Policy Matters: Key Political and Regulatory Issues Affecting the Biotechnology Industry

Carl B. Feldbaum, President

Good morning, ladies and gentlemen. My name is Carl Feldbaum, and I'm here today to talk about the major political and regulatory forces shaping the biotechnology industry. The impact of those forces is large. Policy matters for this young and fragile industry. As you know, it takes a decade and hundreds of millions of dollars in investment for a biotech company to reach the point at which it can apply for regulatory approval its first product; and even then the prospects are good but not certain, as about one in five products that make it to an NDA or BLA will not win approval, according to the FDA. That biotechnology companies have proliferated and flourished in the U.S. despite such rigorous barriers to market entry is a testament to a consistently supportive regulatory and political ecosystem.

In less than 30 years, we have built a biotech industry in the U.S. that encompasses at least 1,300 companies that employs 174,000 people, that has brought more than 130 new drugs and vaccines to market, and has taken another 350 into late-stage testing. Just how did that happen? Well, first of all, in the 1970s Congress opted not to prohibit or overly restrict the then-nascent technology of recombinant DNA just because it posed ethical challenges and was, yes, a little bit scary. Then as now the debate percolated throughout the political system, into statehouses and sometimes even city council chambers. "God knows what's going to crawl out of the laboratory!" was the cry of the mayor of none other than Cambridge, Massachusetts, where the town council passed a moratorium so that a committee could evaluate the danger Harvard's and MIT's petri dishes might pose to the townspeople.

Despite the rhetorical firebombs of critics who feared we were headed for a brave new world, scientists and regulatory agencies painstakingly worked out the ethical and safety protocols that allowed for the development of dozens of critical medicines and vaccines. So first, for biotechnology to advance, research freedom is essential.

In the early 1980s, a quartet of events at the federal level helped scientists and entrepreneurs translate accelerating academic research in the life sciences into new medicines: The Supreme Court's 1980 Diamond vs. Chakrabarty decision, which assured investors that recombinant organisms would be patentable; the Orphan Drug Act, which stimulated a wave of R&D for rare diseases; and the Bayh-Dole Act of 1984, which helped move federally funded discoveries off the shelf and into private development. Another important piece of legislation that year, the Hatch-Waxman Act, set the terms for generic competition in the pharmaceutical industry.

The results of the positive policy climate set by this legislation have been extraordinary: Again, more than 130 biotech medicines and vaccines have been approved, and approximately 350 additional products are in late-stage development. That packed pipeline is likely to expand further given the recent surge in both public and private investment in biomedical research. This is a Wall Street crowd, so I'm sure you're well aware of the fact that last three years have brought a massive bolus of private investment into the biotechnology industry-somewhere between $60 billion and $70 billion-and despite the cooling of public markets since late 2000, investment is still running at about 1999 and 2001 levels, both of which were very good years for biotechnology.

However, this year's dramatic 30 percent slide in biotech stocks illustrates companies' continuing vulnerability to the vicissitudes of the market. To improve financial stability through the ups and downs of the market, BIO is pushing for a refundable credit for net operating losses resulting from research and development expenses-a credit that would be repaid to the government once a company becomes profitable. Such a credit would in effect extend the benefits of the R&D credit to the companies that need it most-those that can now only carry forward the current credit because they are operating at a loss and therefore owe no taxes.

On the government investment side, the doubling of the NIH budget since 1998, coupled with rising state and regional investment in biomedical research and facilities, is powering an acceleration of basic research whose results will launch biotechnology's next generation of companies through the technology-transfer system set up by the Bayh-Dole Act.

At the state level, incentives to drive the formation of biotechnology centers are now considered as essential as attracting auto plants was to earlier generations of economic development officials. There is intense competition among the states for biotech facilities. Right now, for example, five regions are vying for the headquarters of the International Genomics Consortium -- Phoenix; Atlanta; Montgomery County, Maryland; San Diego; and Houston.

A BIO-commissioned report last year found that 41 states offered biotechnology incentives, and that many are moving beyond the traditional R&D tax credit programs to provide substantial funding for incubator facilities and even for venture capital and grant funds. Michigan, for example, is using its share of the tobacco settlement to devote $50 million per year to life-science research, commercialization and development projects.

Of course, the most important measure of this industry's success is not the amount of money flowing into it, or the number of states joining the competitive fray, but the number of new medications and vaccines we bring to patients. In 2001, the FDA approved 16 new biotechnology-based products, and this year has brought additional important approvals: the first-ever approval of an effective therapy for psoriatic arthritis (Enbrel, in a supplemental indication), approval of a second-generation blood-boosting product for reducing infection in chemotherapy patients, and approval of a radiolabeled antibody for non-Hodgkin's lymphoma.

But the pace has noticeably slowed over the last two years, and we are well off the rate of approvals for new biotech products we were getting used to in the late 1990s. Despite the important reforms of the FDA Modernization Act and the substantial improvements wrought by 10 years of the Prescription Drug User Fee Act, the agency is once again becoming a chokepoint in the development pipeline. In fact biotechnology and pharmaceutical executives are beginning to break a longstanding taboo against agency criticism and voice serious concerns, even in public, about the slowdown at the FDA-which is affecting every stage of clinical development, not just reviews of approval applications-and the ongoing lack of an FDA commissioner. That position has been vacant since early 2001, and filling it has become one of BIO members' top political goals.

The FDA needs a compelling spokesperson to act as an advocate for the agency with the public, the media, Congress and the White House-especially the Office of Management and Budget. Since the enactment of the original PDUFA law in 1992, the NIH budget has tripled, while the portion of the drug review budget not financed by user fees has stagnated. Our nation is funding fundamental biomedical research at unprecedented levels, but starving the agency that handles the other end of the pipeline, where products are developed and, ideally, are approved to benefit patients. Without additional funding, the FDA will be unprepared to handle the flood of new products expected to enter and emerge from that pipeline in the coming decade.

Indeed, the volume combined with the complexity of the science behind biotech products, requires a creative commissioner who can ensure the FDA expands its review capacity, attracts new scientific talent, and forges stronger ties with academic health centers and the NIH.

Despite the obvious need for leadership, the political difficulties of finding a suitable candidate are obvious with a Democrat-controlled Senate and a socially conservative Republican president.

White House officials have indicated to BIO that commissioner candidates should have an M.D. or Ph.D. degree, "cultural change" experience within a life-sciences organization, and first-hand experience with therapeutic drugs or medical devices. They also are seeking a social conservative who favors free-market policies. An industry executive is a possibility, they say, provided he or she has academic, nonprofit or government experience.

But Senator Edward Kennedy, who will chair confirmation hearings, insists that industry experience represents a conflict of interest. Clearly, both sides will have to moderate their positions if a qualified candidate is to emerge in the near future. If you add up all of the qualifications and restrictions that have been applied to this position, the entire population of planet Earth is disqualified.

BIO's other top FDA issue this year has been the renewal of PDUFA, which is slated to expire September 30. We've negotiated with the FDA and PhRMA fee increases that will help alleviate the immediate resource crunch at the agency, as well as provisions that will aid companies developing new products. Our companies, for example, will gain the right to call for an independent consultant to help settle disputes about the design of pivotal Phase III trial protocols. BIO pushed hard for this measure at the behest of our emerging-company members, many of which are developing first-in-class products that, as you know, too frequently suffer costly late-stage setbacks on the road to approval.

Our health policy efforts are now shifting to Medicare prescription drug coverage, which is fast rising to the top of the congressional agenda. Mitch Sayare, the CEO of ImmunoGen, testified on BIO's behalf at a Ways and Means Medicare hearing on April 17th, and in the Senate a major bipartisan bill is being drafted for debate this summer. We could see the House actually vote on a bill by June. The structure of such a benefit obviously will have a huge impact on health care generally, and especially on the biotechnology industry, both because the bulk of our products in development address diseases associated with aging and because our industry is so dependent on capital markets, which are easily spooked by the specter of price controls. Some of you may recall the effects of the Clinton health reform plan, which deflated stock prices and investor interest in the sector for over a year, delaying dozens of important projects.

Memories of that saga remain fresh for our industry's executives, who helped BIO develop a set of six core Medicare drug coverage principles back in 1999 when President Clinton brought this issue to the forefront. Our principles stress solutions that rely on the private marketplace and competition, that support continuing innovation, and that provide stop-loss coverage for those whose expenses would be catastrophic. We are encouraged by the fact that the leading House bill embraces these principles.

There's no doubt that a Medicare prescription drug plan will eventually pass and be signed into law. Both political parties, as well as the public and the biotech and pharmaceutical industries, recognize this 1965 program has to be overhauled to accommodate pharmaceutical-based 21st century medicine.

Clinical trial reform is another emerging issue on Capitol Hill, and contrary to the conventional wisdom about trade associations, we support reform. BIO has developed a set of key principles aimed at fostering consistency between states, improving the institutional review board system, and promoting disclosure of potential investigator conflicts of interests.

Such measures would benefit all concerned -- investigators, sponsors and patients. True, safety lapses are exceedingly rare in a system that handles 20 million patients a year, but they are tragic and the consequences of those lapses on medical research can be tremendous. Two years ago, the federal government took a very hard look at gene therapy trials because of one death, and last year the NIH suspended publicly funded research at Johns Hopkins following the death of a healthy volunteer. Reform of the trial oversight system has become inevitable and, in fact, it is desirable for our industry, whose future rides on maintaining public trust that the benefits of participating in trials outweigh the risks.

Another reform movement is afoot in Congress, this one in blind reaction to the Enron scandal, which has given momentum to potentially destructive legislation that would require companies to either pay taxes on stock options or list them as expenses. The legislation does nothing to foster transparency, since stock options are already detailed in SEC filings, but would decimate the system by which companies reward scientists, administrative and other employees for their loyalty and sweat equity on the long march to profitability. As BIO and other organizations representing high-tech, entrepreneurial industries have noted, by including the estimated value of stock options in profit-and-loss statements, the legislation would actually increase the uncertainty of financial statements-ironically making it more difficult than it is now for investors to compare similar companies. We'll win this eventually, once its real impact is appreciated.

And finally, I'm sure you've heard about our other leading legislative issue this spring, an issue that raises complex ethical concerns: cloning. The House last summer passed a ban that encompassed both reproductive and therapeutic cloning, and the Senate has been deadlocked on the issue through much of the winter and spring. But we think Orrin Hatch's decision last week to support therapeutic applications of cloning as "pro life and pro-family" research was a turning point. He now supports-as does BIO-a bill that would outlaw human reproductive cloning, but allow therapeutic research using somatic cell nuclear transfer.

This has been a difficult issue for us politically, but the CEOs on BIO's executive committee and board of directors were adamant that we had to be on the front line for research freedom, even though the economic impact of cloning technology on the industry is negligible. In fact, not one of the CEOs on BIO's board of directors heads a company engaged in embryonic stem cell research. However, many of our CEOs are scientists, and they have reached the conclusion-shared by so many of their academic colleagues-that therapeutic research using nuclear transfer is ethical, medically important and must not be banned. Many of those CEOs head companies whose products are based on recombinant DNA-a technology that 25 years ago was as controversial as therapeutic cloning is today, and indeed recombinant methods remain controversial in the agricultural sphere.

Although I've focused today on legislative and regulatory issues, the courts ultimately interpret our nation's laws and regulations in decisions that can have a profound impact, not just on the economics of our industry, but on society at large. Most trade associations only work with the first two branches of government, the Legislative and Executive, but we have come to deal with the Judiciary too. Since few judges have a strong scientific background, Supreme Court Justice Stephen Breyer has called for an "ongoing conversation" among the biotechnology industry, scientists, legal scholars and judges about life-sciences research and its legal dimension.

We've heeded Breyer's call by spearheading The Biojudiciary Project, which will be launched officially on May 21st at the National Press Club. In collaboration with Ernst & Young, the Foundation for Genetic Medicine and two leading Washington law firms, Arnold & Palmer and Ropes & Gray, we've developed an online primer for judges describing federal law pertaining to biotechnology, with discussions of relevant cases-and links to them-as well as an annotated scientific glossary.

The venue of the National Press Club is important, because the media is of course the fourth estate in our government. On any given morning, almost 40 percent of the nation's major daily newspapers run at least one story pertaining to biotechnology. A couple of weeks ago, William Kristol sent me a letter demanding to know if BIO supports patenting of cloned embryos (and of course we don't). The president himself has raised the specters of embryo farms and human life as a commodity.

Thankfully, we have spent years earning our reputation as hard-working scientists and entrepreneurs seeking to benefit humanity, and we have worked through many bioethical dilemmas before they became front-page news. We've also consistently communicated the benefits of our industry's research to the public: A wave of new drugs and vaccines that have helped more than 250 million people-including many whose diseases were previously untreatable-with hundreds more products in the pipeline to address more than 200 disorders, ranging from rare diseases to heart disease, cancer and neurodegenerative diseases that afflict millions.

We did all this in preparation for the day when this once-exotic industry entered the mainstream of public consciousness. That day has arrived. The media and the public are eager to learn about our breakthroughs in the lab, on the farm and in the clinic, and to ponder their implications. They want to know how we're going to bring the benefits of biotechnology to those most in need, how we're managing risks and benefits in clinical trials and protecting patient privacy, how we're balancing the profit motive with altruism, and where scientists will draw ethical boundaries. These are not issues to which our CEOs can devote a lot of time-preoccupied as they are with the dizzying pace of scientific research, clinical development and investor courtship-but they are issues that will have profound consequences for our industry 10, 20 years down the road.

We are in this room today as a result of the decision to allow recombinant DNA research to move forward in the 1970s, the legislation of the early 1980s, and the Diamond vs. Chakrabarty decision, and-perhaps most important-avid public support for life-sciences and biomedical research. You better believe policy matters.