A Little Dose Of Government Won't Kill Biotech

For months now, biotech executives have used words such as "catastrophic" to describe health-care reform. The industry's lobbying group, BIO, has even accused President Clinton of turning his back on medical research, on competitiveness, on food safety, and on AIDS. BIO is aggrieved over a Clinton plan to create a price-review committee for wonder drugs that have no competitors. The committee wouldn't set prices. But the industry fears it would jawbone them down and says that threat is driving away investors, who are needed to finance most biotech research until companies can turn a profit.

There's nothing wrong with aggressive lobbying, but BIO's Chicken Little campaign contradicts reality. The health-care proposals haven't hurt yet: For all their handwringing, biotech companies raised $3 billion or so in 1993, their second-best year ever. And a dozen companies have registered to sell more stock, usually a sign of a friendly market. Not every startup has all the money it wants, but that's because 200-plus public companies are fighting over the pot. In the end, moreover, Clinton's proposal--review board and all--may benefit biotech by complementing current marketplace trends that already favor the industry.

THE PRICE IS RIGHT. One is a move toward value pricing. Drug makers prospered in the 1980s by raising prices relentlessly even as their lackluster labs turned out chorus lines of me-too products. Now, managed-care companies, insurers, and other bill payers have a reasonable demand: prove that a drug is worth its price. Such "pharmaco-economic" analysis looks at a drug's economic impact on total patient care: A pricey drug that prevents complications or replaces other costlier procedures could still be called a bargain.

Virtually every biotech company is already doing such analysis--and hustling to turn out products that shine under this light. A case in point is Chiron Corp.'s test for finding hepatitis C in blood. By preventing transmission of the virus through transfusions, Chiron says, the test has saved $500 million in treatment costs and kept a million people worldwide from being infected. So nobody is begrudging Chiron its $75 million annual profit.

Beyond that, health reform may hasten moves to streamline drug marketing. Part of the reason biotech companies had to raise so much money was to compete with the huge sales forces of established drugmakers. But as hospital chains and managed-care companies consolidate their buying--a trend the Clinton plan would reinforce--the need for squadrons of salespeople evaporates. "We're looking at 50 core health-care customers" instead of thousands, says Dennis Houghton, director of managed care for Synergen Inc., "and we have technology that can make a difference."

Biotech executives do have a legitimate worry over the criteria used to determine a new drug's value. Clinton's plan is vague on this. Pulmozyme, the new Genentech Inc. drug that breaks up mucus in the lungs to help cystic fibrosis sufferers breathe, shows how much room there is for subjectivity. Genentech says the drug will cost $27 a day, or $9,800 a year. That's stiff, so Genentech prepared analyses to show that Pulmozyme reduces use of antibiotics and hospital stays to treat infections. Genentech says Pulmozyme saves $3,600 a year for the average patient. That still leaves $6,200 in costs, however, so the question becomes: How much is it worth to help children play and adults work? Is it $620 or $6,200 or $62,000 a year?

There is no right answer, of course. Proponents of price reviews, such as drug industry critic Senator David H. Pryor (D-Ark.), say that's why there should be informed discussion on prices--to develop reasonable criteria. Bureaucratic that may be, but it's hardly catastrophic for companies with their ducks in line. Pryor hasn't complained about Genentech's Pulmozyme analysis, for example. And major insurers such as Aetna and Blue Cross/Blue Shield say they'll pay for the drug. There's no reason to believe a committee would disagree.

DANGEROUS GAME. Industry executives also fret that a review committee might embrace a profit formula based on a drug's manufacturing costs. That, in fact, would stifle research. As Genentech CEO G. Kirk Raab notes, biotech margins must be high enough to help recoup investments in products that don't pan out. If the committee is created, its dabbling mustn't lead to price controls: Experience shows that they never work well in any industry.

Labeling a less onerous review of prices an unmitigated disaster overstates the case, however. And plying that argument to win a lobbying battle is a dangerous game. The argument itself might spook the capital markets. For if biotech drugs can't stand scrutiny, why should anyone invest in them?

Hamilton covers biotech for BUSINESS WEEK.

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