Innovation vs. Healthcare Spending: Biotech’s Biggest Looming Challenge


Xconomy National — 

Let’s start with the good news.

We are at the beginning of a transformation in human health, treating diseases in ways that we could only speculate about in the recent past. While biology isn’t quite engineering (yet), biotech has become a technology-based, high-growth, high-wage space, all while working to cure cancer. Doing well by doing good. It is more than a business.

The FDA approved 45 new drugs in 2015, an 18-year record, following a similarly high 41 in 2014. Healthcare company revenues continue to grow at a faster rate than the average S&P 500 company—11 percent growth vs. 3 percent for the S&P in 2015 (via Goldman Sachs 2016 Healthcare Outlook). They’re on track to outperform the S&P for a fifth year in a row during a broad bull market.

This kind of performance is breathing new life into biotech. In a virtuous biotech cycle, innovative products improve health, generate returns, and in turn attract the funding that fuels the next wave of product innovation. Biotechs are maturing from private, early stage drug discovery companies to publicly traded ones running clinical trials and commercializing products. There were 43 IPOs in 2015, 71 in 2014, and 41 in 2013. The biotech industry is growing up.

No wonder we receive so much positive press…right? Individually, we are grateful for the increasingly miraculous benefits of new drugs, whether personally, for our friends and family, or for public figures like former President Jimmy Carter, whose melanoma was wiped out by a new immuno-oncology drug called pembrolizumab (Keytruda). Nonetheless, the general view of the biopharma industry is largely negative.

Why is that? Healthcare spend is high in the United States, and it is too easy to point fingers at biopharma.

Here comes the bad news. The U.S. is a country of consumers, and that includes consuming healthcare. Compared to the Organization for Economic Co-operation and Development (OECD) countries, we spend significantly more on healthcare by many measures, but don’t live as long. In 2013, the U.S. spent 16.4 percent of its GDP on healthcare versus 8.9 percent, on average, for OECD countries (OECD Health Statistics 2014 and 2015). The yearly per capita amount we spend on drugs in the U.S, approximately $1,000, is roughly double the OECD average, though the total spent on drugs every year is only about 10 to 15 percent of total U.S. healthcare cost. Even if the U.S. spent no money on drugs, we’d still be consuming nearly 15 percent of the GDP on healthcare.

That said, drugs simply cost more in the U.S. than they do in other advanced economies. And consumers, payers, politicians, and the press notice these higher prices.

Additionally, this extra healthcare spending isn’t leading to longer lives. In 2011, the U.S. life expectancy was 78.7 years, 1.5 years less than the OECD average. From 2000 to 2011, life expectancy in the U.S. increased by 2 years compared to a 3-year average gain for the OECD countries.

Addressing the broader challenges in the U.S. healthcare system—from the geographic monopolies of service providers to high administrative costs—is beyond the scope of this piece, though clearly important. The question for us is what can the biopharma industry do, working with others like payers and patient groups, to make healthcare more affordable without the government intervention that is common in other countries?

The easy stuff first. Tame excessive pricing.

Businesses reasonably work to maximize profit within legal, regulatory, and ethical bounds. Throughout the U.S. economy, we applaud innovation and the resulting profits (see Steve Jobs, the iPhone, and the roughly $200 billion in cash on Apple’s balance sheet). But healthcare isn’t a typical consumer market. There’s a unique moral element involved. We are ok with the idea that not everyone can afford the newest iPhone the day it’s released. We are very uncomfortable with the idea of denying care to a patient because of a drug’s price.

What can we do to about this?  First, stop the astronomical price increases for generic drugs that often have single-source suppliers (e.g., Turing Pharmaceuticals and Daraprim), as well as the subtler price hikes for established drugs that go well beyond the rate of the consumer price index. This second point is … Next Page »

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Jason Rhodes is a partner at Atlas Venture and focuses on the creation, development and business strategy of novel therapeutics companies. Follow @JasonPaulRhodes

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