than the therapies they replace (evolutionary), many of these outfits will suffer Gilead’s fate. I’ve already blogged on real examples of this phenomenon in tendon healing.While the cell therapy and pharma consultants I’ve interacted with have dismissed this as just a matter of using expertise to choose a good market to enter, the Gilead example shows there are fatal flaws in their analysis.

The upshot? The smart tech money is staying out of biotech until we get sweeping regulatory reform. The investors pouring their money into biotech now had better study Gilead’s fate. Patient advocacy groups also need to take note. If a biotech product is revolutionary and without any cheaper competition, it’s likely fine. If it’s evolutionary and is less regulated (hence cheaper), it’s likely also fine. However, thanks to the ACA and double digit annual price increases in healthcare, we no longer live in a world where expensive evolutionary biotech products will survive. This means millions of patients expecting iPhone type healthcare breakthroughs in the next 20 years will be left hanging…

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Chris Centeno, MD is a specialist in regenerative medicine and the new field of Interventional Orthopedics. Centeno pioneered orthopedic stem cell procedures in 2005 and is responsible for a large amount of the published research on stem cell use for orthopedic applications. View Profile

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