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Letís talk about stagnovation
As we approach the year-end holidays, 2013 has clearly been a very disappointing year for support of life-science innovation. Many of us in early-stage companies are camped in the valley of funding death. Capital has continued to flow most enthusiastically to markets unfettered by regulatory frictions and those not yet impacted by “affordable” reforms exemplified by taxes on medical device revenues and the price controls that do not support the cost of providing a service. The country has been without experienced leadership for five years. We continue to be in a spiritual recession in life sciences as pharmaceutical firms reduce headcounts by tens of thousands with hospital systems now joining in with like numbers. It’s ironic that providing healthcare benefits for these employees becomes one reason to have fewer of them. Academic life-science research spending has been sequestered, cutting thousands of NIH grants a little and many hundreds by 100 percent, given that they could not be funded at all. This reality threatens to delay promising peer-reviewed research and perhaps redirect the careers of very capable life scientists to other fields. They are unlikely to come back. Will we get to sensible budget reconciliation in early 2014? I’ve not met anyone who is optimistic.
I’ve invented a new word, stagnovation, a portmanteau of stagnation and innovation, suggesting a period where innovation is frozen by an uncertain future that disincentivizes success, reducing trying. In talking to potential life-science investors these days, the primary concerns are expressed in questions such as these: “Reimbursement?” “What are the chances with the FDA?” “How will this reduce cost?” “How long will it take to get to positive cash flow?”
These no doubt are appropriate questions and we must answer them. But given alternatives with more certainty, capital becomes impatient and runs away, leaving the suffering patients waiting.
The stress on academic grants and funding startups has no doubt engendered some thinking. As I like to say, nothing sharpens the mind more than a lack of money and dulls it more than too much. Pharma now has a renewed interest in academic research and vice-versa. Post WWII, Vannevar Bush, director of the U.S. Office of Scientific Research and Development during the war, provided his report on Science–The Endless Frontier. This defined his 1945 recommendations on sustaining the research enterprise that so successfully and quickly advanced technology during the war, from radar to penicillin. Bush espoused an approach that was not supported by his own experience, but was nevertheless widely accepted. His approach was linear, suggesting that applications came downstream from “basic research” that was driven by curiosity and nothing more. This appealed to academics, wanting to ensure their purity and separation from commerce. A half-century later, in 1997, Pasteur’s Quadrant by Donald E. Stokes was published. Stokes took issue with Bush’s simplistic linear notions as having rationalized poor public policy. He noted that research can be simultaneously motivated by fundamental understanding (basic) and considerations of use (applied). Stokes replaced the Bush timeline with Cartesian coordinates having the understanding motive on the y-axis vs. the application motive on the x-axis. He provides a number of compelling examples and uses Pasteur as the metaphor for the combinatorial motivation (upper right quadrant), Bohr for a pure research motive (upper-left quadrant) and Edison to represent research motivated by application only (lower-right quadrant). This way of thinking fits the renewed engagement of pharma and the academy and the still-developing notions of translational research at NIH. For those interested in these thoughts, searching the internet for “Vannevar Bush” and “Pasteur’s Quadrangle” will bring rich rewards.
There has been some good news with the stock market this year, and more life-science firms have been able to go public. There also has been considerable buzz about the potential of crowdsourcing and other means to encourage private investment (like risk-taking) in young firms. Unfortunately, what often sounds very promising is typically encumbered by regulations on who can invest and how they can prove themselves worthy of the honor. On the contrary, there are no such restrictions on who can purchase lottery tickets, putting assets at risk to support government. We need to work harder on ways to attract small amounts of capital to medical innovation without so much of it flowing to the legal profession. This then is yet another regulatory friction on innovation.
Doris Kearns Goodwin has released a well-referenced and enthusiastically reviewed book on Theodore Roosevelt, one of my several heroes (The Bully Pulpit: Theodore Roosevelt, William Howard Taft and the Golden Age of Journalism, Simon & Schuster). This one is on my holiday list. Teddy got it right with his enthusiasms. Government was needed to tone down unfettered capitalism with the Food and Drug Act (1906). Teddy also reined in the monopoly power of industrialists and bankers, while expanding our national parks. Today, he’d neither be pleased nor surprised that the regulations his team got started have evolved to cripple decision-making, focusing on risk more than opportunity. You can be sure he’d bring a few R’s and D’s over to the White House for a little talk and banging of heads. Then we’d get some results to support R&D, pointing out to the “American people” that total federal medical research expenditures are just a bit over 1 percent of the budget. That would be a bully good day.