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Point of View : 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
  • Bernhard Sixt, Ph.D.

Regulation fosters innovation. This phrase articulates a point of view that many will find inherently contradictory. How can it be that rules allow inventiveness to roam and develop freely? Yet, it is true. Regulation has helped foster major innovations in many industries. For example, the molecular device industry needs regulation to ensure patient safety and, if developed and applied correctly, that regulation will foster major innovation and bring greater investment.

Today, the molecular diagnostics industry finds itself at a specifically critical juncture. In the past, laboratory-developed tests (LDTs) were developed and performed within single institutions. Under the Center for Medicare and Medicaid Services (CMS), the Clinical Laboratory Improvement Act (CLIA) of ’88 became the safeguard of laboratory quality standards, based on the fact that tests are developed and performed within the walls of one institution, for that institution, and focused on ensuring the quality of that specific laboratory.

Commercial companies, however, have expanded this practice, developing and marketing LDTs nationwide in large laboratories, testing patients from many areas. Under the current regulatory framework, they can do this by simply complying with CLIA standards focused on the laboratory. Beyond the increased numbers in testing, the tests themselves have become more complicated and provide greater risk to patients as doctors rely on them to make important therapeutic decisions.

As a result, the FDA began looking at regulating those tests that it deemed no longer intuitive to physicians, due to their underlying technology and algorithms. This led to guidelines for regulation of so-called in vitro diagnostic multivariate index assays.

However, the agency started to recognize that complexity wasn’t the most important factor in LTDs—more important is the “risk” associated with the outcome of the test. For example, the outcome of a relatively one-dimensional test for the expression of the Her2 neu gene in a breast cancer patient decides if the patient is a candidate for Herceptin or not.

Because a major therapeutic decision hinges on the outcome of the test, it’s not its complexity that is important, but its robustness, reliability, and reproducibility. It is on these aspects that the FDA now wants to focus on a more risk-based approach to regulation, acknowledging that many new LDTs have important therapeutic implications. A lab that complies only with CLIA standards is no longer sufficient.

The ensuing debate has many in the laboratory industry pitted against regulation. One of the main arguments offered by the large clinical laboratory community is that regulation stifles innovation. Apart from the fact that concrete examples are painfully lacking, which is a sign in itself, we believe that it is actually the opposite. But, there is another, even more important point: who wants to knowingly champion innovation without transparent and solid rules to safeguard the safety of patients?

Even if the current system of drug development is widely criticized, no one would advocate that industry go without regulations. Similarly, as molecular diagnostics and therapeutics are converging and doctors rely more and more on diagnostics to make lifesaving decisions, we must ensure that LDTs, first and foremost, are providing the most precise information to doctors and patients.

Ensuring patient safety can still provide a platform for innovation which can and has thrived with regulation in place. Take, for instance, the automobile industry. Densely populated Europe needed solutions to cut back on damaging emissions from the glut of cars. However, it was California, the world’s eighth largest economy, that started driving more regulation on car emissions and safety.

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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.