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Reinventing Health Care, Drug Development, and the FDA

January 2005

STANFORD GRADUATE SCHOOL OF BUSINESS—Continued resurgence and growth in the biotech industry depends on transforming health care policy, drug development, and the Food and Drug Administration (FDA), speakers told the sixth annual Health Care and Biotech Symposium, held at the Stanford Graduate School of Business.

The daylong conference, held January 26, was organized by the student Stanford Health Care Club. Titled "5 by 20: Five Ideas That Will Revolutionize Health Care by 2020," the conference drew a diverse audience of more than 250, including students from the Stanford schools of Business, Medicine, and Law, as well as alumni, investors, other business leaders, and the public.

Idea #1: Revamping the FDA and Clinical Trials

Donald Kennedy
Kennedy

Belated bad news about blockbuster drugs such as Vioxx and Celebrex has rocked the FDA and eroded public trust in government and the pharmaceutical industry. "We have no reliable system in the U.S. for detecting adverse drug reactions," said keynote speaker Donald Kennedy. Former president of Stanford, Kennedy served as commissioner of the FDA in the 1970s.

The FDA urges doctors to report adverse drug reactions voluntarily but requires companies to report problems they learn of during post-approval marketing. Busy doctors tend to underreport but companies are "doing reasonably well," Kennedy said. "But at the end of the day … we just don't know enough soon enough." He cited systems in other countries such as England and New Zealand as "decisively better than ours."

Clinical trials—and the reporting or underreporting of results—are another aspect of the bad news problem at the FDA. "The big fuss has come with the revelation that there are some clinical trials with negative outcomes that go unreported and are inaccessible to the public," said Kennedy, who currently is editor of the journal Science. "I think that's unfortunate, and so do editors of leading medical journals." The International Consortium of Medical Journal Editors (ICMJE) recently announced that they will not publish research articles reporting the results of a clinical trial unless that trial is registered in a publicly accessible forum before enrollment begins. Registering the trials would make public information about trial design and primary and secondary endpoints, which many companies consider proprietary. "The registry that everyone thinks is the right one is www.clinicaltrials.gov, which is maintained by the National Institutes of Health," Kennedy said. This issue is being debated in Congress, he noted, and the pending legislation "looks tougher than the editors' requirement, but nobody knows what the outcome will be."

Institutional Review Boards (IRBs) at hospitals and universities also can require as a condition of approval that sponsors of a trial agree to register it in a publicly accessible forum. "If that happens, if IRBs get together, journal editors get together, and we get a registry that shows all results, positive and negative, of all clinical trials, that will produce a very different picture," Kennedy explained. "It will avoid something that statisticians refer to as 'the file drawer problem,' which means that negative results go unpublished and remain buried somewhere in a file drawer." Both journal editors and companies tend to publish only reports of positive results and consider negative results less interesting and not publishable. However, statisticians consider this biased sampling.

Clearly, the FDA is ripe for reform, and Kennedy predicts "dramatic announcements from FDA and Health and Human Services. I don't know what they will be, but the pressure is sufficient to introduce substantial organizational reforms. The deep question is whether these will, in the long run, benefit consumers, benefit the course of innovation being conducted so valuably by many of the people in this room, and benefit the public."

Idea #2: Faster, Better, Cheaper Drug Development

Philip Pizzo
Pizzo

Philip Pizzo, dean of Stanford's School of Medicine, asked a panel of biotech CEOs why it costs more than $1.2 billion to develop a drug and how biotechnology can reduce that cost. "The main reason drug development is expensive is that it's so unproductive," said James Sabry, CEO of Cytokinetics. "The chance of finding a drug is small. The chance of finding an innovative drug is smaller. We're developing drugs like we did 10 or 20 years ago when outcomes were hard to predict."

Better prediction, not only of potential benefits of new drugs but also of potential harm, remains an unfulfilled promise of biotechnology. Using pharmacogenomics to identify biomarkers that have true predictive value would shorten development time, panelists agreed. So would focusing more resources on larger Phase 1 trials to maximize the collection of biological information early on.

Focusing on smaller markets with unmet medical needs also can reduce costs. "What it costs you to reach the key decision makers—those who treat cancer—is much less than trying to reach a broader general market," explained William Ringo, CEO of Abgenix. "Oncology is an example of lower-than-blockbuster cost of reaching a market."

During product development, companies must evaluate not only safety and efficacy but the changing marketplace and whether a product will be competitive. "We can't compete commercially with a company that has two or three thousand sales representatives, so our product must have some clear distinguishing characteristics," said Ringo. "And it is absolutely critical that we create an image in the eyes of the public of adding value to lives."

The panel also talked about price and the fact that the U.S. investment in drug development is actually subsidizing low prices in other countries such as Canada. "The little secret was that big pharma made pacts with other industrialized countries to not have them pay [for research and development] because sales to those countries get manufacturing up and increase profits," explained Corey Goodman, CEO of Renovis. Thanks to public Internet access, that arrangement has unraveled, opening the need for discussions of R&D cost-sharing by those countries that can afford to pay more.

While big pharma churns out me-too drugs and searches for blockbusters, biotech continues to innovate. As Mark McDade, CEO of Protein Design Labs, explained: "Small companies are the new engines for productivity. There's a shift in where innovation can best occur. We can apply better skills—whether it's better leadership, or university teamwork, or opening up communications in organizations that might have silos—those are the types of improvements that managers can do within the life science industry."

Innovation is paying off as the number of successful biotech products grows. "Last year, the number of new chemical entities that entered the marketplace from biotech eclipsed that of big pharma," Sabry said. "And the trend is not just a one-year blip. It's one of the most robust business trends in the life sciences sector and it comes from the ability to take risks. Companies with the ability to take those risks will develop innovative products and those products will change the outcome, not just for shareholders but for patients."

Idea #3: Controlling Health Care Costs and Improving Access

In the United States, health care costs now exceed 15 percent of the gross domestic product. Health insurance premiums continue to rise faster than salaries. At Stanford, for example, the least expensive health insurance plan costs about $10,000 per family per year. More than 45 million Americans are uninsured.

Even as costs rise, the quality of care suffers. According to an Institute of Medicine report, each year an estimated 100,000 people die from medical errors in hospitals.

Although there is widespread agreement that America's health care system is broken, opinions differ on how to fix it. Participants heard two approaches that shared only one common view: that consumers must have "more skin in the game," that is, consumers must be responsible for more of their own health care expenses. That would make consumers more cost conscious and less likely to overuse services, the panelists said.

The two approaches presented were consumer-directed health care and consumer choice with managed competition. Daniel Kessler, a professor of economics, law, and policy at the Business School and a senior fellow at the Hoover Institution, discussed consumer-directed care, essentially a private-sector plan that would eliminate employer-paid health insurance. Instead of paying for health insurance, employers would compensate employees with higher wages.

Kessler and colleagues have developed a five-step plan to reduce health care costs: tax reform, insurance reform, malpractice reform, expanded health information, and expanded control of anticompetitive behavior. He described potential benefits of the first three steps. "Tax reform would make all health expenditures fully deductible for people who have at least catastrophic insurance coverage and offer a refundable tax credit to those too poor to pay federal income tax." Insurance reform would make individual and small group insurance plans subject to federal regulation, rather than state regulation. Malpractice reform would set "reasonable caps" on punitive damages and decrease the practice of defensive medicine that results from fear of litigation.

Alain Enthoven, the Business School's Marriner S. Eccles Professor of Public and Private Management, Emeritus, sees consumer-directed care as ineffective over the long term in controlling health care costs. "It's really open-ended fee-for-service. Once you exceed your deductible, you're in fee-for-service. The problem is that the Institute of Medicine has shown that fee-for-service motivates overuse of costly procedures."

Enthoven offered a different approach: consumer choice, based on managed competition that creates a level playing field. As a model he cited Stanford, which lets faculty and staff choose among a consumer-directed plan, a preferred provider plan, or one of three health maintenance organizations, or HMOs. "Once a year the benefits office offers a side-by-side comparison of benefits as a way of preventing companies from playing games with consumers," Enthoven said. He added that managed competition at Stanford has led to a migration away from the first two options; three-fourths of faculty and staff are enrolled in HMOs.

To avoid penalizing the chronically ill, Enthoven advocates risk adjustment of premiums. "The technology exists to scan medical records, particularly pharmacy records, and translate that into expected medical costs for the next year." People with high costs can receive compensatory payments to offset this additional burden, he proposes.

Enthoven maintains that consumer choice results in "high quality, cost-effective integrated delivery systems where physicians take responsibility for managing the quality of the product. They work together as teams and share information." Consumer choice programs also emphasize prevention of illness and disease. "These programs have pioneered in early detection of problems, smoking cessation, wearing seat belts, controlling weight, whereas consumer-directed care doesn't cover preventive services."

Getting employers to adopt a consumer choice approach similar to the Stanford model may be difficult. "Most employers don't offer choices," Enthoven said. "It's easier for employers to offer high deductibles than to offer a range of choices, which makes the system fundamentally dysfunctional. Employers are focused on the short term—this quarter—but they need to take a longer view."

Idea # 4 Revolutionary Technologies

What will be the next "big things" to revolutionize the industry and health care over the next 15 years? Stefanos Zenios, associate professor of operations, information, and technology, posed this question to a panel of experts from industry, medicine, and venture capital.

Some of the most important breakthroughs may be evolutionary rather than revolutionary—smarter, thoughtful application of existing technologies, according to Sharon Tetlow, MBA '86, healthcare venture partner with Apax Partners: "Developing new biomarkers and learning to better target treatments, for example."

Thomas Krummel, chair of the Department of Surgery at Stanford's School of Medicine, agreed. "Application of what we can do now is most likely to be the most useful. Ubiquitous computing, for example. Information on demand anywhere in hospitals. It embodies rational health care. And it will be just as revolutionary as indoor plumbing or electricity was when they were installed in our hospitals at the beginning of this past century."

The Internet will continue to transform biotech and health care, predicted Alpheus Bingham, vice president of strategy for Lilly Research Laboratories, Eli Lilly and Co. "We're just seeing the first steps. By linking human minds, the Internet has enormous potential for transformation."

Creating more clinically relevant delivery systems for existing molecules will remain an important application, said Mona Haynes, marketing director for Alkermes. Naltrexone, a drug used for alcohol dependence, was originally a pill to be taken daily; Alkermes created a once-a-month injectable form of the drug called Vivitrex. "We also partnered with Johnson & Johnson to reengineer a schizophrenia drug [risperidone] originally in pill form. Now it's an every-two-week injection called Risperdal Consta."

Clinical need for new drugs and devices also will drive innovation. Krummel told the story of the development of the pulse oximeter to measure oxygen content in the blood. "At one time in the U.S., five patients died every day because doctors didn't know the blood oxygen levels. And every day, the anesthesiologist in charge of the project would ask: 'Have you got it solved yet? Five more people died today!'" Clinical need also motivates investors. "Frankly, I would have trouble investing in biotech without a clear clinical need," Tetlow said.

Universities play an essential role in biotechnology innovation. Tetlow calls them FTFIO-first to figure it out. "The university is where really smart people innovate, and then biotech turns innovation into product."

Idea #5: Consolidation for Leadership in Biotech

William Rastetter
Rastetter

Not every successful merger grows from a patent dispute, but that's how the third largest biotech company was created in 2003. William Rastetter, executive chairman of Biogen Idec, described how the two successful companies merged. It began with the two CEOs, who saw that the two firms were complementary rather than redundant in culture, mission, and product. Focusing on values, organizational principles, and decision forums, the planning group carved out major roles for both management teams in the new entity. Results of this synergy included a more diverse product line in oncology and immunology, and more robust resources for R&D, which created a powerful engine for innovation, discovery, and excellence. After outlining the process and detailing the outcome, Rastetter cautioned, "You can do all the process steps perfectly but if you don't get the people part right, forget it."

Two comments from the audience highlighted the quality and importance of this forum. The first came from Nok Anulomsombut, a member of the MBA Class of 2006 from Thailand: "For a person like me who knows little about health care, they made things easy to understand. I also had an opportunity to interact with health care leaders and learn about industry trends and challenges."

The second comment came from Stanford alumna Melanie Mahtani (PhD '94, genetics), vice president for business development and scientific collaborations at Genospectra.

"As a doctoral student, I was always inspired by Donald Kennedy and his leadership. His experience at FDA and now as editor-in-chief of Science offered a remarkable introduction to FDA issues and the changing face of clinical trials. I was also impressed by Alain Enthoven, who brought incredible historical experience in public policy at the federal level and at Stanford to the discussion of making health care more inexpensive and more accessible. It's very rare and fortunate for us to see people with such a huge breadth of experience still engaged in public policy and continuing to contribute their opinions."

—Nancy Evans

Stanford GSB News

Reinventing Health Care, Drug Development, and the FDA

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