Fear Of `De Facto' Price Controls Forcing Cuts In Biotech Innovation, Officials Say

With health-care reform proposals threatening financial prospects, firms are shelving projects laying off researchers The biotech industry is marshaling its forces for what many of its executives view as the political fight of its life. Financial analysts and other observers agree with the executives, saying that the industry faces financial threats posed by various mechanisms in President Clinton's health plan designed to influence drug pricing. These observers warn that such mechanisms, if legislated, would result not only in the loss of promising drugs, but also in significant declines in the biotech work force--thus dealing a major blow to the industry overall. Particularly ominous, they contend, is a Clinton-plan proposal for an advisory council that would evaluate the pricing of certain new drugs. Already, the concerned sources point out, the proposed legislation has prompted reluctance among venture capitalists to risk biotech investments, which, in turn, has forced some biotech firms to lay off employees, freeze expansion plans, and put entire lines of research on hold. "The fear of the advisory board is heads and shoulders over any other concern" currently facing biotech companies, says Lisa Conte, chief executive officer of South San Francisco, Calif.-based Shaman Pharmaceuticals Inc. "It's terrifying, and it could destroy this industry." At the center of the controversy are two mechanisms included in the Clinton health plan by which government could influence the pricing of drugs. One is the establishment of a Department of Health and Human Services (HHS) advisory council on breakthrough drugs--drugs that either treat previously untreatable conditions or are the first effective therapeutics against a disease--that would review introductory prices for these therapeutics, and publicize its disapproval of any price. Another would give the HHS secretary the power both to blacklist certain drugs from Medicare reimbursement if government-required rebates on drug prices proposed by a company are deemed unacceptable by the secretary, based in part on the findings of the new council. In addition, the proposed health-care legislation would require drug manufacturers to pay special rebates to Medicare on new drugs for cancer, AIDS, and other diseases, also based in part on the advisory board's review. The Clinton administration has insisted, both in meetings with the biotech industry and in press reports, that these components of the proposed health-care legislation do not constitute price controls, as the council's reviews of the drugs are nonbinding, and their findings could be used only to regulate prices in the case of Medicare reimbursements. The administration has also professed that it wants to work with the industry in support of its important technology. Repeated calls by The Scientist to White House and health- plan task force officials were not returned. Biotech industry officials are claiming--and their assertions are supported by many industry analysts--that the proposed legislation constitutes de facto price controls because insurance companies and the public will balk at paying prices the council may criticize. They also say that fear of the legislation's impact is already having a detrimental effect on investment in biotech. "It's just price controls by a different name, and it is recognized as such by our investors," says Conte. In fact, several market statistics indicate that since January 1993, when the president first intimated that some form of government evaluation of drug prices would be included in his health-care reform plan, investors have been moving away from biotech stocks, analysts say. Vector Securities International Inc. of Deerfield, Ill., reports that the total assets in health-care mutual funds--which might be inclined to invest in drug or biotech companies-- dropped throughout 1993, from $4.3 billion at the beginning of the year to $3.6 billion at the end, in part because of the proposals. And Michael Celano, accounting firm Arthur Andersen & Co.'s partner in charge of its Philadelphia office of life sciences, says that the number of biotech initial public offerings (IPOs) fell from 43 in 1992 to 25 in 1993. Those that were financed were offered at a harmfully discounted rate, in part because of fear of the health-care proposals, he says. Other biotech officials report similar situations. Shaman's Conte, for example, saw her company's stock price plummet by almost 50 percent, from $15 for its IPO in January 1993 to $8.50 for its secondary offering, held in early December. And Mitchel Sayare, CEO and chairman of Cambridge, Mass.- based ImmunoGen Inc., says his company closed on an offering in mid-February 1994 at $7 per share--this after an IPO price in 1989 of $10 and an intermediate high price of $19. "I have been out there on the street, trying to get a deal done," Sayare reports. "And it is extremely difficult. Paying for the innovation we are working on here already represents a serious challenge." Biotech officials concede that other factors have contributed to stock devaluation throughout the industry over the past year. Two highly publicized clinical trial failures--of Malvern, Pa.- based Centocor Inc.'s Centoxin and Boulder, Colo.- based Synergen Inc.'s Antril--acted to depress biotech stock prices in early 1993, as did decreased earnings at industry leader Amgen Inc. of Thousand Oaks, Calif. But investors and analysts also say that the specter of price controls is making them wary. "It's a negative factor, and a reasonably big one," says Skip Klein, a health-care analyst with T. Rowe Price Associates Inc. in Baltimore. Sayare explains that when his investors originally decided to put their money into biotech, there were essentially three risks: technology (whether or not the products would work); regulatory hurdles (getting the products approved by the Food and Drug Administration); and the market (having the products accepted in a competitive marketplace). "What the investors see now is that there is a fourth risk," he says. "And that is that ImmunoGen will not be able to set prices for its drugs that it needs to recover its costs and to provide our investors with a fair return." Drug manufacturing has always been a high-risk business. A study conducted at Tufts University over two decades and released in 1991 found that the odds that a drug entering clinical testing will actually reach the market are about one in five; and a recently completed Duke University report revealed that only 30 percent of marketed drugs actually recoup their R&D cost. "If you are going to ask investors to take that kind of risk," says Steve Push, a spokesman for Genzyme Corp. of Cambridge, Mass., whose stock price plummeted 39 percent last year, "you have to offer rewards commensurate with that risk." "Innovation requires investments in terms of both human and financial capital," observes Gregory Brown, vice president of Vector Securities. "And that capital will flee if there is no possibility of return." Against the backdrop of this political and economic debate, research projects and the scientists who perform them within this industry are being negatively affected. Two recent surveys conducted by the Biotechnology Industry Organization (BIO) found that 44 percent of companies specializing in cancer research and 47 percent of firms working primarily on AIDS have already had their work delayed or curtailed because of capital constraints. Forty- one percent and 40 percent of cancer and AIDS companies, respectively, cite what they term the administration's proposed "de facto" price controls as the dominant reason for their lack of capital; and 62 percent and 63 percent, respectively, predict further restrictions on research if the legislation is passed. Michael Fung, senior scientist at Tanox Biosystems in Houston, says that, owing to lack of financing, in part because of investor uneasiness over the proposed legislation, his company hasn't been able to take its lead product, antibody AIDS-439, into clinical testing as planned. "The compound is literally sitting in the refrigerator, waiting," he says. "The longer we wait, the greater the possibility that the antibodies will deteriorate, and all of the effort will go down the drain." Thomas J. McKearn, CEO and cofounder of Princeton, N.J.- based Cytogen Corp., saw his company's stock drop $23 per share in 1993, for a total of $370 million in lost value. McKearn says the firm had to cut back both on staff and projects: In September, 58 people were laid off, 83 positions were eliminated, and R&D personnel was reduced by 40 percent. Three phase I studies for cancer imaging agents were canceled. William H. Rastetter, president and CEO of IDEC Pharmaceuticals Corp. in San Diego, says he has been forced to make a similar decision: IDEC's lead compound, IDEC-C2B8, is in pilot phase II studies for B cell lymphoma, and the company believes that it could also be therapeutically beneficial in leukemia and myeloma. But it's on hold indefinitely. "If our stock were at [$]15 or [$]20, we would be in phase I trials for these conditions [leukemia and myeloma] now, and our product might get to market sooner for these patients," Rastetter says. "But given the current financial environment, we can't do the trials." IDEC went public in September 1991, garnering a value of $15 per share. Today each share is worth around $6. At Waltham, Mass.-based ImmuLogic Pharmaceutical Corp. president and CEO Richard Bagley says that, although his company's market valuation has held up thus far, his R&D decisions are nonetheless being driven by the negative environment. He has moved both staff and financial resources from longer-term efforts in the area of autoimmune disease to work with allergy drugs that are closer to clinical testing. Before the health plan was proposed, ImmuLogic established a discovery research group that today is staffed at only one-third the original target level, Bagley says. "Money is needed for clinical trials," he says. "We'd better be prudent." Rastetter says he is frustrated over, essentially, being forced to manage in a short-sighted manner, focusing money and energy on development, to the detriment of research: "If companies in the sector had better access to capital today, the pipeline of innovative health-care products would undoubtedly be richer seven to eight years from now." Executives also say they are aware of the negative impact these decisions are having within the companies' labs. Fung talks about the frustration he and his fellow scientists feel at having their promising project put on hold, and says that Tanox is already finding it more difficult to attract excellent, experienced scientists. "They want more security about their future," he says. "People are hesitant to commit their careers to a company that has had to cut its budget." McKearn says the aftermath of laying off one-third of Cytogen's work force has been like dealing with a death. "It is just as agonizing for the people who are left," he says. "There is an intense period of grieving, and morale is on a roller coaster for quite a while afterward." At ImmunoGen, head of research Walter Blattler describes the difficulty even in putting a project on hold for a while and redirecting the efforts of his scientific staff away from their primary interests. "How do you explain to a scientist that his or her project is no longer important?" he asks. "I have worked hard to give our people intellectual ownership of their projects; now I have to take that away. It's not easy." Biotech industry officials say their ultimate concern is that if research is cut, cures will not be found. "The irony is that in the name of health-care reform this legislation will render the patients the ultimate losers," Rastetter says. "If you cut innovation, you are doomed to using older technologies." The Clinton administration's focus on pricing of "breakthrough" drugs is at the heart of their worries. "Having an advisory panel on breakthrough drugs really urges companies to go into generics," or products that offer only incremental increases in therapeutic value, says BIO president Carl Feldbaum. "It's counterproductive, and anti- innovation." A number of industry analysts point out that the proposal is the opposite of one that is spurring research investment in Japan. There, they say, a government- dictated pricing structure rewards innovation by setting prices for innovative drugs often at two to three times prices paid in the U.S.; the longer a drug is on the market, the lower the price it is awarded. Feldbaum says he has been told by one person involved in the design of the legislation that the health-care task force's concern was the power any company that came up with a cure for AIDS or other currently incurable disease would have to charge any price for its product. "Our response to such a concern," says Feldbaum, "is that the problem is not that there is a cure for AIDS, the problem is that there is not a cure for AIDS. If you squelch R&D on just breakthrough drugs, you are going to postpone or prevent the day that there will be one." BIO and a number of industry executives are proposing an alternative to the advisory board, one which relies on the Department of Public Health's existing-outcomes research group to evaluate drug prices. "This office is already collecting information on outcomes research--how a given treatment or drug compares with options for a specific disease," Feldbaum says. "We are urging that the health-care alliances have the ability to access that information, and determine for themselves what price they are willing to pay. We are confident that, on such a basis, biotech drugs will be able to compete." Biotech executives and analysts say that the market is already demanding pharmacoeconomic studies and cost- effectiveness data on promising compounds. "Cost- effectiveness is one of the critical issues of the future," says Sarah Gordon, biotech analyst for Amerindo Investment Advisors Inc. in New York. "Today I'm much more careful to get detailed analysis about how a company is going to evaluate cost-effectiveness [of its product], and I look to have those measures built into the phase III trials." Industry officials and analysts are insisting that free- market pressures, not political ones, are the way to keep drug prices in control. "The market is already correcting a lot of the failings that the Clinton plan is trying to address," says Vector Securities' Brown. "The market is correcting it by demanding that new technologies prove themselves cost-effective. We don't need a regulator to tell us to do that." Susan L-J Dickinson is a freelance writer based in Philadelphia.

Fear Of `De Facto' Price Controls Forcing Cuts In Biotech Innovation, Officials Say

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