The Foundation Lecture, University of Manchester, Manchester, UK, October 10 2018

Biotechnology and the Conflation of Science, Business and Ethics

By Gerald Chan

When I was making the decision of where to do my post-doctoral training, I was attracted to one lab that was using DNA of defined sequence for studying DNA damage by ultraviolet light. Those were early days of recombinant DNA when we did DNA sequencing by hand. We now look back and can only marvel at the crudeness and labor intensity of science a mere thirty some years ago.

My choice for my post-doctoral training was emblematic of the aspiration of life science at that juncture in moving from phenomenologic observations to molecular explanations. This pivot ushered in a golden age of life science in which we still find ourselves today. Our understanding of the molecular basis of life has exploded. Equally gratifying is to see the expeditious translation of such new discoveries into clinical medicine and related products for the improvement of human health. This collective effort of translational science, carried out not in academia but in a commercial setting, spawned a nascent industry that we now call biotechnology. Rather than making new medicine by trial and error as practiced by the pharmaceutical industry of old, the biotechnology industry is informed by life science articulated in molecular terms. The old pharmaceutical industry that grew out of the chemicals industry gave way to a new industry that is led by biology. One may say that the center stage of drug development passed from chemistry to biology.

I am fortunate to have started investing in biotechnology from the early days of the industry. For someone who came from a family in the real estate business in Hong Kong, this is a rather drastic departure. In reality, there are more common features between property and biotechnology than what meets the eye. Property is the ultimate example of real assets. If my property occupied the city’s busiest street corner, no one else can own that corner nor create another one exactly like it. People can build buildings, but no one can create land. Land is the most irreproducible of all assets; its financial value is underpinned by its irreproducibility. There is therefore an aspect of natural monopoly in real estate. Professor Eric Posner of the University of Chicago recently introduced the concept of a new tax on real estate taking into consideration its inherent monopolistic character.

In contrast, intellectual properties, the stock in trade of biotechnology, are difficult to create but much easier to reproduce. This is why we have patents to protect inventions. The financial value of an innovative drug is underpinned by patent protection. The same chemical molecule as a generic drug costs a fraction of the same drug before patent expiration. Hence, both the property business and the biotech business possess monopolistic characters derived, for the former, from the irreproducibility of land and for the latter, from patents. The difference is that the monopoly of properties can be perpetual as long as property right is protected by law, but monopolies that stem from patent protection have expiration dates.

It may further surprise you if I say that the biotechnology business does have shared characteristics with the creative industry. Novelists write novels, musicians compose songs, scientists make scientific discoveries. The former are protected by copyrights, the latter by patents. A novelist enjoys copyright for seventy years, a scientist’s patent is only good for twenty.

While patents and copyrights are instruments designed to protect the financial interests of the asset creators, we must not lose sight of their value to society. As early as the eighteenth century, the Founding Fathers of America thought it necessary to devote one clause of their nation’s constitution to addressing this matter. Article 1, Section 8, Clause 8 of the American Constitution states,

To Promote the Progress of Science and Useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Inventions

Left open is the question of how limited should the limited times be. Thomas Jefferson wrote that patent life should be just long enough to encourage innovation but not a day longer, clearly recognizing the duality of the function of patents to encourage innovation if patent life was not too short, as well as their ability to stifle innovation if patent life was too long.

Lest we should be unduly pessimistic about industries whose asset value is sustained by ephemeral patent protection, these industries do have a redeeming feature characterized by unlimited plentitude. Without this countervailing feature, the ephemerality will bring the industry to a standstill. Just as the world has yet to run out of literature after centuries of human writing, there is not the faintest indication that science is about to run out of new discoveries.

One historical document that captures the concept of the supply of science being infinite is the masterplan for the scientific research establishment in post-WWII America written by Vannevar Bush. Commissioned by President Franklin Roosevelt to draw up this plan, he entitled his report Science, the Endless Frontier. The image of an endless frontier is an appropriate tribute to Nature’s scope, order and mechanistic intricacy that we have yet to, and may never fully fathom.

For students of history, the image of an endless frontier will hark back to the frontier as the dominant idea for making sense of American history as propounded by the historian Frederick Jackson Turner. Eighteenth and nineteenth century Europeans had never seen a nation develop where there was an endless supply of land as the settlers in America continuously pushed the frontier of the nation. While the Europeans fought over the same piece of land time after time over centuries, the settlers in America simply went further westward to possess more virgin land. So it is in business today. While the property moguls fight over the same street corner, or the private equity folks fight over the same old companies, those of us who work in biotechnology simply create more new companies with novel or hitherto unwrought scientific discoveries. The biotechnology sector has yet to be opportunity constrained; rather, it is perpetually capital constrained.

Invoking classical economics, the concern may rightly be raised that if the supply of science which fuels the biotechnology industry is infinite, biotech companies would have very weak pricing power for their products. The reality is in fact the contrary. There are few sectors that have such strong pricing power for their products as biotechnology. We now have Harvoni, a drug for hepatitis C infection that is priced at $1125 per pill to be taken daily over twelve weeks. The cancer drug Revlimid costs $660 per pill. This works out to $18,500 for a 28-count bottle. This drug is to be taken as maintenance therapy for as long as the cancer is in remission. Therapeutics for rare genetic diseases routinely run into several hundred thousand dollars per year and use of these drugs are lifelong.

Many forces contribute to the high cost of novel medicines. I cite but two for today’s discussion with the disclaimer that my words should by no means be construed as my justifying the current state of affairs in pharmacoeconomics nor the practice of pharmaceutical companies continuously increasing the prices of approved drugs.

First, whereas the supply of science as the raw material to biotechnology is infinite, the cost to developing the science into products is excruciatingly slow and capital intensive. This capital intensity comes from the development process being highly regulated by government agencies such as the Food and Drug Administration in America or the European Medicine Agency here.

Any industry whose products matter for the safety of the citizenry must necessarily be subject to government oversight. With the medicine that we take, our confidence does not only rest on the prescribing physician’s qualification as certified by professional bodies of the medical profession, it also rests on the knowledge that any medicine on the market has gone through an unbiased approval process administered by a disinterested third party. The capital intensity in the biotechnology business is a price that society pays for the assurance that the drugs on the market are both safe and efficacious.

It follows that for any economy that wants to build a biotech industry, there must be sufficient financial capital in the system committed to this endeavor. Britain is a classic case of a nation with superb science but a scarcity of financial capital for developing the science into commercial products. This imbalance has plagued the British economy perpetually since the dawn of the biotechnology industry even though many of the scientific discoveries that gave birth to biotechnology came from this country. If the perceived risk reward ratio is insufficiently attractive for attracting private capital into this sector, either government funding or philanthropic capital will have to step in to fill the gap. This is very much in keeping with the admonition of none other than Adam Smith.

Given that it is so costly to develop novel drugs, it also follows that market players will only develop drugs that can be sold for high prices. Pharmaceutical companies have most often used as benchmark for pricing a novel drug the cost of providing care for the patient if that drug was not available. For example, the high price of the hepatitis C drug is justified by the cost of care for a patient without this medication who would eventually develop liver cirrhosis necessitating liver transplant, or liver cancer. This is the logic behind the thousand-dollar pill. Economics undoubtedly also underlie the recent decision of the pharmaceutical company Novartis to stop working on antibiotics. The fact that a short course of antibiotics does cure infections is also the reason why antibiotics do not make for good pharmaceutical business. A patient cured is a customer lost. Contrast that to disease modifying drugs that require lifelong use; they are annuities to drug companies. Just as the threat of multi-drug resistant bacteria is more dire than ever before, the economic disincentive for developing novel antibiotics is also greater than ever before.

The second reason I cite for the extraordinary pricing power of the biotechnology sector is the inelastic demand for its products. Because they matter to people’s well-being including in some cases life or death, the demand for biotech products is extremely inelastic. This demand inelasticity is as stubborn as the survival instinct in human nature. Add to this demand inelasticity the protection of patents that precludes competition, it is no wonder that biotechnology companies have virtually monopolistic pricing power once a drug is approved by the regulatory agency. Without checks and balance from non-economic forces, the biotechnology sector can easily lead to market abuse or market failure. The societal ramifications of biotechnology post many challenges to the notion that this sector can operate in an unfettered market under a laissez-faire government.

Whether the demand for biotech products should be so inelastic is as much an ethical question as an economic one. At the heart of this question is how much is a human life worth and do all human lives have the same worth. In countries where healthcare cost is borne by the public sector, as long as demand exceeds capacity, rationing of shared resources will always create ethical dilemmas. There must therefore be a methodology applied to quantifying the amount of justifiable spend on each patient that can serve as a basis for fairness. Perhaps the best attempt to providing such a quantitative framework is that used by the National Institute for Health and Care Excellence, or NICE, here in Britain. The methodology of QUALI, developed in the 1970s, imputes an economic value of a patient to society and measures that against the cost of a proposed medical intervention.

Americans have always been unwilling to accept such calculations and leave the pharmacoeconomic decisions to the individual and to the market. This is quite in keeping with American sensibilities in two regards – an absolute belief in the sanctity of life and therefore its value being incalculable, and the can-do attitude even when it comes to the challenge of defying death. It is no wonder that healthcare expenditure in America is so unbridled. For all their ideological loftiness, the Americans have little to show for their money spent. Whereas America spends 18% of its GDP on healthcare, the life expectancy of Americans ranks number 37 in the world. The place with the highest life expectancy in the world today is Hong Kong where males can expect to live to the age of 81.2 years and females, 87.3 years. It is therefore all the more stunning that the healthcare expenditure of Hong Kong is only 6% of its GDP. Half of it is self pay and half of it is borne by the public sector. This is yet another achievement that Hong Kong has to show the world although credible explanation for this success still awaits elucidation.

Some years ago, an oncologist friend in Hong Kong related to me a rather poignant story of an economically rational end-of-life decision. He had a patient who was suffering from end-stage liver cancer. The next line of therapy for this patient would be the drug Nexavar which cost roughly fifty thousand US dollars for a course of therapy. Clinical trial experience showed that this therapy would prolong survival for about two months. The financial net worth of this patient was about one hundred thousand US dollars. He reasoned that undergoing treatment with Nexavar would halve the inheritance that he would be able to leave to his children. He opted to forego the therapy and the additional two months of life. It is always heart-wrenching when someone is forced to name a monetary price for a human life and to execute a transaction over it.

The story of this liver cancer patient took place in Hong Kong where this therapy was self-paid. For such patients and their families, the decision to treat or not to treat is a matter of conscience. For societies where there is socialized medicine, the cost is transferred from the patient to the taxpayers at large. How then should be the ethics of society paying fifty thousand dollars for a couple extra months of one older person’s life? It is a question of resource allocation as befitting that society’s conception of the value of a human life and of a good society, subject to the reality check that no society commands infinite resources. This ethics is above all an inter-generational one, for it is the taxes of the living paying for the life extension of the dying.

Inter-generational ethical dilemmas will only become more vexing as population life expectancy continues to increase. The most grave threat may well come from the growing burden of Alzheimer’s disease. This is one disease area where the biotechnology industry has utterly failed to deliver. Billions of dollars later, Alzheimer’s disease is the biggest graveyard of failed clinical trials. I applaud the Cameron government for bringing the Alzheimer’s problem to the fore of national awareness. There is at least a public dialogue in this country on the potential of caring for Alzheimer’s patients bankrupting our society. We must, furthermore, be cognizant that finance alone will not suffice to solve this problem as high-income countries are also facing a demographic headwind. In these countries, there will not be enough young people to take care of the senior folks. Their demographic structures, never seen in human history, are perhaps an unexpected consequence being reaped by the generation that invented both modern medicine and pharmacologic birth control.

Any inter-generational ethical dilemma is a manifestation of the struggle between the past and the future. It is in this light that we must turn our attention to the university, a unique institution in human society which does both the work of preserving the past and enabling the future. The University of Manchester stands as a shining example. Rooted in the dynamism and creativity of the Industrial Revolution, this University has not ceased to push the frontier of science and culture. For many of my Hong Kong compatriots present here, British universities held a special meaning. It was to British universities that many from the former colonies came to be educated. Here, they acquired their professional competence and their cosmopolitan sensibilities. Through training the future leaders, British universities have had a large role in shaping the post-colonial world order. They remain one of the most powerful levers for Britain to exercise its soft power.

Equally commendable is the city of Manchester in which this University is situated and with which there is the closest working relationship between town and gown that I have ever seen anywhere. It was in Manchester’s city centre that Marx and Engel met. The big questions they raised still demand answers today in the face of the glaring inequality of our society.

I am honored today to become a Mancunian and to join many of you, in particular my Hong Kong compatriots here, as an alumnus of the University of Manchester. For the honor that you are bestowing on me, I am most grateful.