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Nov 15, 2010 (Vol. 30, No. 20)

Innovation Can Prosper in a Regulated Environment

Contrary to Popular Belief, Government Intervention May Be a Good Thing

  • Success Stories

    It is undeniable that increasingly stringent regulations regarding safety, carbon emissions, and overall sustainability have led to massive innovation in the car industry. As a result, we now drive cars that are lighter, safer, easier to recycle, and provide many more miles to the gallon. It is difficult to see that the automotive industry would have moved at this pace of innovation if left to its own devices.

    Another industry that grew from regulation is mobile telephony. We have grown so reliant on our mobile devices that we often regard them as just another indispensible gadget from the consumer electronics industry. That may be true today, but it was not always so. At the dawn of the mobile telephone era countries had their own networks and operators, while handsets were often manufactured by the national consumer electronics champion: Siemens for Germany, Nokia for Finland, and so on. In fact, the system precluded cross-border calls, and even within a single country it required different numbers for different areas.

    In retrospect, one of the most important industrial policy decisions made by the European Union was requiring operators, manufacturers, and administrators to work on a common system. This was the beginning of the Global System for Mobile Communication or GSM. Roaming agreements ensured 24/7 connectivity regardless of where you were.

    Suddenly our local champions were servicing global markets and had all the incentives in the world to innovate. Handsets became smaller, incorporated more functionalities, and became the critical business and personal tools we know today. So the next time you look at your Blackberry or iPhone and marvel at the elegance of its engineering and efficiency, know that without this first regulatory step, it would still be years away.

    Even within healthcare itself we have found the growth of a new industry as a result of regulation. Prior to 1983, pharmaceutical companies had developed only a few treatments for rare diseases, ten in all.

    A rare disease was a disease with a patient population that was deemed too small for a pharmaceutical company to recoup its investments in research and development. As a result, these diseases were underserved, the orphans of drug development. But in 1983, the U.S. Congress passed the Orphan Drug Act (ODA), which was designed to address the issue for orphan disease patients and pharmaceutical companies alike. The ODA contained provisions such as tax incentives, smaller clinical trials, accelerated FDA review, and, crucially, a seven-year market exclusivity once a product was approved.

    Outside of the ODA’s purview, but almost as crucially, it allowed drug developers to set prices that were above and beyond what anyone had ever dreamed, by simply showing payors what a patient’s financial burden was on the healthcare system without treatment. Every dollar below that threshold was a dollar gained.

    All these factors together formed the foundation of the U.S. biotechnology industry. The biotech industry began with the premise that by harnessing the newly acquired knowledge of the structure of DNA, the development of therapeutic proteins would be possible. Since many rare diseases were caused by defects in one gene, no area was better suited to apply the knowledge of DNA than orphan diseases.

    Estimates vary, but there are approximately 5,000 to 8,000 rare diseases caused by one defective or absent gene, and the total number of patients suffering from orphan diseases is a staggering 25 to 30 million. Several of the first biotech companies have become household names: Amgen, Genentech, Biogen, Genzyme. Drugs such as Epogen, Neupogen, and Herceptin were all launched as orphan drugs.

    In conclusion, the ODA constitutes a piece of legislation that has not only brought many important treatments to patients who were previously ignored, but has also functioned as the midwife of an industry that stands for everything that is great and innovative in American entrepreneurship. By defining the orphan drug space as it did, by setting out clear rules, and offering a measure of security, the venture capital industry flocked to finance the plethora of biotech start-ups. The rest of the world has been playing catch-up ever since.

    It is my firm belief that the convergence of molecular diagnostics with therapeutics presents us with a unique opportunity to dramatically improve patients’ lives, while at the same time building a whole new industry segment. It is an opportunity that is equal or perhaps even greater than that of the biotechnology industry.

    By putting in place a sound regulatory framework to foster this convergence, and one that sets high hurdles with respect to patient safety and benefits, U.S. regulators and the industry have a huge incentive to get it right. Because only then will we be able to attract quality capital to help develop this space, make true innovation prosper and fulfill its promise.

    Finally, I think it is not just an opportunity, but an obligation. There’s so much at stake. Let’s regulate. Let’s innovate. Both can be done to ensure patient safety and a thriving diagnostics industry.


Readers' Comments

Posted 02/10/2011 by Esah Ali

Dr. Sixt's point is well taken.  The important gauge to pay attention to would be one that measures when the market suffers due to over-regulation.  However, unlike banking or taxation, my belief is that biotechology becomes more relevant/trusted once it has been thru a thorough vetting process.  It's interesting how the political and economic models have now jumped on the scientific bandwagon and accepted peer-review as part of that same "vetting process".

Posted 11/24/2010 by Dr. Jack Coupal

It's ironic that Dr. Sixt uses California and motor vehicle regulation as an example. There have been many high-tech start-ups in California  because of the climate and availability of talented people. However, the heavy regulations and high taxation in California have driven many of those small firms to transfer their fragile start-up businesses to border states and Texas to escape those very regulations and taxes.

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