On Drugs: Creative Business Models

Stories have flown around the internet on wings of outrage and indignation at the profiteering of entrepreneurs who increase the cost of life-saving drugs astronomically overnight. Is this capitalism gone wrong? Obviously, many would answer. While I understand such a visceral reaction, I want to explore why it might have looked like a good idea at the time, even though the public outcry doesn’t make it look very attractive now.

What started the furor: Reports of two examples of small companies (Turing Pharmaceutical and Rodelis Therapeutics1) abruptly increasing the price of certain drugs by factors of 50 or more. These drugs are for serious illnesses (toxoplasmosis or drug-resistant tuberculous, respectively) where there is little choice in therapy, although only a small fraction of the population needs treatment. Both medicines had been around long enough that any patents would have expired so generics could be made if there was interest from another manufacturer. A primer on the intricacies of the business of drugs is in this2 footnote.

I can imagine how the reasoning might go in a decision to jack up the drug price (I’m not defending the decision, just trying to imagine a credible strategy). In order to keep the drugs in the company’s inventory, to make them a product that contributes to the bottom line in the way that investors like to see, the price could be increased. By ensuring the drugs remained on the company’s product list, the price increase would ensure the drugs were available when people needed them. Another rationale is the purely economic perspective: if the price is increased and people still buy the product then there is additional value in the product and the increased price is justified. Good old fashion capitalism.

Something about this argument doesn’t feel right, perhaps because of the nature of the business of healthcare. In many cases, it’s possible the price increase will be paid by insurance or government programs, so there’s ethical impunity for the company. People will still get the medicine they require regardless of the price. Drug prices skyrocket, because they can.

Certainly there are a number of drugs for rare conditions that cost hundreds of thousands of dollars per year, that are approved and paid for by insurance companies3, a model the small pharmas may have been trying to imitate.

Are recent events merely a symptom of the business of medicine? At first glance, drug development looks like a business with the potential to bring much good to many. Consider:

  • A tremendous effort is required to develop and test drugs to be sure they are effective.
  • Testing new drugs is risky business: Risk that all of the investment will evaporate into proving the drug is not useful and risk for the patients and their loved ones (that the drug will not improve their health or make it worse). There is the potential for greater good too, as a new cure, or better treatment, may be discovered which helps many more people.
  • Approved drugs improve the lives of many, but some cause serious side effects in a fraction of those who take the drug. The regulatory bodies (such as the FDA and HPFB) endeavour to weigh the benefits with the risks and ensure there is full disclosure of the potential side effects. Most of us have benefited from prescription drugs at some point in our lives, heaving a big sigh of relief when the antibiotics overthrow a bladder infection or a painkiller make a nasty broken ankle bearable.Unfortunately, drug development sometimes unintentionally violates the ‘do no harm’ principle, because it investigates the unknown. Some might argue that this is unacceptable, no one should be subject to the potential of such danger. However, look into the eyes of someone with an incurable disease, and suggest there is an untried drug that might bring relief, and tell me ‘no harm’ is being done by denying hope.

Is the pharmaceutical industry really for the greater good?

  • Do they profit from people’s misfortune or provide relief from suffering?
  • Do they over-promise on the benefits of their products? We have laws and regulations on disclosure of efficacy and side effects. Few medicines are 100% effective or without side effects.
  • Side effects happen, sometimes very severe side effects, like death, occur in a very small segment of the population that takes the drug. Is it acceptable to offer someone a potential cure with a small chance of mortality? The philosopher Kant might say no.

Am I off topic? The controversy was, after all, about the price of the drugs. How do we determine an appropriate price?

  • Some countries do price drugs on pharmaco-economic grounds – the price must be justified by indirect indicators of the suffering it relieves.
  • Orphan drug prices are justified by costs, an argument that might be applied in the current cases. The price is required to make a good business case for continuing to provide the drug. Full rigorous disclosure of all the costs of testing, manufacturing, selling, and distributing the drugs might make it easier to swallow the pricey pills.
  • Selling drugs is business, so it should be measured up against the same standards as any business.

The drug-selling business is fraught with controversy, because it combines two ingredients that often don’t mix well: capitalism and human well-being. The complexity of the healthcare system, with disconnected consumers, providers and payers, makes any analysis of the rightness or wrongness of a situation difficult. In a moral world, each person would get the best care modern medicine could provide, but never at the expense of anyone’s well being. A fantastic ideal, a hard thing to provide.

1 For example http://www.cbc.ca/news/health/turing-clinton-prescription-drugs-1.3238202 (Turing) and http://www.cbc.ca/news/health/tb-drug-price-cycloserine-1.3237868 (Rodelis). From the reports I’ve seen, since the news stories broke on Sept 22, Rodelis rescinded most of the cost increase and may no longer sell the drug, while Turing has announced a price decrease.

2 Prescription drugs are complicated from a business perspective. Some general concepts:

  • The right to sell a drug may be protected by patent, but even with the patent, approval to sell the drug is needed.
  • Approval comes from a regulatory board on a country by country basis, and requires significant clinical testing to prove the drug does what it is supposed to and is safe.
  • In addition, the drug may have a trademarked brandname (e.g. Viagra) initiatlly owned by whoever registered the trademark.
  • None of these three rights to a drug need to be held by the same entity. They aren’t very useful one without the other, but each right can be sold or licensed. When the patent expires the other two rights remain.
  • Generic drugs have the same active ingredient as a name brand, and are sold without the name brand after the original period of exclusivity has expired. Generic drugs must be proven equivalent to the approved name-brand but aren’t required to go through the testing again to prove effectiveness because they are the same active ingredient as the name brand. Once patent protection on the name brand drug expires, other drug makers can apply to sell generics. If multiple generics enter the market, the price comes crashing down.
  • Then there’s the ‘buying’ decision – it isn’t the consumer (the patient), nor is it usually the payer (insurance or government), it’s the physician who decides which drug to prescribe, although often insurance companies and government formularies limit what they pay for.
  • A single prescription drug, such as Lipitor to control blood cholesterol, brings in annual revenues of billions of dollars. This is the sort of business the pharmaceutical companies deal in typically.
  • In order to encourage companies to make drugs for rare conditions, there are programs like the FDA’s which offer tax breaks and waive fees. However, many orphan drugs cost hundreds of thousands of dollars a year for one patient.
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Life Sciences Startups – Some Things are Old, Some Things are New

After more than a decade in the doldrums, life science startups are back in vogue. What’s new and what has stayed the same in the path to commercialization for these early stage companies? Yesterday, I attended an event at MaRS, a panel discussion on the Road to Commercialization in the life sciences.

I cut my business teeth in the biotech boom of the mid ’90s – there’s plenty that’s changed, but certain concepts have prevailed. Based entirely on my recollections of the sector twenty years ago, which may be a little hazy or lop-sided, because that’s the way human recollections are, here is what I see as evolved and entrenched between the life science commercialization of 2015 compared to 1998.

What’s different – the ‘hot’ topics¹. Currently epigenetics, obesity, big data approaches to solving problems. In the past, we’ve been through therapeutic antibodies, vaccines, gene therapy, pharmacogenomics, nanotechnology.

What’s the same – discussion about scarce resources, with generalizations that there is insufficient capital for investment in early stage companies. This may be especially true of the valley of death, the gap in interested investors to support companies between startup and IPO or between in vitro proof of concept/target and first clinical evidence of efficacy.

Different – the level of sophistication of investors in the life sciences. Although only a fraction of the total investor pool have the risk tolerance for investment in the sector, those that do are guided by due diligence from people with advanced biomedical degrees and strong connections into the healthcare industry. This wasn’t the case years ago.

The Same – investors say there is plenty of available capital for good quality companies.

Different – consumption of healthcare. I can’t possible do this topic justice here, but how decisions are made about what products are used to treat patients has changed. In Canadian, cost cutting and group buying patterns pervade, in the US ObamaCare has been introduced. Globally, there are new markets.

The Same – debate about the need to support an independent Canadian life sciences sector and associated laments about buyout of Canadian companies by US or multinational firms. This ongoing debate usually raises discussion about a globally competitive market for healthcare products.

Different – the level of government involvement and support. The reason I ventured out from my comfy academic environment into the world of business in the mid ’90s was that public support for research was shrinking, shrinking like a popped ballon, and I believed the future for medical innovation was in the public domain. Today, there are many accessible government programs for early stage companies. Technology transfer from academic institutions reached a zenith and has been replaced with a multitude of programs to support the creation of startup companies in the past couple of years. There were few familiar faces at the event, whereas if I attended in the 90’s, I would have known or recognized at least half the crowd.

I’ve been busy over the past decade supporting commercialization of technology and startups in communication, software, hardware and manufacturing sectors. It’s a pleasant surprise to see the life science startup system has become more sophisticated. That’s a good change – more knowledge, new people, more nurturing support. The things that have stayed the same, and are the same in any sector: good companies, those likely to attract investment, are those with valuable solutions for an identified market, with sound management and business planning.


¹All medical needs are always of interest but certain technological solutions and disease states garner more attention at any given time.

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Patents on Genes – It’s Complicated. Part 2

This is the second part of a blog series inspired by questions about patenting genes. The first part looked at whether genes met the criteria for patentability. In this post, I’m going to discuss the business aspects of patents on genes and their derivatives1.

To start at the beginning, the patent system was invented as an incentive to reward inventors with a short term monopoly to benefit from the products of their imagination. The caveat is that after the patent expires (17 to 20 years), anyone can use the invention to make and/or sell products. In the bigger picture, the goal is to stimulate innovation, with the idea that everyone’s quality of life would improve from the new, creative approaches to solving our challenges. For interest, both the first Canadian and US patents were awarded in the 1790’s to the same man (in Canada with a partner) for a new method of making potash and soap from wood ash.

The word monopoly may conjure up images of well-fed, spiffily-dressed men, pockets bulging with money. If you want to start a bun fight at your average academic institution, mention patenting of research results. Some faculty and administrators believe that, for true academic freedom, the knowledge created through academic pursuits should be available to everyone. Sounds good. But, what if it doesn’t get used to its full potential? If you pay taxes in Canada, you indirectly support a significant number of Canadian faculty members to perform research. Isn’t it important to get the most out of your tax dollars? Thus, a reasonable thing to expect might be to require academic research be turned into broadly available products, if possible. The path from invention to having a product on the market is long and costly and usually done by a business. Any business is going to be infinitely more interested in commercializing a new invention with a government-granted monopoly. Thus, patents might be seen as a necessary evil to translate our tax dollars into useful innovations, via academic research.

Back to the patenting of genes. A lot of research has gone on in academic institutions in Canada, the US and all over the world identifying genes, determining their sequence (code) and defining their function. Mutations in many genes have been found associated with certain diseases, or predisposition to disease.

A natural next step would be to use this information to help diagnose and treat people. How might this be done, practically?

Anyone with training in molecular biology, and a few hundred thousand dollars worth of equipment in the right facility, can determine gene sequences. Or someone could devise a way to do it with less expensive equipment, or make a kit that every nurse or physician could use. I suppose the inventor of such tests might like a patent on their test, so they could set up a business to develop and broadly distribute it with assured profit from their monopolistic enterprise. The availability of the test would benefit both those whose risk of disease could be identified so they could take precautionary measures and to ease the minds of those proven not to have the genetic risk factor.

This may be starting to sound familiar. The case that started me on this blog-stravaganza was about the detection of specific mutations in a gene that identifies one form of sudden cardiac death predisposition. A hospital lab in Ottawa is able to do the testing in-house, while a US company has a Canadian patent2 on a test using the gene to identify those at risk. The US company is insisting the Ottawa lab quit practicing its invention. Can you see both sides? The US company has been granted the monopoly by the patent office, but the Ottawa lab wants to offer patients information that’s important for their medical care. Of course, there are other aspects to this, the cost of healthcare3, profits in healthcare, insurance considerations.

In my opinion, research benefits us all, knowledge should be shared and put to good use. Innovation should be encouraged. At the same time, we live in a capitalist system. Healthcare is expensive and people need to earn a living and money incentivizes many of us.

It’s complicated but I hope informed discussion allows us to make appropriate choices.

1I mean derivates in the literary sense, i.e. related in some general way, rather than the legal/biological derivative which has a much more specific definition.

2 A bit about the international nature of the patent system.

Each country has its own patent system. A Canadian patent allows the holder to prevent others from making, using or selling the invention IN Canada. A US patent grants the right to prevent others from making, using or selling in the US but does not grant any rights in Canada. If they apply, inventors may be granted patents in countries other than their own. I have no idea why the patent system, created centuries ago, has this international aspect to it, but it does.

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Patents on Genes – It’s Complicated. Part 1

I see a report from the CBC about challenging patents on genes. This is not the first time the topic of making money from genetic information has arisen. Here are some related stories¹.

I want to share my understanding of genes, the patent system and the business of medicine, to help anyone who is interested understand the issue.

This could be a story about so many things: Canada vs the US, healthcare access, the patent system, heart disease, genetic predetermination, freedom of information, freedom of choice, capitalism. I’m going to divide this blog into parts, the first dealing with the ‘patenting of genes’, others with the business aspects of genetic information.

I’ll start with something many of us were taught in high school because the details are important for understanding the gene patent concepts.

Genes are physical bits of DNA, millions of molecules combined together in a meaningful sequence. It’s a code. Each gene has a unique coding sequence. The main function of genes is to specify how to build proteins, which are strings of molecules of a different sort, responsible for doing things in the cell, and hence in our bodies. There are genes for insulin and hemoglobin and about 30,000 other things. If it’s part of you, there is a gene or set of genes that specify the composition of the building materials, the method of construction, and how all the parts fit together to make a human being.

All humans have the same set of genes. However, all humans do not have identical genes. Some of us are blue-eyed, some green-eyed, some tall, others think coriander tastes like soap. These are genetic traits (another day I will discuss where genetics stops and other factors take over in shaping human abilities and other characteristics). The genes that specify certain traits (sometimes more than one gene per trait) vary among us.

There’s another source of variability. The sequence of ‘standard’ human genes, those we all have in common, may vary because of random mutation – changes in DNA sequence. Some of these mutations may have been there for generations – they are noticed only if they have deleterious effects. Many times, a mutation has no effect on what the protein specified by the gene does – these are called silent mutations. The genetic code is degenerate. Not that it hangs out with a lawless crowd and drinks and smokes into the night, but sometimes two or more DNA codes specify the same protein bit. Kind of like TO, YYZ and Toronto all refer to the same destination. To further complicate this, proteins will often function quite well with a few mistakes in them, so slight changes in the DNA code that do affect the protein are present in the human population. Sometimes these slight changes turn out to be important, which is getting closer to the issue that inspired this blog. It’s more accurate to say that each person has approximately the same set of very similar genes, than to say we all have the same genes.

Okay, enough of the biology lesson. What does all this have to do with patenting genes?

What can be patented? There are three criteria: the invention must be novel, non-obvious and useful. It seems to me we should use these criteria to determine if genes can be patented.

Clearly, genes are useful. They code for proteins which create and make all organisms function. Utility is usually the easiest of the criteria to satisfy for patentability.

Are genes novel? Consider that one human has about a trillion cells in his or her body, and most cells have at least one copy of every human gene, and there are billions of humans. With so many copies of human genes in existence, novelty doesn’t seem like an applicable concept. Until a few decades ago, we didn’t know the sequence, or code, for very many of these genes. So the sequence information for many genes was novel, until the human genome was sequenced, a decade ago. Even with the sequence for each gene available, more work was required to determine the function of each gene.²

Discovering something exists doesn’t make it an invention. Patents are for inventions, not discoveries. To me, this suggests genes should not be patentable. In fact, the US courts have ruled that the DNA sequence found in the human body is not patentable. Therefore, patents are not held on our genes, the ones in our cells, our bodies.

Does the same argument apply to discovering sequences alterations, mutations, in genes related to disease? A number of diseases, or the predisposition to disease, can now be traced to specific changes in the code of certain genes. This too is something that occurs naturally, however unpleasant the consequences.

What if we use genetic engineering and other technologies to manipulate genes to diagnose or treat disease? Through biotechnology, we have drugs created by using genes to produce quantities of proteins that wouldn’t otherwise be possible, for example to produce life-saving drugs, like injectable insulin for diabetics or erythropoietin for anemia. Should innovative methods to create these drugs be patentable? Or is it obvious to use the genes to produce useful protein?

Similarly, it seems that if we know a certain mutation in a gene is associated with a disease, would it be obvious to use the knowledge of that mutation to guide the treatment of patients? What if a kit was developed that made the detection of the mutation so simple it could be done in a second from a drop of blood? Would that be an invention? What if the kit used a small fragment of the gene sequence? Would a patent on this test be patenting a gene?

All these questions are part of the controversy around ‘gene patents’. The natural genes in our bodies are not patentable, but with our current technological capability, the situation isn’t nearly that simple. We can manipulate genes in many ways, and that is closer to the heart of the current controversy.

In the next part of this blog series, I’ll discuss patent systems and the business of medicine.


¹ This gives a quick overview about the controversy over using certain genes to detect breast cancer predisposition.
This site has lots of detailed discussion about the BRCA breast cancer linked gene and related topics.

² These time frames are important to consider when controversies arise over patents that were filed 10 to 15 years ago.


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Connections: The OBR Roundtable on ‘Stopping the Biotech Exodus’

I attended an interesting event recently, with the ponderous title ‘Stopping the Exodus: Keeping Biotech in Canada’. It was sponsored by the Oxbridge Biotechnology Roundtable (OBR ), an organization with a mission to bring academic researchers and industry folks in the biomedical disciplines together.

My interest was peaked. I live at the interface between academia and industry and have since I realized 20 years ago that biomedical research scientists (which I was) needed the biotech industry, as industry needs the academics. This realization sent me on a path from investment banking, to a health charity, to technology transfer, interspersed with forays back and forth into academia proper. So the topic made me nostalgic. But it’s also very timely, since I’ve recently become better acquainted with what is happening in the Toronto entrepreneurship area and want to understand the emphasis on medical devices and informatics, over therapeutics.

Medical devices and informatics have the potential to provide many great new products that improve the lives of those suffering from health problems, or to prevent suffering, and save money in our stressed healthcare system. But what of new therapeutics? I may be biased, since this was the area I worked in a for a couple of decades, but we need new therapies to treat the diseases and conditions once we have benefitted from advanced diagnosis and efficiencies in the system.

The panel at the OBR event was impressive: four articulate individuals, representing most of the major players in the area. From the Ontario government, Bill Mantel. From the only biotech focused venture capital firm in Canada, Evelyn Pau. An entrepreneurial academic, Aled Edwards, and an entrepreneur’s entrepreneur, Connor Dickie. I might have added someone representing technology transfer or economic development or a similar role – those who facilitate interaction between academia and industry – but perhaps there is a clear message in the absence of such a person.

The audience, a sizeable crowd, was attentive and energetic.

There were many great concepts and initiatives discussed – all related to supporting a thriving biotech industry. The theme that emerged from the discussion, at least from my perspective, was disconnection. The elements, the players, the supporters, and the stages of development, in the research-biotech continuum, need to be better tied together. As some of the panelists point out, communication needs to improve. More media attention could be focused on our biomedical endeavours, whether they derive from the academic or industry setting. Funny, what pops into my mind is my post-doctoral fellowship. I joined one of the groups at Sick Kids that collaborated on the cloning of the cystic fibrosis gene, right after the gene was cloned. We had television crews constantly traipsing through the lab, filming us pipetting something, for the first year I was there. Then interest trailed off, and eventually, headlines to the effect of ‘Ten years after the cloning of the CF gene – no cure yet’ appeared. Not a surprise to anyone who understands the process of biomedical research but undoubtedly disappointing to many who hoped for more difference in the lives of those suffering with the disease. A disconnection.

I admired each of the panelists. They were all very positive and optimistic about their areas.

The Ontario government has revised their strategy recently to put an emphasis on entrepreneurship and investing with industry.

The VC reported an upsurge in investments and IPOs of emerging biotech companies.

The entrepreneurs enthused about advances in technology that will allow acceleration of medical discovery and new business models that make it simple for technologies to be brought to the public. Dickie and Edwards are models of success, fabulous examples that it can be done, whether the entrepreneurial venture comes directly from academic research or inspired individuals. They made it look easy.

So, there are success stories, plenty of funding, government support – optimism. Why then the dire title – ‘Stopping the Exodus’ – like there’s a problem? A disconnect.

I think I understand, and my assessment of the disconnection was echoed in questions from the audience. Rock stars. Risk-taking, driven entrepreneurs, slick, confidence-oozing venture capitalists and well-spoken government officials. They are like rock stars. Not everyone wants to be a rock star, or an entrepreneur. Not everyone wants to be the CEO, travel constantly, or take big risks. I think it still seems too hard for most academics to reach out and extend their careers into the domain of the start-up company. Programs and financiers support those entrepreneurs that take the steps to seek them out. Perhaps there is some characteristic common in academics in the biomedical field that makes them more hesitant than their engineering/computer science colleagues to seek that help.

What this suggests to me is that more connections need to be made to familiarize all the stakeholders in the biotech arena with each other. We all say we understand each other, but I’m not convinced there is a real, hands-dirty, up-to-the-elbows, knowledge of what drives academics, industry folks, venture capitalists or government administrators by those in the other groups. My education across areas began when I was hired from the lab by an investment bank to analyze opportunities in new biotechnology ventures. Much like the consultancy program of the OBR, this provided exposure for an academic to real industry and investor issues and vice versa.

I’m optimistic. There is dialogue, like the session sponsored by the Oxbridge Biotechnology Roundtable. There is interest – I was impressed by the number of people at this event. The players are engaged – government players continue to create new programs, investors are investing. With efforts such as the OBR, more connections can be made. Connections I think could best be made from the most junior scientist to senior administrators/executives.



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