Smoke Signals Look Good for Biopharma

The smokeless backrooms of politics in Washington 2009 are looking like a good environment for the biopharma industry -- better even than the deals that emerged from the smoke-filled rooms of lore.

This could very easily have been a year of multiple political threats to the industry with the drug business portrayed as a scapegoat for out-of-control health costs, but it is emerging instead as a year offering reasonable compromises and proposals to protect pharma pricing and give the industry access to significant new markets.

The first signs that the biopharma sector may have crawled out of the bulls-eye as a target for health reform are (1) the Obama Administration's decision to turn back to the tobacco industry as the number one health villain and (2) relatively small financial contributions expected from the biopharma sector to pay for health care reform.

As we have written recently, tobacco regulation is next on Capitol Hill agenda for the Democrats. Getting rid of cigarette smoke has become a core issue for the new administration despite the fires incinerating the other parts of the economy. The campaign against smoking is more accurately a "Corr" issue for the administration, supported by the HHS Deputy Secretary-designate, William Corr, a long-time ally of House Energy & Commerce Chairman Henry Waxman (D-CA) and long-time critic of the tobacco industry.

No matter how the anti-smoking campaign found its way into the packed Obama agenda, the fact that it is there means that pharma immediately becomes a lesser evil on the list of industries affecting US health care.

Pharma is well aware of the smoke-screen and regulatory/political cover that the tobacco industry presents. Even before the 2009 legislative season was underway, Pharmaceutical Research & Manufacturers of America President Billy Tauzin was expressing full support for the government to go aggressively after tobacco regulation.

"Any work" the government could do "to prevent people from smoking is good work," Tauzin declared, saying "tobacco is not our friend." It is a point not lost on a political pro like former House Energy & Commerce Chairman Tauzin that pharma experienced its best years of growth and new product introductions while the Food & Drug Administration was absorbed in its fight against the tobacco companies in the late 1990's.

The anti-smoking position allows Tauzin to talk positively about health reform. He took his prevention rhetoric to the White House Summit where he talked about the importance of healthier lifestyles. He claimed that 67 percent of cancers could be avoided if people did not smoke, ate properly and exercised.

Tobacco regulation can be a distraction for FDA's senior management and take up a lot of the agency's resources, but it creates a less pressured atmosphere for drug regulation.

The second sign of a developing positive atmosphere for biopharma is the relatively small $29 billion that the industry will be expected to contribute to the $634 billion down payment fund for Obama's health care reform initiative. That is the amount the federal government will collect from increased Medicaid rebates. Pharma will actually face additional payments to the states of about $12 billion more (for a total of $41 billion). The full negative impact on the industry including cost reductions in the private market is estimated at $70 billion over ten years.

Compare that to $117 billion that the health insurers are being asked to give up from reductions to Medicare Advantage payment rates and you can see why the health insurers are crying "foul" and complaining that the pain of health reform is falling disproportionately on them. It also becomes clearer why biopharma leaders are accepting the proposed payments more stoically: they are being asked for less and have a lot to gain if insurance coverage can be more widely extended to the currently uninsured and under-insured -- a potentially large new market for pharmaceuticals.

The fact that cuts to pharma revenues are within the tolerable range combines with the industry's position against smoking to create a good climate for working with the White House, HHS and Congress on two key industry objectives: (1) a well-crafted follow-on biologics bill and (2) control over patient co-pay levels for drugs and biologics.

By supporting Corr's anti-smoking effort, pharma improves it relationship with a key figure for the FOBs bill. Corr was the staff architect for Waxman behind the original Waxman-Hatch generics bill 25 years ago. He is likely to be the driving force behind getting a follow-on deal done this year. He is no friend of pharma; but having the smoking issue as background is very convenient for the industry.

Legislative control over co-pays is getting less public attention but could be the big money issue for pharma in the current legislative season -- especially as specialty drugs and biologics become more important to the industry.

Both BIO and PhRMA have identified efforts to restrict the amount of out-of-pocket expenditures that patients will have to make for drugs as important to their policy agendas. This is an access issue for patients that offers an indirect price protection to the industry. If pharma can avoid high co-pays, that will permit them more flexibility for high prices.

The objective is to make sure that health insurers and Part D Medicare plans cannot set co-pay levels so high as to act as a de facto barrier against patient use of the products. The drug industry senses that controls on co-pays are politically viable in a Democratically-controlled Washington because they can be presented as a patient/beneficiary access issue.

The Democratic victories did not seem like good news for pharma in November and it still could turn out badly, but things have started out pretty well.

Von Eschenbach Maps Out Role In Health Reform

“I’m not going to go fishing and play golf.”

That is how former FDA commissioner Andrew von Eschenbach describes his post-government plans after leaving the Food & Drug Administration: a consulting gig at Greenleaf Health LLC, a return to MD Anderson and any “other opportunities,” should they present themselves. Von Eschenbach left FDA in January when President Barack Obama took office and has kept mum about his future plans.

Until now. On the policy side, von Eschenbach is teaming up with an old FDA colleague—his former chief of staff Patrick Ronan. Von Eschenbach will be a senior adviser at Greenleaf Health, a regulatory consulting firm that Ronan founded upon leaving FDA in 2006. Ronan was von Eschenbach’s chief of staff for his first year on the job, and the two have kept in touch after Ronan left the agency, von Eschenbach said.

Greenleaf’s clients include medical device companies, pharmaceutical manufacturers and public relations firms, but Ronan says Greenleaf’s sweet spot is with smaller biotechs without a Washington presence that need regulatory guidance. Ronan and von Eschenbach are the two principle advisors; Greenleaf also has a chief marketing officer.

Of course, as a former government official, von Eschenbach is restricted in the work he can do as an industry consultant. For the next year, for example, he cannot advocate directly to FDA on behalf of a third party. And he has a lifetime ban on lobbying the agency on the rules and regulations upon which he worked on or influenced while he was commissioner.

But in speaking to von Eschenbach, that doesn’t sound like the type of work he’s interested in anyway. In a phone interview, von Eschenbach talked broadly about “contributing to a more strategic discussion of the future of health care” and helping to find “integrated solutions” for diseases like cancer and Alzheimer’s—all in the context of the greater health reform debate.

As he was at FDA, von Eschenbach is interested in issues like personalized medicine, genomics and informatics, and ways in which the system can prepare for a more patient-centric health care environment. Greenleaf, he says, is a great “launching pad” by which to contribute to those kinds of macro health care issues, and participate in a “greater conversation on a global perspective.”

Von Eschenbach is also “deeply interested” in directly contributing to health reform efforts—one of President Obama's priority issues for his first term. Von Eschenbach says he is open to talking to policymakers (without directly lobbying anyone) about changes that are needed to support the types of products—like personalized medicine and drug-diagnostic combinations—that he believes will be the future of health care. (Von Eshenbach offered thoughts on that topic during a recent health policy conference sponsored by The Atlantic. You can read more in an upcoming issue of The RPM Report.)

If that weren't enough, he's also returning to academia. As we predicted in an earlier blog post, Von Eschenbach is returning to University of Texas MD Anderson Cancer Center in Houston, where he spent 25 years of his career in various leadership positions before being named director of the National Cancer Institute in 2000.

Upon his return to MD Anderson—which is still in the works—he will be an adjunct professor and will serve on the advisory board of the David Koch Center for Applied Research in Genitourinary Cancers. His first board meeting is April 3.

Comparative Effectiveness Compare and Contrast

Since Sen. Max Baucus introduced his latest legislative attempt to create a national center on comparative clinical effectiveness research, we’ve had some time (OK, OK, a week—it is summer, after all) to dig into the details.

With the help of our colleagues over at “The Pink Sheet,” we’ve put together a list of some of the key differences between the Baucus bill (S 3408) and previous comparative effectiveness legislation—including language in the senator’s own Medicare Part D price negotiation bill from 2007.


So here’s a little compare and contrast, as reported in this week’s issue of The Pink Sheet.”

Organizational structure: Baucus would create the “Health Care Comparative Effectiveness Research Institute” as an independent, public-private entity. Past efforts had the Agency for Healthcare Research & Quality as a central player: The CHAMP Act would have established a center inside AHRQ, and Rep. Tom Allen (D-Maine)'s bill would have established a trust fund through the quasi-government agency.

Who sets the agenda?: Research priorities would be determined by the center itself. That’s a change from the comparative effectiveness language in Baucus’ Medicare Part D price negotiation bill, under which HHS would set the research agenda. But the government would have some influence over what would be studied: the HHS secretary and NIH director would sit on the governing board.

Money, money, money: Baucus calls for appropriations of $5 million in 2009, $25 million in 2010 and $75 million in 2011. Starting in the fourth year, annual contributions would be made from the Medicare Trust Fund ($1 per beneficiary per year), revenues generated by a fee on private health insurance policies ($1 per insured person per year); and general revenues ($75 million a year). Funding would increase to $300 million a year by the year 2013, and all funding would sunset after 10 years.

By comparison, the CHAMP Act set government appropriation levels at $90 million, $100 million and $110 million during the first three years, but was not as direct in setting levels for private participation. The bill said that the private sector contribute beginning in the fourth year to bring the total trust fund amount of $375 million.

And then there’s the billion-dollar question for industry….

How will the research be used?: Baucus does not offer any specific guidance on how the information can or cannot be used by private or public payors. That’s a big change from the price negotiation bill, which clearly stated that “authorizing consideration of comparative clinical effectiveness studies in developing and reviewing formularies under the Medicare prescription drug program.”

Waxman With A Zinger!

There's clearly no love lost between House Oversight and Government Reforms Committee Chairman Henry Waxman (D-Calif) and North Carolina Republican Patrick McHenry.

But Waxman outclevered the more junior Republican this afternoon at the Medicare Part D hearing. During friendly questioning of Acting CMS Administrator Kerry Weems, McHenry was making the point that no way could you trust the government to negotiate better prices for drugs under Part D compared to the private sector.

"There are some shortcomings to the program, it's a government program, that's what government does very well, right? Inefficiency is what government does very well," McHenry said of the Part D program.

Weems answered the eventual question on negotiating savings.

Waxman waited until the end of Weems' testimony and then hit the audience with this one-liner:

"Thank you, Mr. McHenry. Mr. Weems, thank you very much for your participation, I know you're anxious to get back to the work that government bureaucracies do so poorly, according to our friends on the other side of the aisle, but I salute you for the work that you do," Waxman said with a smile.

Zinger Zam!

Chairman Waxman will be here all week, folks.

Drug Safety...or Food Safety...or Tobacco Safety...or Pet Food Safety...or Dietary Supplement Safety?

So which is most important to you? Well, if you're in charge of FDA, they all are. That came through loud and clear during a health care reporters breakfast with commissioner Andrew von Eschenbach organized by the folks at Health Affairs.

But fortunately for us here at the IN VIVO Blog, we only have to worry about drugs and biologics. With Congress taking off for their August recess, it looks like the Prescription Drug User Fee Act reauthorization as part of the much grander FDARA drug bill will have to wait until September to get passed.

So wait, doesn't that mean droves of FDA employees will be out of a job come September 1st because there will be no money to pay them (FDA gets half of its drug review budget from user fees)? Not so much. Von Eschenbach said the agency has already dipped into "carry-over" funds to ensure the agency will run smoothly while they wait for lawmakers to act. He expects/hopes the bill will pass in the first few days when the House and Senate come back from recess. Von Eschenbach emphasized he was working very closely with specific players in Congress to make sure that happens. The "carry-over" money, which seems to have magically appeared, is enough to last a couple of months before FDA would have to send out lay-off notices.

The RPM Report will be hosting a webinar on August 14 in partnership with the law firm Ropes & Gray to explain the commercial impact of the new drug safety rules for pharma and biotech companies. This will be the first in a series of audioconferences on the pending drug safety reforms.

Dissin' Steve Nissen?

The New York Times ran an interesting profile of the Cleveland Clinic's Steve Nissen on Sunday in light of his "controversial" meta-analysis finding over a 40% increased risk of heart attack for diabetes patients on GlaxoSmithKline's drug Avandia.

I interviewed Dr. Nissen a few months ago. Check out our July issue of The RPM Report called "Inside the Mind of a Serial Drug Killer" to find out what makes him go, what would make him stop and what he thinks is driving some members of Congress to criticize his efforts. Note, the Times may have higher circulation than The RPM Report , but we had the better headline.

But don't take our word for it. Here are a couple of excerpts:

The RPM Report: What would make you stop doing this type of work in the area of drug safety?

Nissen: It is all of our jobs, not just the FDA’s job to do this. Those of us in the physician community owe it to our patients to give equal balance and weight to positive and negative findings about drugs, and so should the FDA. Even if the FDA were doing an outstanding job, it’s still the responsibility of independent scientists to do these sorts of things, so it really isn’t about the FDA.

The RPM Report: So creating two drug centers—one for premarket review and one for postmarket surveillance—would not stop you from doing this kind of research. You feel this is a moral obligation.

Nissen: It is a moral and ethical obligation; it’s just about good science, it’s a scientific obligation. Science is about pursuing the truth and wherever that leads you. If we had very, very good regulatory agencies looking after this, there may be fewer opportunities to turn these things up.

How did we find out about fen-phen? There was an independent group of physicians that began seeing fen-phen patients with valve abnormalities. They said, “Oh my God, this is a potentially serious problem, let’s publish it,” and they did a great thing, they probably saved a lot of lives; they’re heroes.

The RPM Report: Why is there such a visceral reaction to you and the research you are doing? FDA’s meta-analysis of Avandia studies showed similar findings as your meta-analysis.

Nissen: Right. Part of the problem is this is not about me. One of the issues is sometimes when you don’t like the message; it’s easier to attack the messenger. It’s to be expected, but we’ve got to keep everyone focused on the science. I was very restrained in that [Avandia] hearing, I didn’t attack back. I simply said: this is what we did, this why we did it, this is why it’s important, and I’m going to stay on that message because it’s the right thing to do.

The RPM Report: Rep. Darrell Issa (R-Calif.) seemed particularly unnerved by your analysis and the process you took to get it published?

Nissen: He was wrong about the statistics, you cannot calculate an effect size if there are no events [studies with no heart attack events were excluded from Nissen’s meta-analysis]. He had been briefed by people giving him campaign contributions and that happens to be GSK. I looked it up. The three people on the attack at the hearing were very heavy recipients of GSK campaign money.

For the rest of the interview, subscribe to The RPM Report. Also, Nissen will be speaking at our annual FDA/CMS Summit in December in Washington, D.C. in case you want to hear him in person.

Speaking of Avandia, there is a July 30 fact-gathering meeting between FDA and Glaxo (Takeda, which markets Actos, is an invited guest) regarding the cardiovascular profile of the diabetes drug. While something conclusive could come out of that meeting, it's highly doubtful. So we'll just have to wait and see whether Nissen and his meta-analysis are vindicated for finding risks that hadn't been previously uncovered or his findings were rushed, sloppy and wrong. Stay tuned. It could be a while.

Higher Tax, Fewer Deals?

The IN VIVO Blog has been somewhat mum on the carried interest debate. Frankly, this topic is being covered to death elsewhere (The link goes to PE Hub but there's no shortage of discussion.)

This topic is important, no doubt, crucial even, but Mom always told us if you don’t have something fresh and interesting to blog about than it’s better not to blog at all. (Well, she would have said that.)

So we’ve been asking around a bit, trying to get a sense from our VC community on the potential impact of these changes. To be honest, the change put forth by the Democrats didn’t really sound the alarm bells in our virtual hallways. But the same apparently isn’t true in the actual hallways of VC firms investing in life sciences. IN VIVO Blog expected VCs to answer queries with a “Congress will be Congress” attitude similar to the one put out when discussing changes at the FDA or CMS.

But there’s some genuine concern here. No question, much of that concern most likely has to do with a diminished paycheck. But there’s some fear surrounding the impact these changes could have on the availability of capital.

An email from one West Coast VC:

I really believe that these proposed new taxes will make it so that some new companies will not get funded. These taxes essentially raise the cost of capital and if the returns are not there to the GPs then they will not get funded eliminating many high risk or sometimes questionable deals. One has to remember that often deals look promising and then don’t make it while the opposite is true as well but maybe not to a greater extent. If the cost of capital is high then those marginal/high risk deals won’t get done.

It is the same concept as lower interest rates and lower borrowing hurdles allowed the housing market to boom. If the cost of capital rises then it eliminates those who are at the margin. The same is true in our business. Those on the margin lose—fewer jobs and lower growth.

The suggestion that this could eliminate “many high risk or sometimes questionable deals” rings true and does sound an alarm. After all, doesn’t that describe most biopharma deals and a good deal of device companies as well.

Could this change in taxation have a particularly detrimental impact on the life sciences industry, pushing VCs even further away from funding true start-ups? Even worse, would this aggravate the diversion of dollars away from smaller, venture capital firms looking to do these deals. Or perhaps, as A VC Blog suggests, the best VCs will just invest their own money, forget the institutional dollars.

A VC Blog also had what I thought to be a very thoughtful position later on.
Mom did teach us not to covet other people's stuff, so the "Tax the Rich" crowd won't get a sympathetic ear here. Still, the suggestion that the GP's carry on "other people's money" goes beyond that simplistic idea. The idea that this income should be taxed as salary isn't that far out (or far left) as some would like it to appear.

We’ll update with interesting points of view as we continue to talk to folks. But don't feel like you need to wait for a phone call. Consider this an open invitation to opine on what impact the suggested changes will have on the life sciences industry.