Conversation with Patrick Lee
Principal, Healthcare team, Palo Alto Investors, an investment firm focused on venture capital and public-equity investing
“The pullback of venture capital investing in healthcare has been breathtaking. On the drug approval front, we see costs and uncertainty on the rise. It’s like playing football in a game where the end zone keeps getting moved back 10, 20, 30 yards. You think you’re there, but you’re not.”
Patrick Lee, who is also a practicing radiologist, tells a cautionary tale about shrinking investments in medical innovation. He argues that investors are unnerved by the politically charged environment around reimbursement changes and healthcare reform. He explains that the ever-changing nature of the drug-approval process stifles the kinds of investment that take 10-15 years to experience a return. He warns that without change from Washington, U.S. leadership in this area may be lost.
How did you get involved in this field?
In medical school, I found myself fascinated by clinical practice and outcomes research. But frankly, none of it brought about medical innovation fast enough for me. I found the investment industry a great place to combine all my interests. Now I get to help drive medical innovation.
Is the U.S. the hotbed of medical innovation?
Definitely. From a broad perspective, most economies of the world tend to fall into three buckets. There are emerging markets, which are based on low cost labor and commodities. There are economies modeled after European countries, which have more of a socialist-type system. They primarily consume healthcare. Then there’s the U.S. Innovation is in our DNA. It’s ours to lose.
By most accounts, medical innovation in the U.S. is in trouble. Agree?
Increased healthcare regulations are making it tougher to innovate here compared to 20 years ago. In drug research, the number of requirements for drug approval have gone up tremendously, which also increases the cost. People say it now costs a billion dollars to get the average drug to market. This is partially because of inefficiencies in the research model. But it’s also partly due to regulatory requirements.
Can we regain our leadership position?
The right resources are here in terms of people, intellectual capital, and experience. And we have the heritage of innovation. What we need to do on the regulatory front is to find a better balance between ensuring patient safety and fostering innovation.
Tell me a bit more about your view on the regulatory environment.
Patient safety should always come first, but when there is political pressure on regulatory agencies, they tend to increase regulatory requirements which significantly increases the cost of drug development. This may be appropriate for some therapies, but in areas of unmet medical need, an appropriate balance should be considered. There are good people in the FDA trying to do their best to serve the public interest. But as a small biotech, the requirements can become overwhelming. The net outcome is not only lost innovation, but also increased healthcare costs. It’s a cycle. The question is: what is appropriate risk benefit for new therapies?
What’s the connection between healthcare, innovation, and jobs?
Innovation definitely creates great, high-paying jobs in scientific research. We’ve seen increases in jobs in healthcare over all. But I’d argue that we’ve seen a decline in innovative jobs in new ventures. We could prevent that decline by providing incentives for companies to innovate.
What are investor attitudes toward healthcare innovation right now?
The trend right now is fear. The pullback of venture capital investing in healthcare has been breathtaking. On the drug approval front, we see costs and uncertainty all on the rise. It’s like playing football in a game that the end zone keeps getting moved back 10, 20, 30 yards.
We also feel pressure on the intellectual property side. Investors need assurance that when they get to market, they can make a reasonable return. On price controls and re-importation, people have to remember that drug development is like trying to hit a goalpost 10 years in the future. Even the threat of the goalpost moving is very unnerving for investors. Imagine investing a billion dollars to get the average drug to market. Imagine the types of returns you have to make on the back end to justify that up-front investment. This is why you have seen the flight of capital out of the medical innovation area and into areas like emerging markets and commodities.
So what can be done around patent protection?
You have to provide exclusivity for drugs. In the example of biotech drugs, something like seven years is simply not enough. For example, when you finally launch a drug after 10 years of investment, it usually takes two or three more years to even begin making a profit. The average infrastructure to make and market a drug costs at least $120 million per year. If you put in a billion dollars at year one, you don’t get any back until years 12 or 13. Seven-year exclusivity doesn’t even allow people to make back what they put in.
What about the drug approval process?
A lot of the drugs we invest in now are for rare diseases and smaller populations with no approved treatments – some of these diseases affect only thousands of patients in the U.S. But we often will be asked for trials that take years to complete and cost hundreds of millions of dollars. Economically, that is not feasible. You can’t run a trial and make back a return in any reasonable amount of time.
Do you have views on the relationship between industry and academia?
There’s a balance you have to strike between doing pure academic research, which is very important, and doing research that can be quickly translated into clinical care to benefit patients. We need more resources devoted to getting therapies to bedside faster.
