Fresh off its successes in the green-energy patch, the Obama team is turning its investment skills to the life sciences. Last Friday, President Obama announced his intention to increase the federal government’s involvement in the business of biotechnology.
His plan is for a new federal center inside the National Institutes of Health (NIH) that would be focused on the development and commercialization of new drugs. The National Center for Advancing Translational Sciences (NCATS) would engage in early drug-development work, eventually handing off programs to private companies for completion. In return, the government would take a guaranteed royalty stream on drugs that eventually made it to market. The center would get its seed money by tapping other NIH programs. Longer term, the administration’s plan is to provide billions in dedicated federal funding to the new drug center.
Several legislators have already questioned whether NCATS is needed. Rep. Denny Rehberg (R., Mont.) — chairman of the Labor, Health and Human Services, and Education Appropriations subcommittee, which funds the NIH — has said NIH should not search for a director for NCATS until Congress has given its approval. Last week, the NIH began circulating an advertisement for the new director’s job anyway.
The NCATS idea reflects the belief of the president and NIH director Francis Collins that the for-profit drug industry has ignored promising areas of science because these opportunities appeared financially dubious. Collins has said that government can plow scientific fields that profit-driven companies ignore. He suggested during an interview on CNBC earlier this year that NIH drug developers would also get a break from regulators at the Food and Drug Administration. His reasoning seems to be that government regulators could place more trust in government drug developers.
The president’s move to get the federal government further into the business of developing new medicines is coming at a time when his regulatory agencies have been badly squeezing the American life-science sector. The longer and larger development programs mandated by skittish regulators have made the cost of developing drugs dramatically higher — with fewer new programs getting funded, and a smaller number of drugs reaching the market as a result.
These trends, in turn, have discouraged private investment. Companies in the U.S., Europe, and Canada raised slightly more than $25 billion in 2010. This is about the same amount of money that they raised five years ago, but more of the money this time came in the form of profitable companies’ entering large debt transactions in a low-interest-rate environment, not in the form of true venture capital to start new companies.
In other words, venture investors are concentrating money in fewer companies because developing and launching new drugs has gotten so expensive. The result is far fewer new biotech initiatives. Five years ago, biotechnology companies raised almost $5 billion in venture capital that went to early-stage ventures. Last year, new companies raised about half that amount.
The new Obama drug initiative is of a piece with the administration’s abiding faith in the virtue of government investment as a trump to private entrepreneurism. At the core of this religion is a faith that that the political allocation of capital leads to better, or at least more “equitable” outcomes.
The achievements of the NIH are monumental, but its domain is basic science. This involves the discovery of scientific principles that can lead to new avenues of practical research. NIH funding has led to the discovery of molecular signals that often became the targets for new drugs. But the NIH was never in the business of actively developing the drugs themselves. That was always the work of the private sector.
For one thing, NIH has never been very good at drug work. The government already spends $30 billion a year on life-science research through the NIH — more than $50 billion once money from other agencies is factored in. Yet by its own count, the NIH has helped to discover only 84 drugs over the past 60 years. By comparison, in recent years, the private sector has spent about $60 billion and launched more than 30 products annually.
The NIH has also been reluctant to submit to the same kind of FDA oversight that is routine for private drug companies. By some counts, as much as 40 percent of all drug-development costs are now consumed by the auditing of clinical-trial data. For example, if a drug is found to reduce the size of brain tumors, multiple doctors have to review the x-rays, without being told about the previous doctors’ conclusions, to ensure that the readings weren’t affected by bias. Several years ago, approval of an important cancer drug that the NIH helped to study was delayed by many months because the NIH didn’t think it needed to submit to this kind of regulatory requirement. The FDA forced the NIH to go back and redo its analysis.
If drug development becomes the domain of government researchers, it’s a sure bet that political lobbying will eventually trump scientific promise and commercial viability when it comes to investment decisions. This fact has been borne out by the shortcomings of the government’s BioShield program, which was established in 2004 to protect against biological weapons and other threats. The program has been plagued by political meddling and attempts by politicians to steer contracts for vaccines and antidotes to favored companies and constituents.
The president talks about the biotech sector as an “engine” for job growth, even while he increases regulations on the industry and hundreds of thousands of employees are laid off. In July alone, the U.S. pharmaceutical industry shed 13,493 jobs, more than any other sector in the economy, according to a Challenger, Gray & Christmas report.
The irony is that the carnage caused by the president’s own policies has formed the intellectual foundation of his call for a government takeover of drug development. The entire experience brings to mind the Reagan adage describing the liberal political economy: If it moves, tax it; if it continues to move, regulate it; and when it stops moving, subsidize it.
But federal subsidies are not a substitute — politically or in practical terms — for a vibrant private biotechnology industry. Neither is the work of the NIH. When pressed on these points, the president says his new drug center will complement the private sector. But to listen to him describe its activities is to understand the real intention. The president wants to make blockbuster medicines. Maybe the resulting revenue is how he plans to plug his mounting deficit.
— Scott Gottlieb is a practicing physician and resident fellow at the American Enterprise Institute. He was deputy commissioner of the FDA from 2005 to 2007.