January 1, 2007 (Vol. 27, No. 1)

Blue Dog Democrats and Republicans Take on Stem Cells, Generics, and Price

Industrial Biotech

Industrial biotech also is likely to prosper, given the impetus to develop biobased fuels. U.S. automakers are interested in increasing the supply of alternative-fuel vehicles, provided they have a guarantee of adequate fuel supplies. BIO says ethanol production in the U.S. is creating concerns about pressures on the food and feed supplies. By November, corn commodities were up 44% from the previous three months and agricultural futures were at record highs at the Chicago Board of Trade.

Jane Rissler, Ph.D., senior scientist at the Union for Concerned Scientists, says there is opportunity in bioenergy. Her group advocates “a fresh look at the regulatory framework,” although the biotech industry shouldn’t expect any favors from the Union of Concerned Scientists. Dr. Rissler’s mantra was “so much can be done without biotech.”

“The one thing that is critical for biotech to continue to advance is funding for basic research,” Hisey says, citing it as the driver for product innovation. There may be some support for increased funding for the NIH, Joseph speculated.

“Several messages were clear in this last election,” Caldwell says. “Americans want the U.S. to maintain our lead in biotech. Congress—Democrats and Republicans alike—recognize that we are an economy with a value-added workforce. They are very cognizant of the need to stimulate new technology.”

As part of that stimulus, the Democrats’ plan to increase scholarships to train the next generation of scientists, engineers, and mathematicians and to create a new visa category for doctoral and post-doctoral scholars to make it easier to attract foreign scholars.

In the opening days of Democrats’ control of both houses of the U.S. Congress, the question of whether they are friend or foe of biotech will be answered.

But friend or foe may be too definitive for this new Congress, just as biotech may be too ill-defined. The new legislative environment will be challenging, according to BIO spokesman Jeff Joseph. The fact is that there are winners and losers within the same industry, and the tenor of the new Congress depends upon many factors beyond the Democrats’ stated agenda.

First, President Bush is unlikely to compromise his core values. He is, however, likely to compromise on some issues, as evidenced by his history as a Republican Texas governor who worked successfully—both parties say—with a democratic legislature.

Second, those Democrats elected during the mid-term elections tend to be from the moderate wing of the Democratic Party, making a total of 54 what are called Blue Dog Democrats. We saw the first effects of this moderate group when they elected Steny Hoyer (D-MD) rather than Representative Nancy Pelosi’s (D-CA) favorite, John Murtha (D-PA), as Senate Majority Leader. Representative Pelosi was elected by the Democrats to be Speaker of the House, pending a vote of the full House of Representatives when it convenes in January.

According to former Speaker of the House Newt Gingrich, writing in an open memorandum to House Republicans dated November 15, the Blue Dog Democrats and the Republicans “should be able to find a handful of key things to work on together.” On some issues, those two groups can form a coalition that results in an effective backbench majority, like that of the Reagan Republicans and conservative Democrats in 1981.

Embryonic Stem Cells

That said, embryonic stem cell supporters are the acknowledged winners. Speaker of the House Pelosi earmarked this as one of her primary issues, striving to pass legislation in the new Congress’ first 100 legislative hours. Representative Pelosi’s spokesman, Drew Hammill, says the proposal will be based upon legislation passed by Congress last July and vetoed by President Bush.

Amidst speculation that it may be vetoed again, Republican sources on Capitol Hill privately say they have no reason to believe the President will change his stance. William M. Caldwell, IV, chairman and CEO of Advanced Cell Technology (www.advancedcell.com), suggests that what has been learned in the six years since the ban on federal funding for embryonic stem cells may effect the outcome. “We’ll see a move to make more cell lines available for basic research,” he predicts, particularly since the 21 lines (not the 60 President Bush expected) were “all contaminated with mouse feeders and, therefore, not fit for actual research and development.”

The real question, according to Richard Hisey, U.S. managing principle and life sciences leader for Deloitte Consulting (www.deloitte.com), is the level of support for embryonic stem cell research.

If the bills are passed into law, Caldwell says they will spur basic research at the university level and early-stage venture capital, which generally avoids political risks.


In contrast to those prospective bright spots, the outlook for pharmaceutical developers seems dour. Regardless of who controls Congress, some $40 billion worth of medications are going off patent in the U.S. in the next few years, and $60 billion are going off patent globally in that time frame.

“That $40 billion of branded sales will be turned into about $5 billion of generic sales,” Hisey says. “There’s $30 to 35 billion of gross margins that are no longer available for reinvestment. Conservatively, it takes about $1 billion to bring a drug to market, so that’s at least 30 therapies per year that won’t see the light of day.”

To compound the woes, “Blockbuster drugs aren’t being replaced by other blockbusters,” Hisey continues. Drugs need significant clinical benefits to persuade physicians and third-party payers to use them, and many of the new drugs don’t offer significant improvements. Consequently, prescribers are holding them in abeyance to ensure they have a loaded arsenal to combat the growing bioresistance to existing therapies.


In surveys conducted mid-year by The Tarrance Group and PhRMA, likely voters listed affordable healthcare as their primary healthcare concern.

The Association for the Advancement of Retired Persons (AARP) plans to push the new Congress to address measures to make drugs and healthcare coverage more affordable. Political pressure on that point is expected to be strong.

In this environment, the new Democrat-controlled Congress plans to allow Medicare to negotiate prices with drug companies. Hammill says he doesn’t know how that will affect biotech and pharma companies. But, because the secretary of the U.S. Department of Health and Human Services will have the authority to negotiate prices, he speculates that “it will give them one large customer versus many different customers and may make it easier.”

“No matter how we view the recent electoral developments, we cannot cast the results as anything other than materially deleterious to these companies,” Stock analyst Dennis Gartman, Daily Wealth.com, casts big pharma as the “big loser” in the new legislative environment.

From BIO’s vantage point, there are two major concerns if Medicare negotiates drug prices.

“This is the precursor to what will become price control,” Joseph says. Because Medicare prescriptions account for approximately one-half of the medication sales in the U.S., such control could lead to an artificial market. Additionally, Joseph says, “There are no incentives to push drug development.”

As the influence of Medicare-direct negotiations push prices down, willingness to invest in biotech stocks may wane, based upon their perceived risks, beginning a cascade that limits funding, drug development, and, ultimately, consumer choice.

The ultimate effect depends upon how the negotiations are handled. If Medicare prescriptions are negotiated as a bundle, Gartman may be on the mark. Originally, Medicare Part D offered a meaningful drug benefit in which the people chose the plans that best fit their needs. That strategy was not to allow direct negotiation but to allow market forces to work.

The AARP, which carefully monitors the legislative agenda, also sees plans to address perceived holes in the Medicare prescription drug benefit and allow reimportation of prescription drugs from Canada as high on the agenda.

Until the election results were in, reimportation was no longer an issue because of the success in Medicare Part D in bringing an affordable drug benefit to about 40 million people. Representative Pelosi’s office confirms that it’s not on the agenda for the first 100 hours. Nonetheless, Credit Suisse lists drug reimportation as a distinct possibility and one of six key threats to America’s pharmaceutical industry

In November there were rumblings that another presumed dead plan might resurface in the form of Senator Hilary Clinton’s (D-NY) failed universal healthcare plan. A health insurance trade group, America’s Health Insurance Plans, proposed a universal coverage plan to provide subsidies for working families to buy medical coverage, support state health reform efforts, and expand public health programs at a 10-year cost of some $300 billion. Other plans are likely to be introduced as the legislative agenda matures.

Nearly 20% of respondents to The Tarrance Group and PhRMA surveys listed universal health coverage or coverage for the uninsured as one of their top healthcare concerns.

About the same time, Senator Edward Kennedy (D-MA) convened a drug safety hearing, claiming that the FDA allowed politics to dominate science. FDA oversight hearings are planned for early 2007.

While there’s general agreement that the FDA is underfunded and understaffed, there are fears that moves to strengthen FDA’s safety record would slow the introduction of life-saving drugs, as well as concerns about how the costs of conducting any post-commercialization safety studies required by Senator Kennedy’s proposal would be shared.

This new Congress also is considered likely to move on follow-on biologics. With the effort to create a pathway for generic biologics, the trick is to distinguish between traditional generics and follow-ons, which have different science and are difficult to replicate.

Many biotech companies, like Roche (www.roche.com), are keeping their speculations to themselves for now. “It’s too soon to tell what will happen,” spokesman Darien Wilson says. At this point, “we’re leaving it to the trade associations to monitor.”

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