Biotech sector fears financial squeeze
CAMBRIDGE — As the pressure to make health care more affordable mounts, Massachusetts biotech companies and medical device makers are warning that lower costs for consumers could be bad for business.
Companies and investors in the life sciences cluster — a crucial part of the state’s economy — say that new restrictions on payments for drugs and other medical products will stifle innovation and harm patients, according to a report scheduled to be released Thursday at a state biotechnology gathering.
The 115-page study, called Impact 2020, was prepared by Weston consulting firm Health Advances for the Massachusetts Biotechnology Council, a trade group convening its two-day annual meeting in Cambridge. In some ways, it puts the industry at odds with what has become a paramount social cause: providing medical care for everyone at reasonable prices. But the companies say their products, though costly, save money in the long term by keeping people out of the hospital.
While the state has spent decades building one of the world’s largest biopharmaceutical sectors, the MassBio report says industry leaders will have to fight to preserve and expand it in the face of formidable challenges — including reduced reimbursements that the companies receive from the government and private insurers for treatments.
Such medicines frequently cost patients and insurers tens of thousands of dollars a year, but can take drug makers a decade and as much as a billion dollars to develop.
If companies can no longer make reasonable returns on their investments, “this entire sector could disappear overnight,” said Harvard Business School professor Vicki Sato, a molecular and cell biology specialist who advised Health Advances on the study.
The report cites a cautionary tale involving Organogenesis Inc. of Canton and Shire of Lexington. The companies, the report says, couldn’t recoup the money they spent to develop complex wound-healing products that use skin cells because the US Centers for Medicare and Medicaid Services reimbursed them at a lower rate by bundling payments with more basic products and services. That forced Organogenesis to lay off 150 workers and Shire to sell its competing product to Organogenesis, the report says.
“If people risk hundreds of millions of dollars and spend years of effort to get a product to market, we have to make sure the payment system rewards that innovation,” said Geoff MacKay, chief executive of Organogenesis and outgoing MassBio chairman.
Alper Ozinal, a spokesman for the Centers for Medicare and Medicaid Services, confirmed the agency previously paid separately for skin substitutes but now packages them with reimbursements for other services and procedures. The change was a cost-saving measure, to give hospitals “incentives to provide care efficiently,’’ Ozinal said.
Massachusetts is the first state to take specific steps aimed at making care more affordable by creating a Health Policy Commission charged with limiting the increase in spending to the growth in the state’s economy. Its chairman, Stuart Altman, national health policy professor at Brandeis University, says he supports medical innovations but can’t defend their high costs.
“Here we are spending 50 percent more per capita on health care than any other country, and we’re not getting any of the benefits,” Altman said. “So anyone who says we can’t cut the growth in health care spending without harming health care is just looking at their self-interest.”
In addition to cost-containment efforts, the MassBio report details what it describes as other threats to the sector, including cuts in federal funding for basic research, declining venture capital investments in biotech startups, and aggressive competition from other regions vying for life sciences business.
The study, based on nine months of research and interviews with more than 100 industry and academic leaders in Massachusetts and beyond, says the 620 companies, universities, and research organizations that make up the MassBio trade group need to aggressively make a case for the value of what they do.
It says the industry should work to demonstrate the value of its drugs and medical devices in saving and extending lives and holding down costs by keeping people healthy.
Another task will be finding alternative sources to bankroll early-stage companies at a time when the uncertain environment is scaring away some private investors and federal budget cuts are squeezing research efforts. Traditional drug companies, larger biotechs, disease foundations, and other nonprofits have stepped up grant giving but not enough to offset a drop in venture capital financing in recent years, the report says.
It also urges the Massachusetts sector to keep pace with the emergence of information technology as a tool for discovering drugs. A particular concern is that the San Francisco Bay area will capitalize on its strength in crunching “big data” to outmaneuver Massachusetts in genomics-based drug targeting to create “personalized” medicines.
Finally, the report calls for focusing on the needs of patients by pushing for medical breakthroughs despite funding and payment restraints and growing competition.
“People don’t always connect the research that’s going on in Massachusetts to the patients,” said incoming MassBio chairman Glenn Batchelder, founder of Civitas Therapeutics, a Chelsea company developing inhaled treatments for Parkinson’s and other diseases. “A lot of the changes threaten our ability to develop medicines. As society wrestles with how we’re going to pay for them, we have to show how our products can help to lower health care costs.”
Ironically, the MassBio study sounds an alarm at a time when the state’s life sciences sector is robust. Massachusetts biotechs completed 14 initial public offerings over the past 12 months, raising a combined $1.3 billion. And the Nasdaq biotechnology index surged 60 percent in 2013, far outpacing the broader stock indices.
But much of the report focuses on funding issues that could have a negative effect on the industry in the near future. While some Massachusetts venture capital firms continue to pour money into life sciences startups, the national investing trend is down, especially for early-stage companies. Citing data provided by Silicon Valley Bank, the report says venture dollars raised for life sciences investing dropped 54 percent between 2007 and 2012, a period when basic research grants to academic labs from the National Institutes of Health and other federal agencies also fell.
“How the money flows makes a difference,” Harvard’s Sato said in an interview. “If government funding for the sector continues to get eroded, and if venture and corporate funding is down, that will absolutely have an impact.”
The report also documents competition from other aspiring life sciences sectors, including New York, Houston, and Seattle, as well as countries such as China, which is investing $300 billion over five years to develop its biotech industry.
“We talk about how great everything is,” said MassBio president Robert Coughlin. “But it’s fragile. We can’t afford to lose it.”
Correction: An earlier version of this article had the incorrect amount of money being invested by China in the biotech industry over five years. It is $300 billion.