Health Care Reform and Biotechnology

If you even occasionally read the news these days, you probably suffer from more than a little health care debate-related fatigue. What I would like to do here, rather than double down on the fanaticism and hyperbole that already pervade the airwaves, is to examine the nuts-and-bolts practicality of the law as it relates to the biotech sector in general, and more specifically, how it affects the sector's most fragile entities: micro-cap biotech start-ups.

To frame this discussion, let's go back to the months leading up to the law's passage. Biotech companies were worried, with good reason, that the government's efforts to curb health care costs would target their expensive therapies for price fixing, diminished patent protections, or both. During legislative negotiations, the Obama administration pushed to limit biotech drugs' patent exclusivity to 7 or even 5.5 years before the gates would be opened to lower-cost, generic competitors. However, the late Senator Ted Kennedy, representing as he did over 46,000 biotech employees working for 480 companies and 120 universities in Massachusetts, objected to this infringement and insisted on the 12 year patent exclusivity that was ultimately enshrined in the law. Senator Kennedy understood the vital role of the profit motive in American innovation, and thanks to his persistence, a biotech company that assumes the great risks and costs of developing a new therapy and succeeds, will:

A) Recover its vast research and development expenditures (estimated at $1.0-1.2 billion per drug),

B) Reinvest profits into its development pipeline and its future growth,

and most importantly,

C) Present the biotech sector to the capital markets as an attractive and worthwhile destination for their investment dollars.

The above discussion, however, is of immediate relevance mostly to companies who are soon anticipating or already generating product sales. How does reform affect the start-up companies, whose best case scenario is becoming profitable after working for 6-10 years on a long-shot drug candidate? The answer lies in the law's Qualifying Therapeutic Discovery Project (QTDP) program, which provides $1 billion to be distributed to certain early-stage research programs, whose commercial potential might be remote, but which nonetheless show "the greatest potential to create and sustain high-quality, high-paying U.S. jobs and to advance U.S. competitiveness in life, biological and medical sciences." Recipients get some combination of grants and tax credits, and among those benefiting are two truly promising companies: RXi Pharmaceuticals and Marina Biotech.

RXi and Marina both pursue the development of therapies based in RNA interference. RNAi is a biochemical pathway whose groundbreaking discovery turned classical genetics on its head and earned Craig Mello and Andrew Fire a Nobel Prize in 2006. Hopes for its therapeutic application are sky-high because, among other reasons, it is considered capable of targeting conditions that are not suitably "drugable" by traditional methods. Here is a cursory break-down of the two companies with regard to their QTDP awards under the health care law:

RXi

• Employees: 27
• Annual Cash Burn: ~$18 million
• QTDP Grant: $977,917

Marina

• Employees: 46
• Annual Cash Burn: ~$25 million
• QTDP Grant: $733,000

At 5.4% and 2.9% of annual cash burn for RXi and Marina, respectively, one might wonder how significant these grants could possibly be. Keep in mind, though, that early-stage companies often subsist on operating cash that will only take them a few months out, and frequently find themselves scrambling for the funds that will see them through their corporate infancy. Grants issued under the QTDP program in fact go a long way toward attracting and retaining talent and buying expensive equipment and supplies. In short, they offer added continuity to vulnerable organizations who may be sitting on breakthrough medicines (Using the grant money, RXi is pursuing treatments for Fibrotic Disease, Age-Related Macular Degeneration, Lou Gehrig's Disease (ALS) and Rheumatoid Arthritis; Marina is targeting Familial Adenomatous Polyposis and Inflammatory Bowel Disorder). Important to note is that these companies are only two of an extensive list of recipients.

Since the health care law began to take shape almost two years ago, it has been derided as a socialist intrusion into the private sector, an unaffordable government hand-out, a sure-fire killer of jobs...the list goes on. I will not purport to understand the full breadth of problems in the health care system, nor how the massive reform law addresses each of them. However, if we examine the law's effect on biotechnology, on which I think I am authorized to comment, the frenzied warnings of apocalyptic job loss and stifled innovation just do not hold water. On the contrary, the law's treatment of the sector is stridently pro-capitalist, not only offering robust protection of mature companies' profits but also nurturing the start-ups that will become the growth engines of the future. The law creates and protects American jobs, and not just for the sake of doing so. Rather, the scientific and technical positions supported by the law are those that will yield the breakthrough treatments of tomorrow, ultimately lowering health care costs and raising the standard of care for a range of terrible afflictions.