Front-runner Hillary Clinton’s answer? Drug companies (along with the National Rifle Association, “the Iranians” and Republicans).

What did the makers of medicine do to earn a place on Clinton’s hit list beside gun promoters, Iran’s hardliners and her GOP rivals? Most recently it was Turing Pharmaceutical’s decision to increase the price of AIDS medication, resulting in widespread condemnation and subsequent investigation by the New York attorney general’s office. More broadly, however, anti-drugmaker rhetoric like Clinton’s responds to a moral distaste for free markets when it comes to not-so-free medicines.

 

Price gouging like this in the specialty drug market is outrageous. Tomorrow I'll lay out a plan to take it on. -H https://t.co/9Z0Aw7aI6h

— Hillary Clinton (@HillaryClinton) September 21, 2015

 

Yet we are dependent upon these markets – and investors willing to take risks and expect returns – because without investment, the pipeline of drugs being developed will dry up. The rapid appearance of a policy from Clinton to tackle the way drugs reach Americans appears focused on making the buying public happy, for long enough to win an election, at least. But this apparently knee-jerk policy approach may not be good for long-term health.

Specifically she said she would intervene in the way pharmaceutical companies reinvest their profits in research, reduce the amount of drug exclusivity before generics are allowed on the market, allow foreign drug imports, let Medicare negotiate prices, and cap how much insurers can charge certain customers. In summary, she is using every lever she can pull to drive down prices, profitability and future prospects for biotech investors.

But how would such populist-inspired policies affect the flow of new medicines, particularly those we can only imagine right now?

Price caps and competition might appear good for the health of the nation today, with drugs already on the market, but how does the future look for these undiscovered medicines if Clinton and others have their way?

As my own research into the early stages of drug discovery highlights, breakthrough medicines begin as embryonic ideas in the mind of a scientist somewhere, and first must endure one of the longest and most financially high-risk product development processes known to man before eventually saving a patient’s life.

Surviving the ‘Valley of Death’

In the pharma industry, the “Valley of Death” is a well-known phenomenon: a brutal metaphor describing an equally brutal phase in the lifecycle of a growing biotech.

To shift from being a small, high-risk, big-idea start-up to a successful biotech business that contributes to health and the wider economy, these companies must overcome many hurdles. There are plenty of ambitious new ideas emerging from universities and elsewhere. There are successful giants with truly global operations. But in the middle lies the valley of death, and precious few biotechs make it through.

Why do we care about these small upstarts when we have world-class scientists in huge, established corporations? If most drugs were still discovered inside big pharma, perhaps we wouldn’t care. But those days are past, and the new order of this industry is one of collaboration, acquisition and what UC Berkeley’s Henry Chesbrough terms “open innovation.”

It is not uncommon for half the drug discovery pipeline in a major pharma corporation to originate from outside its own laboratories, coming from smaller biotech firms, university spin-outs or partnerships. If too many of these start-ups fail, the acquisition pipeline for our drugmakers becomes increasingly fragile.

Thus, it’s important to understand what factors will help the best science get from idea to medicine, which levers government should pull – and which it shouldn’t – to fairly increase the health of the nation.

Biotech incubation

A pivotal role in moving great science from idea to medicine is played by incubators. As the name implies, these hubs provide a haven where conditions are right to promote early-stage growth.

If the goal of policymakers is to get more drugs to more people more quickly and more cheaply, finding ways to boost the scale and success of incubation makes a lot of sense. This is what governments in the US and around the world have done, in different ways. One example is the Stevenage Bioscience Catalyst (SBC), the latest incarnation of biotech incubation.

Founded in 2010, this incubator offers insights into the forces shaping the biotech sector and has been the primary site of my extended research into the performance management of such innovation ecosystems. Helping biotech start-ups navigate the valley of death is the essential goal of this upstart, which is funded by the UK government, big pharma and a major charity.

The business model of the incubator is shaped by long-term aspirations for sustained growth across the entire biotech sector. There are two interconnected attributes that are particularly important:

1. The business model is centered on science, rather than financial success of the incubator itself as a landlord, or its founders as investors, or its tenants as the current custodians of new scientific ideas. The primary concern of SBC is to identify great science, then help those who own it to advance it as efficiently and effectively as possible by providing a package of scientific and business services.
2. It understands and manages the complex mix of accountabilities that necessarily exist within its ecosystem. This form of drug discovery is no single company affair; it’s a giant relay race in which a precious scientific idea is the baton, moving from university lab to biotech start-up to big pharma company and finally to health care providers as medicines.

Incubators such as SBC not only support the science, they support the intellectual athletes who carry it forward, and (indirectly) the providers of resources and capabilities to the baton holders. Each player has a role, each player expects some reward and, if these accounts go unsatisfied and the risks of engagement do not match the potential returns, the advancement of science may falter.

For policymakers, these two factors need to be considered in tandem before they regulate against drug companies: what will policies created in the wake of a public opinion backlash do to the long-term flow of ideas into incubators or biotech start-ups? And what will it do to the investment or risk appetite of every one of the myriad companies that are needed to support a drug discovery ecosystem?

Demons or angels?

Attacking the returns on investment in pharma seems to be a safe bet for politicians. They are perfect corporate targets for vote-winning appeals to aging Americans (who, incidentally, are a high-turnout demographic in elections). But such attacks are not well-grounded, for both financial and ethical reasons.

Firstly, the idea of systemic, excessive profitability in the pharma industry is an accounting illusion. My colleague, professor Igor Goncharov, shows that accounting rules in the US and Europe limiting R&D capitalization have a significant effect on the balance sheets of pharma organizations.

That is, prudent accounting significantly undervalues the knowledge-based intangible assets they hold because expenditure can be capitalized only once a drug receives approval, which is after most R&D expenditure takes place. Based on a highly cited 2003 study, the average cost to develop a drug in today’s dollars is in excess of US$2 billion.

But balance sheets cannot show the enormous investments (including the unsuccessful ones) required to generate each drug, and from them, each dollar of income. This leads to inflated return-on-investment figures and, in turn, to greater regulation.

As Goncharov explains:

 

…the perception of high profitability of US pharmaceutical firms triggers excessive regulatory scrutiny and increases regulation of the pharmaceutical industry. Regulators seem to fixate on reported profitability and do not adjust for accounting distortions caused by R&D accounting.

Secondly, as a society we do not mind, and even admire, the rapid growth and huge profits associated with high technology firms. Yet their efforts are seldom focused on preexisting social need. Rather they “create” a need through a new kind of product, then reap the rewards.

If we want investors to direct their funds toward drug discovery – meeting real, existing needs in society rather than constructed desires – surely we must accept these market rules and make sure the health of Americans remains an attractive investment?

A holistic health policy

Clinton intends to “hold the pharmaceutical industry accountable and rein in drug costs for American families" and “demand a stop to excessive profiteering.”

One element of her plan would require pharmaceutical companies that benefit from federal support to invest a sufficient (though unspecified) amount of their revenue in R&D or pay rebates that support basic research.

This sounds very attractive, but behind the rhetoric are some very difficult choices to be made about how much value could, or should, be distributed right down the pharma supply chain.

It’s a chain that is far from static, as projects succeed or fail, merge together or split apart. Trying to “follow the money” invested by government in early stage research could be problematic, but also unrealistic, as so much risk is still being taken on by pharma firms long after early-stage funding has been spent.

And if they bear this risk alone, these companies will, quite understandably, fight to retain control over how they spend their profits.

In reality, if the US government caps the upside risk on every successful drug by reducing how much of the costs can be passed on to patients while also limiting the time drugmakers have to generate pre-generics returns from 12 to seven years, it needs to reduce the financial risks of drug development too. Clinton’s proposals say little about this, but she needs to address the realities of the market as it is, rather than the socially righteous market as we would all wish it to be.

The US has created a health care market, for better or worse, and it is a highly complex system that touches the lives of every American. If Clinton wants to make medicines accessible, she needs to accept that she is just as accountable to pharma for holding down prices, as pharma is to the consumers.

If she fails to take on those accountabilities, the scientific marathon runners may never venture out of their homes and labs with their great ideas, the support structures for their ordeal will dry up, and the short-term grab of medicines for short-term health (and vote) benefits could yield a long-term health crisis for the US, and an investment crisis for the biotech industry.

Chris Ford, Lecturer in Accounting & Management, Lancaster University

This article was originally published on The Conversation. Read the original article.