How to waste a billion dollars on biotech

The public sees defense contractors as their biggest parasite. Let’s not let biotech go there.

The big news last week was the signing of the monster COVID relief bill. The main biotech headline was the $1.75 billion earmarked for sequencing. (I admit surprise at the absence of any additional allocations for BARDA or NIH.) Still, the bill was expected to pass and the biomedical elements of the bill barely changed from the original committee language. That’s why I spent the week thinking about anthrax vaccines.

Last week, the New York Times dropped a deeply reported piece on Emergent, the company that supplies anthrax vaccines to the strategic stockpile, and is now manufacturing COVID-19 vaccines for J&J and AstraZeneca. It was…not a good look.

Highlights:

• The US routinely spends nearly half of the stockpile’s budget on Emergent’s anthrax vaccines. There are specific examples when anthrax spending has won out over stockpiling PPE such as N95 masks.
• PHEMCE ordered a review of stockpile strategy that included recommendations to reduce spending on anthrax vaccines in favor of other priorities. Its recommendations were ignored.
• As a sole-source contractor, Emergent has repeatedly threatened “all-or-nothing” access to BioThrax during contract negotiations. The price of a dose rose by $25 (8-fold) in 12 years even as margins exceeded 70%. One year, the US increased its order by $100 million because Emergent insisted it needed the revenue to stay in business.
• Emergent’s vaccine, BioThrax, was considered inferior to a competing product from VaxGen, but Emergent’s aggressive lobbying killed VaxGen. Emergent bought VaxGen’s IP, then got tens of millions in funding for a development program that failed
• Last year the US chose to stockpile Emergent’s new anthrax vaccine as well, even though it is available only under EUA and represents an incremental improvement over the existing product

Reading the piece, I was struck by the cooperation the reporters received from their government sources. Most went on the record, including apolitical types incentivized to be careful: Rick Bright, Richard Hatchett, Nicole Lurie. For all its financial success, Emergent seems to have alienated the public’s biotech braintrust.

Meanwhile, I launched BasePare just two weeks ago, in part with the argument that biotech will become increasingly dependent on government contracts. Does Emergent’s example mean we’re destined become parasites on the public interest?

Destined, no. At risk? Absolutely.

It’s easy to dismiss the Emergent story as a typical boondoggle. You should suspend your cynicism. It doesn’t have to be this way. With the right structure, we could avoid a generation of stories about how corrupt the bio-industrial complex is, like the defense contractor stories of yore about $400 hammers and $640 toilet seats. (The fact that in the year 2021 I knew to google “$400 hammer” and “defense toilet seat” — both stories from the mid-’80s — just goes to show how durable these story-lines become. I really don’t want us to go there.)

I see two major themes in the Emergent story:

• Contracts were awarded over the informed objections of multiple career officials over multiple years; contracts backed inferior products and plans
• A single-source contractor drove prices and terms by holding an asset of public interest hostage

Here are some thoughts for how to rein it in.

The US can set clear priorities and make it hard to ignore them

There aren’t that many organs in the federal government with a reputation for high-quality decision-making when big money is at stake, but three in particular come to mind: NIH, FDA, and the Federal Reserve.

NIH uses scientific review to fund more than $30 billion in extramural research each year. These are high-risk projects, many of which fail for legitimate reasons, yet you don’t see stories about massive, sclerotic projects eating up the NIH budget. By and large, failed projects are cut loose and newer, higher-quality science takes their place. The system is so effective that you could double the NIH budget and still fund high-quality science.

FDA uses a simple standard — safe and effective — to guide decision-making about whether to permit sales of the most sophisticated, dangerous products in the world. FDA receives tremendous pressure from industry and politicians, usually for being too cautious. But even when it makes the wrong call, its simple standard makes it clear what we’re arguing about.

Federal Reserve policy moves trillions of dollars in value, often with politically risky decisions. (Recent example: its policies during the Great Recession, which triggered intense backlash.) This is possible because the Fed is insulated from political pressure: Governors hold staggered 14-year terms and can only be dismissed for cause.

Biotech procurement would benefit from a combination of these strategies: a statutory mandate for what should be procured, arms-length scientific review of which proposals meet that standard, and an ultimate procurement authority insulated from political pressure.

There are countless ways to build a system like this, but here’s one example:

• Mandate: Congress enacts a statutory standard that biomedical procurement must be prioritized so as to minimize the most likely, severe, and frequent public health risks.
• Politically independent authority: Congress creates a Biomedical Procurement Commission (think of it like the FTC, FCC, or SEC) that annually generates a ranked list of biomedical risks and procurement needs. The Commission would comprise six biomedical professionals, appointed by the President to staggered 12-year terms. Three seats would be filled by the FDA commissioner, CDC Director, and NIH Director (or a proxy Director from a relevant Institute as the topic demands).
• Scientific review: Biomedical projects would be scored by independent panels based on their impact on the Commission’s list of risks, probability of a successful outcome, and the plan for deliverables and accountability.

This all sounds very bureaucratic, and it would be. But it need not get in the way. Most contractors would never have to deal with the Commission or have to worry much about its reports. Indeed, contracting activity would largely carry on as it always has.

But the Commission’s annual report would have regulatory authority. Disputes over the relevance of a contract could be brought before the Commission. The Commission would have the authority to investigate, suspend, or otherwise punish contractors, providing leverage to renegotiate or terminate contracts that failed to meet the public’s needs and goals.

So if a contractor is, say, holding a key asset of the strategic stockpile hostage with tales of impending bankruptcy, this politically insulated board could open an investigation into the economics of the manufacturing line. If an established contractor is trying to box out a new competitor, it could call management to testify under oath about its products and plans. This is the kind of sunlight that helps keep roaches at bay.

Biotech contracting should be open by default

Emergent’s contracts would have received public ridicule much earlier, and more often, had the terms been public.

There are all kinds of legitimate reasons to keep contract terms private. The best is when the government needs secrecy for security reasons. But this argument falls short for all but the most clandestine projects. Most biomedical projects aren’t classified and need not be sealed. Meanwhile, the contractor wants to keep the terms secret, ostensibly to prevent disclosure to competitors, but more likely to prevent bad PR. Either argument is weak in the best of cases, and falls apart for sole source contracts.

So one simple solution is to default to contract terms being public, and force the contractor to get line-by-line exemptions from the Procurement Commission. Require that secrecy clauses automatically sunset to force the contractor to come back and re-apply.

Ensure public access to public health infrastructure

A private company should not be able to make a hostage out of a product of interest to the public’s health.

There are several ways to deal with this. Pay with a cost-plus-fixed fee. Get march-in rights. Make the contracts transferable. Include anti-shelving provisions that put the intellectual property up for auction, or make it open-source. Anyone who has written (or more to the point, tried to enforce) a supply agreement knows that these kinds of terms all have their strengths and weaknesses, loopholes, and counterproductive incentives. No one contract term is a silver bullet. But terms like these are all points of leverage that can tilt the playing field if a contractor is trying to screw the public.

The problem is that a career official would find it nearly impossible to credibly threaten a large contractor with these consequences. You’re going to march in to my factory? Good luck. Who’s going to run it?

That’s why an independent Commission like the one above is so important. The federal government won’t be able to march into a factory with a new management team, but it could show up with an army of reporters and lawyers. A dedicated board, with teeth and the political independence to use them, would have a fighting chance to find bad deals and set them right.

Look, government contracting will always be subject to waste, fraud, and abuse. As government takes an ever-larger role in defining where biotech is headed, it’s easy to be pessimistic about what our industry will become. But it is possible for the federal government to make good decisions, even under incredible financial and political pressure.

We should want biotech contracting to be fair and constructive. It won’t happen by accident, so we’d be smart to set up a better system now, before we see our faces in the paper for the wrong reasons.

If you liked this, please clap so I know what’s working. If you want to know when new posts drop, sign up for my weekly email.