How Health Care Reform Impacts San Diego Biotechs

As the dust settles from the recent passage of the health care overhaul legislation, most San Diego biotechs are celebrating. For the most part, they got what they wanted from a bill that will impact their ability to fundraise, develop and sell their drugs and medical devices.

Local trade group Biocom spent the last year lobbying for tax credits and patent protections that ended up in the legislation. Their success means that small companies can get more research money and local biotechs can develop some drugs without worrying about early competition from generics.

“This is a tremendous boon for everybody, the industry as well as patients,” said Jack Florio, a life sciences investment banker at Brinson Patrick Securities, a La Jolla firm that helps publicly traded companies raise funding.

While the bill promises health insurance to an estimated 30 million Americans, its impact in San Diego will also be felt by a local biotech industry that employs 44,000 and has an estimated $9 billion annual impact on the economy.

A key provision in the legislation for local biotechs gives them 12 years of exclusive access to their own data used as a blueprint for a type of drug known as a biologic. Those drugs are manmade versions of the body’s proteins and antibodies used to treat diseases like Alzheimer’s, HIV and diabetes.

The change means they have time to develop and market their products before makers of generic versions begin selling cheaper options.

Although previously biologics companies could keep their data private interminably, the industry knew that protection couldn’t last, Florio said, and so it was happy to see the exclusivity time raised from seven years in different versions of the proposal.

Groups like the AARP say the exclusivity period will delay patients’ access to cheaper versions of drugs. But its protection will encourage innovation and investment in new treatments, said Dr. Laurent Fischer, the CEO of Ocera Therapeutics, a local biotech that is developing biologic drugs to treat chronic liver disease.

“This patent protection allows us to raise money to develop new drugs,” he said. “Without that, it would be very challenging to motivate the capital market to invest in new drugs.”

The legislation also established $1 billion in tax credits for investments made in 2009 and 2010 on projects that prevent or treat diseases. Because the credit is reserved for companies with fewer than 250 employees, it will help younger businesses that don’t already have marketed products compensate for the current drought in venture capital investments, Fischer said. Companies can also convert the credit into a grant, so they won’t have to wait until tax time to receive money.

“This would be a boost for companies like Ocera,” Fischer said. “If you’re not profitable for years, and access to funding sources is limited, it’s better to have money you can get today.”

Not everything in the legislation was good news to biotechs.

In particular, a 2.3 percent tax on the sale of medical devices will dampen local businesses like Volcano Corp., Nuvasive and Gen-Probe, said Joe Panetta, Biocom president.

The companies make devices that facilitate minimally invasive surgeries, treat spine disorders and screen donated blood.

“Instead of their revenue going into additional research, it will go to a tax paid to the federal government,” he said. “For smaller companies, this will be very burdensome.”

The tax, which is expected to raise $20 billion to help the government fund health care reform, was meant to be an exchange for the 30 million newly insured customers. But that logic doesn’t pan out, said Jon Vance, a medical device investment banker at Avondale Partners in Solana Beach.

“The majority of those new patients will likely be young, and so I don’t know if there will be enough medical device sales to offset that tax,” Vance said.

However, those 30 million newly insured will likely benefit San Diego’s biotech industry overall because they will be able to use drugs and medical devices, Panetta said.

“The potential to have more people insured is positive, not only because they will see an improved quality of health, but because there will be greater access to the products we’re developing,” he said.

Beyond specific taxes and laws, Panetta and Dan Bradbury, the president and CEO of Amylin Pharmaceuticals, see promise in the overhaul’s emphasis on comparative effectiveness, or comparing different ways to treat diseases to find the best option.

“That emphasis drives people to try to think harder about how we can do things differently to improve outcomes,” Bradbury said. “I’m very optimistic about the opportunities there.”

However, Panetta worried that the legislation’s creation of a nonprofit institute to study how differing treatments compare could put too much focus on finding the lowest costs, which would help generics makers but hurt biotechs.

“It would penalize innovation,” he said.

On top of the impacts of specific components of the legislation, the simple fact that the bill has passed will also likely help San Diego’s biotech industry grow. Because investors dislike uncertainty, they were waiting until they could see how the legislation would play out, Panetta said.

“They were holding back until they were confident what the outcome will be,” he said. “Regardless of their political opinions, they are now in the position to have clarity, and so that is a big benefit.”

Correction: The original version of this story incorrectly identified the disease that Ocera’s drugs are trying to treat. We regret the error.

Contact Claire Trageser directly at claire.trageser@gmail.com.