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SPEAKER 1: Good afternoon. My name is [INAUDIBLE]. I'm the provost since August 1. And we have a very special event today. Doctor George Scangos is at the forefront of the biopharmaceutical industry as the CEO of Biogen, a local biotechnology company that specializes in developing therapies for serious neurologic, autoimmune, and [INAUDIBLE] disorders, including some of the most devastating diseases we face, such as Alzheimer's, Amyotropic laterosclerosis, and Parkinson's Disease.
Doctor Scangos is widely credited with revitalizing the company since he joined in 2010, focusing on drugs targeting neurologic diseases. Biogen's growth since that time, under Doctor Scangos, has been spectacular. Just last week, Fortune recognized him, his success with Biogen, including tripling it's earnings since 2010, by naming him one of the top 10 businessmen of the year.
Doctor Scangos is a major influence in the pharmaceutical industry. He is Chair-Elect of the Board of Directors of Pharmaceutical Research and Manufacturers of America, PhRMA, which advocates for public policies that encourage the development of new medications in the US. A member of Cornell's class of 1970, Doctor Scangos earned his degree in biological sciences. I understand that he entered Cornell with the intention of studying French literature.
But he changed his mind after a superb freshmen biology course taught by Professor William Keeton, who's teaching excellence Cornell has celebrated by naming one of our west campus houses after him. George's second course was with the renowned Jerry Fink in genetics. And he told me today at lunch, after that course, he was sold on biology for a career.
Doctor Scangos went on to earn a PhD in microbiology from the University of Massachusetts at Amherst. He did postdoctoral work in genetics with Frank [INAUDIBLE] at Yale. He was Professor of Biology at John Hopkins University before moving to industry. And before joining Biogen, he held high level positions at Excelesis and [INAUDIBLE] Pharmaceuticals.
His work is relevant to much of the interdisciplinary research going on across Cornell's Ithica and New York City campuses. I know all of you will appreciate the opportunity to hear his thoughts. This lecture is [INAUDIBLE] generously served his alma mater, including participating on a Cornell University Council, the Cornell Silicon Valley Advisory Council, and the Life Sciences Advisory Board.
We're delighted to welcome George back to campus today for his lecture, Risk/Reward in Biotechnology, can we afford to innovate? George Scangos.
DR. GEORGE SCANGOS: Thanks, Mike. And thanks, thanks for coming. I want to talk a little bit today about the confluence of a couple of factors that are impacting the industry. The first is the amazing state of science today, and medicine and computational biology and engineering, which come together to make it possible now to make drugs for diseases that up until now, have been refractory.
So a few years from now, with some good luck and unless some sea change comes, there will be cures for diseases like Alzheimer's disease. There will be cures for many kinds of cancer. There will be treatments for diseases that up until now have been impossible to treat. It has never been-- I have been in this business now for over 30 years-- there has never been a more exciting time. And never have the possibilities to make new kinds of drugs been more exciting than they are today.
And they just get better over time. So for all the students in here, in your life times, you will see amazing things. And you're coming along at a time in history where it is, I think, a time when you guys are so fortunate to be where you are today. And what you'll see in your lifetime I think is truly amazing.
At the same time, we have societal forces that are putting pressure on the ability to do that. And you don't have to, unless you're living in a cave, you've heard all of the issues around drug costs, and are they too expensive, and why are we paying so much for drugs. And Hillary Clinton makes it an issue in her campaign. Even the Wall Street Journal, the friend of industry, has run articles now about drug prices.
So are drug prices too high, or aren't they too high? And how should we think about that, and how should we think about taking this industry into the future? So I want to go through some examples. Tell you a little bit about Biogen, and just as a little bit of story, this is not an advertisement for my company. It's an example, I think, of the industry. And so I'll talk about some of the great things that we have. But there are a lot of companies in the industry who have great things in their pipeline. So don't take this as a Biogen advertisement, but as a state of what's possible.
So Biogen was founded in 1978. It is the oldest freestanding biotechnology company. It was not the first one founded, but all the companies that were founded prior to Biogen have either gone out of business or been acquired. And we now do business in over 30 countries. And we focus on autoimmune and mostly neurological diseases. We think about our business in three ways, and we have drugs-- most of our drugs are for the treatment of multiple sclerosis.
So we have a part of our business we've called specialty medicines. We don't sell anything for any specialty medicine except for multiple sclerosis. But some of the drugs that are useful for multiple sclerosis are probably useful for other autoimmune diseases, inflammatory bowel disease, Crohn's disease, and other. So we are doing clinical trials in those diseases, neurodegeneration, Alzheimer's, Parkinson's, ALS, others.
And then we have an eclectic collection of things which we group together to call rare diseases. So we sell drugs for hemophilia. We are in a phase three program for a disease called spinal muscular atrophy. I'll go into what that is a little later. We have a very interesting compound for neuropathic pain. Certainly pain isn't rare, but certain kinds of pain are rare. And we're not in the business of developing better Advil. We want drugs for specific kinds of neuropathic pain. And then we have some gene therapy, gene editing programs going on that I think are interesting.
So we have, these are our marketed products. The top five are for multiple sclerosis. The next two are for hemophilia. Rituxon and Gazyva are actually sold by Genentech and Roche. They're wonderful drugs for treatment of lymphoma and leukemia. They were developed at Biogen, discovered at Biogen. Well, discovered at Biogen. They were developed by Genentech and Roche. And now they're sold by Genentech and Roche, but we still have an economic interest in those products.
We have a lot of drugs in the pipeline. This is our R&D pipeline. The top compound, Zinbryta-- I don't name these drugs, don't blame me for the names-- is we hope to get approval for that next year. At the bottom, you see three biosimilar drugs that we've made together in a joint venture with Samsung. And those are biosimilars for Enbrel, Humira, and whatever the third drug-- what's the third drug? Humira, Enbrel, and Remicade. Thank you. And so those will be approved, likely be approved, next year as well.
Then you see all the drugs in between. Some in phase three, five in phase three, and a bunch in phase two. This is our-- look, companies go through good times and they go through bad times. You know? And now I'm one of the 10 best business people because Biogen had such great growth. But Biogen had such great growth because we introduced five new drugs. All of those drugs were started well before I got there. Right?
So I'm happy to take the credit, right? But in reality, drug development is such a long process that it takes years before what you do pays off. But we did have several new drugs approved over the past few years, our revenues have gone up, and so the company's had a really good run from 2010 when I joined until the end of 2014. But if you look out into 2015, and the green chart is the stock price of Biogen, compared to the couple of indexes, you see we didn't do so well this year.
And so this year has not been as, let's say exciting, as the past few years. And that's part of the industry we live in. So what happened? What caused the change? Well, some business realities. Here's what changed. This is a new drug we introduced in 2013 called Tecfidera. This is an oral drug for the treatment of multiple sclerosis. It's one of the first oral drugs, non injectable.
It was, based on its clinical trials, quite efficacious. Provided a good level of improvement for patients suffering from MS. It was absolutely safe, and it took off like a rocket. And you see here the quarterly revenue numbers for that drug, which was going up through the ceiling. And then in Q4 of '14, where the star is, something happened in the trajectory of that change. And what happened was we had a safety event.
There is a disease called Progressive Multifocal Lucoencephalopathy, PML, which is a brain infection from a virus called JC virus. And it can be fatal. It often is fatal. It often causes disability, permanent disability in the patient. So it is not a good thing. It occurs in patients taking drugs that down regulate their immune system. And most drugs that down regulate the immune system have some incidents of PML.
And so we had a case. Under the first 150,000 patients who took the drug, there was one case of PML. That fundamentally changed the trajectory. It's been flat since then. So for almost a year now, essentially the drug has been flat. We've had a couple more cases of PML with that drug, but the frequency is still reasonably low. So this is a reality of our business. You have a drug, and this drug was viewed as a kind of a watershed in the treatment of MS, because it's very effective, and it was viewed to have no safety issues.
Well, it has a safety issue. It's rare, it's not frequent, but it has one. And that changes the perception among patients, and it changes the perception among physicians. And not as many people take it. So it's flat. And so our revenue growth, which we had expected to be quite high based on this, is now not. Our revenue growth now is projected this year to be 8% or 9%. So that's still healthy. We're losing money. We're not going out of business. But it's not what we thought it would be.
Our R&D plans, including the phase 3 trial I said I'll tell you about in a few minutes, are expensive. And you can't, we can't afford those R&D plans on top of everything else that we're doing without the double digit revenue growth that we were anticipating. So this year we had to make some tough choices. So we eliminated certain areas. We stopped our immunology research. We stopped fibrosis research. We stopped certain clinical programs. We've eliminated a lot of other programs.
We had about 8,000 employees. We got rid of about 850, laid off 850 people. So this has not been a very good year for the company, in terms of all of those kinds of issues. So why did we have to do that? We're still growing at 8% or 9% a year. And the reason is because we have such an amazing pipeline of compounds that have such potential to bring new drugs to patients. So we have certain priorities that we had to set.
We have built up an R&D group in neurology and neuroscience that I think is really world class now. That's not a short term investment. You can't start that and stop that with the financial vagaries of the company. You have to maintain that. We have to take this portfolio of clinical programs that we have, and we have to move them forward. We're building a new plant. We have to do those things. And so we have eliminate other things.
And I guess one point to make is if we were rolling in money, we wouldn't have to make those choices. So here's what our late stage pipeline looks like. And this is where most of the money goes. And I just want to show you one slide for each of these, so you can get a sense-- or maybe one or two-- for what's going on. And again, let's start these, and then I'll show you what this is all about.
So Aducanumab-- again, not my name-- is an antibody against the beta amyloid plaques that form in the brains of Alzheimer's patients. And so the question has been for years in the Alzheimer's community, do these plaques cause the disease or are they a consequence of the disease? If you can prevent the deposition of these plaques, would you prevent the disease? And if you can remove those plaques, would you ameliorate the progression of the disease?
There are really good genetic data now based on some genetic studies, the most recent of which was done in Iceland, to say that if you prevent the deposition of these plaques, you prevent the progression of Alzheimer's disease. And so these plaques are causative. That's a different question from asking whether if you remove the plaques in the brains of a patient who already have them, will you alter the course of the disease? And that hypothesis has not been carefully tested before.
So we have an antibody which in animal models pulls the plaques out of the brains of animals that have them, and improves the cognition of those animals. So what will it do in humans. So we ran a study. This is a clinical trial. These are patients with early, very early Alzheimer's disease. So a very mild form of Alzheimer's disease. And the first question we asked was, can we remove plaque from the brains of these patients?
And what you see here is both the placebo and four different doses that we gave-- 1, 3, 6 and 10 milligrams per kilogram per patient. And what you see on the left is six month data, and on the right is year data. And what you see is there's dose dependency, the higher the dose, the more plaque you remove. And there's time dependency, because any given dose has greater removal at a year than it does at six months.
So now this is a small trial. You see at the top, the numbers. So they're in the 20s, a maximum of 30, but most of the groups have a 20s. So with the trial that small, you can get fooled. Sometimes you gets spurious data. On the other hand, these data seem very clean. And to see this statistical significance in a trial that small size, the error bars have to be tight, and the magnitude of the effect has to be substantial. So we took this as encouraging.
And then the question is, does this plaque removal alter the cognitive decline of these patients? And that's shown here. We had two cognitive tests, one called the Clinical Dementia Rating-- CDR-- and then there's the Mini Mental State Exam. And what you see here in orange are the patients from the low dose groups who had less than one standard deviation removal of plaque. And in the blue are patients who had greater than one standard deviation of plaque.
And on the left, as the line goes up, cognitive ability declines. And you can see that between zero and six months, there's some difference. But between six months and a year, the treated patients did not decline very much at all. And you see the same in the Mini Mental State Exam, where that line going down indicates worsening of cognitive ability. And you see the same pattern.
From zero to six months, there's a little change. But from six months to year, there's a big differentiation in the patients who got the higher doses of the drug. So these again, these data indicate or suggest small trial. That we are interfering with the cognitive decline in these patients. So that's all very encouraging. So the question is, what to do next-- the small trial.
So normally one route would be to run a phase 2 trial with a few hundred patients to see if you can replicate. That adds about four years to the process, to run that trial and analyze the data. And we want to get this drug to patients as soon as we can, if it indeed works. So we decided to go from these data into phase 3 trials. So we're now running two phase 3 programs, 1350 patients each. So 2,700 patients total.
Those trials will cost a billion dollars, because there's a lot of imaging, a lot of PET scanning, as part of that trial, so they're expensive. And if this works, you'll notice that the doses are 6 or 10 milligrams per kilogram. So 6 milligrams per kilogram for an average patient is, for a 70 kilogram patient, is 400 grams. So half a gram, essentially, per patient per month. So 6, so let's call it 6 grams, 5, 6 grams per patient per year.
And you think about the millions of patients with Alzheimer's disease and the amount of antibody that you need, that's a lot of antibody-- metric tons of an antibody. And so we're building a new plant to make that. So we're making that bet. If that bet works, we'll have a great new drug for Alzheimer's disease. If it doesn't, it's a 2 and 1/2 billion dollar mistake. That's the business.
Now at the other end of the business, there's a disease called spinal muscular atrophy. This is a much rarer disease, a few thousand kids in the US. And in the most severe form of the disease, Type 1, these are essentially floppy babies. These are kids born with no muscular control. So they don't kick, they don't roll over, they don't sit up, they don't walk. And most of them die by the time their two. And so it's a horrible thing to think about, a family having to cope with.
It's a single gene defect, and there is a second gene that is capable of making that same protein. That gene is abnormally spliced, it's processed abnormally. So we have a drug together with, an unfortunately named company called ISIS, which is a biotech company in San Diego. And they had the name first, in their defense.
And I said this morning, I have a jacket that says ISIS on it. And my wife forbid me to go out of the house wearing that jacket. But anyway, and so we have a drug with ISIS to see if we can alter the splicing of that second gene to lead an improvement of the kids. And so here are the data from that trial.
And this is on the left a survival plot, and in the gray are a natural history of the disease. And half the kids are dead by six months. And what you see on the blue line are the kids treated. So there seems to be a major difference there. Take this with a big grain of salt as well, because this is not a controlled trial. This is an open trial against historical controls, and it's easy to get fooled by these data as well.
So these are suggestive, but certainly not dispositive. They don't prove anything. And on the right, you see a functional score. How are the kids doing functionally? Are they able to kick? Are they able to roll over? Do they sit up? Do they walk? And they seem to be getting better over time. So again, this is encouraging, but certainly not proof.
And we are now doing the phase 3 trial, which is the control trial. And we'll have data from that trial next year to see if we can help these kids. Anti-Lingo is an antibody against the protein called Lingo. Lingo is an inhibitor of myelination. The intent of this program is to see if we can induce remyelination in the brains of patients who have MS, who have demyelinated lesions in their brain.
Just show you some quick study from an opic neuritis trial that we did. This is called Multifocal Visual Evoked Potential, so it's a way of measuring amplitude of signals in the nervous track. The baseline is just arbitrarily colorless, and then if things get better over time it's green. If things get worse over time it's red. And the acute optic neuritis is manifest as a loss of vision in one eye.
And so in the affected eye, patients get better normally. And you can see on the top, the bottom is the placebo. And over time it gets green. The top is the treated patients, and they get greener. And you can quantitate these images. The surprising thing for us is the other eye, the unaffected eye, which for some reason is called the fellow eye. Vision gets worse over time.
And it's probably because many of these patients actually have multiple sclerosis. And the acute optic neuritis is the first symptom of their multiple sclerosis. So they have other reasons of demyelination going on in their brain. And you see that eye on the bottom is the placebo group. And you see that getting increasingly red. And on top is the group treated with the drug, and that seems to be less red.
And so again, suggestive. Not proof of anything, but suggestive that we're having an effect. So this is a phase 2 trial. We have another phase 2 trial in MS to see if we actually can provide a clinical benefit to these patients in MS. And we'll have data from that trial next year. If that trial is positive, then of course we'll get that into a phase 3 trial as quickly as we can.
This is a trial for a compound that is-- target is a target called Nav 1.7. This is a target that which has I think unequivocal genetic data that it is a key sensor of pain. There are patients born with an inactivation of this gene, and those are people who don't feel pain. They're kids who break a leg or get a bad burn, they just don't know it.
Patients who have an abnormal activation of this gene are in chronic pain. And so this is a great target against which to make drugs to treat pain. The problem is, if you just inhibit this target, you'll have an anesthetic. You just have a patient who doesn't feel pain. You don't want that either. You want to deal with the activated form of this receptor. It's a sodium channel and it has a different conformational state when it's activated.
So this is a drug that is actually specific to that activated state, so it does not cause anesthesia. And it's hard to do pain trials because there is such a big placebo effect. You give anybody a drug and ask them if they feel better, they do. And so this trial has unique design in that everybody was given drug for three weeks. And what you see on the left, this is a pain scale.
Patients are asked about their pain, 1 being mild pain, 10 being the worst imaginable pain. And they are all patients who were on the drug for three weeks, and you can see the pain going down. Half of them were then switched to a placebo, half were left on drug. And the patients in red were the ones switched to a placebo. So they lose their pain.
So this drug actually seems to be working for these patients. That's going to be in a phase 3 trial next year. And I'll skip this one because it's complicated and I don't want to take too much time on this.
But the point is, there is both in our pipeline and in the pipeline of most other companies, an array of drugs that are in development that have the potential to bring relief to millions of patients. That's the exciting thing about what we're doing. And the question is, is it worth it, and can we afford to keep doing that? So this is a piece that appeared in the Wall Street Journal a few weeks ago.
And the idea is that you have old drugs that have been on the market for a while. Companies keep increasing the prices. And is that ethical or not? And I want to distinguish this from some of the companies that have been in the news. These are drug still under patent and that we spend a lot of money researching.
So the poster child that they use is Avonex. I don't know if you can read that in the first paragraph, a drug called Avonex. That's our drug. And it says here that we increase the price an average of 16% a year through the decade. That's factually wrong. But we did increase the price. We increased the price an average of 8% a year through that decade. That's the gross price.
When you increase a price, you don't get all that increase because you have to give discounts to people. So the net net to us was a 6% annual increase in the cost of that drug over the course of those years. R&D costs over the time went up 10% a year. You always hear people defending the pharma industry saying we need these high prices so we can put it back and make better drugs for the future. I think most people don't believe that.
And so I like this story because it's looking backward. It's saying over the past decade, we did this. And so we can ask, what did we do with that money? And what we did was bring all of these drugs onto the market. So Tysabri, Fampyra, Tecfidera, Plegridy, are four new drugs for the treatment of MS, that help patients better than Avonex would have helped those patients.
Without the ability to charge what we did for Avonex, some or all of these drugs would not have been on the market. We couldn't have afforded to do this research. So MS patients are better off today because we're able to charge what we did. And this is looking backwards. This isn't hypothetical. This is an actual fact.
Next year we'll get Zinbryta approved, hopefully. That's another good drug for the treatment of MS. Anti-Lingo I talked about, that's we'll see about in the future. And then we have an earlier drug that also is intended to induce a repair, and remyelinate. So in this case, I would argue that those price increases funded the development of drugs that are benefiting MS patients today.
So I think we have kind of a social contract, the biotech and pharma industries, with society. That we put a lot of time and money at risk to develop drugs. Many those drugs fail. Occasionally they work. The ones that work, we have a limited period of time-- it's typically 10 years, 12 years-- that you have patent life left by the time you get a drug on to the market. Sometimes eight, but in that range. And then they go generic.
And when they're generic, they should be cheap. And so for that limited period of time, you have to make enough money to actually fund the next generation of drugs, if we're interested in continuing to have new drugs, and make a return for investors. We live in a capitalist society and investors expect to make some money commensurate with the risk they're taking on this environment.
If you look across the biotech industry, and there are 400 public biotech companies in the US, and you ask in aggregate, what is there return, what percentage return did they make? Its 4%. And that 4% includes Gilead, which makes gobs of money on their Hep C drug, it includes us, and includes companies like Regeneron and others that actually have very successful drugs and are making a lot of money.
Most of those 400 companies lose money. Many of them will ultimately make drugs that benefit patients. So if there is-- I've heard the arguments that their returns are too high to justify the risk-- 4% arguably is irrational. No one would take that kind of risk for 4%. The only reason people invest is they think they're smarter than everybody else and they can pick the winners. But rationally, not a good investment.
The pharma industry makes 17% return, net net, if you take all the companies and all the whole industry. You can question whether that's an appropriate return for the risks that they take or not, but it's not 40% or 50% like is often quoted. 90% of the drugs, prescriptions filled these days, are generics. This is part of the social contract. And these drugs are cheap.
And you can see on the right, drugs that were relatively expensive now are very cheap generics. That's the way it should be. We're seeing increasingly, biosimilars now. And for some of the very expensive biologic drugs, we're making biosimilars that we want to bring onto the market. We'll hopefully launch next year in Europe where the patents expire first. Those drugs will be cheaper. So I think we have also responsibility to bring drugs, high quality drugs, to patients at a lower cost.
Looking over time, these are data from CMS. So these are government data. And what you see is the percentage of health care costs. The bars are the percentage of health care costs that are taken up by drugs. That's been constant, relatively constant, over the years. It actually came down in the years from 2010 to 2013 or so, because there were so many drugs that went off patent and became generic.
What you see in the dark line is the rate of growth of total health care costs. And what you see in the green line is the rate of growth of drug costs. And you can see again is that from 2008 or 2009 until 2013, the rate of increase in the cost of drugs was lower than the rate of increase of health care costs. That's because so many drugs went generic.
What you see in '13 and '14 is a huge spike. That's a single drug, and that's-- well, two drugs, Sovaldi and Harvoni, for the treatment of Hep-C. And these are cures for Hep-C, but they caused a huge spike in the cost of drugs, and they caused a huge problem for State Medicaid agencies, which amazingly enough to me, didn't know this was coming.
And so there's a disconnect. That means to me the company did a terrible job of-- this is Gilead, and I know the people at Gilead, they're actually really, I have a lot of respect for those guys-- they did a terrible job of not preparing the marketplace. So the Medicaid directors couldn't put this in their budget. They didn't know this was coming. They were caught off guard, and that was part of the uproar that you heard.
But it is a cure for Hep-C, and so there are a lot of patients now who won't have liver cancer or cirrhosis or liver transplants. And then that's projected to come down, and it is coming down, because there is a bolus of patients with Hep-C. And once you get through that bolus, you won't see very much more of that drug. And so drug costs are projected to be relatively fixed percentage of health care costs over the next decade.
So why all the furor over drug costs? Well, there are some legitimate abuses of the system, right? Turing Pharmaceuticals, which bought a cheap generic drug, raised the price 500%, and because they have an artificial monopoly, were able to maintain that price. And basically said screw you to the world. We can do it, and we're doing it. That's an abusive. Generic drugs should be cheap.
And that's a problem with the system. And they were able to take advantage of that. Hopefully that's coming to an end. Valiant, a company that had similar practices of buying drugs, jacking up the prices, laying off the people from the companies who made those drugs, provided great returns to its investors for a lot of years. It was a darling. Now as it turns out, some of their practices were questionable, at best.
So there are legitimate abuses that have gotten a lot of publication. This is not true of most companies in the sector. These are very different players. These are not biotech companies. These are not pharma companies. These are-- I don't know what they are-- kind of hedge funds that sell drugs. So that's one reason there's focus now.
It's a political year, obviously. Patients are legitimately unhappy with what they have to pay for drugs, and it's a very populist sentiment right now. And look, a lot of this is political. The insurance industry has done a very good job of pointing the finger at the pharma industry. So people don't complain about the cost of an MRI or the cost of a two day stay in the hospital.
They get the big bill, they may or may not notice what it costs, but they notice that their deductible is 200 bucks and they have to pay it. When they have a $3,000 annual deductible for pharmaceutical coverage, and they show up to get their drugs on January 2, and they have to pay for the first $3,000 out of pocket, they're not happy about that.
And so is that a problem with pharmaceuticals, or is there a problem with insurers? Or is it a problem with the way the whole system is structured? So all those things come to a cast light now on drug prices, which I think is a shame. Because if-- there should be no question that if drug prices in the US come down, there will be cutbacks in R&D. There will be fewer drugs. And the extent to which that comes to pass depends on how much the price has come down.
It's not a light switch, it's a rheostat. The companies will adjust. If the reward is less, there will be less investment in biotech companies from VCs, because their returns will be lower. They'll be much more careful about how they invest. There are other industries where they can maybe get better returns. Pharma companies will be much more cautious about what kinds of projects they would invest in.
We, if the return profile we're different, would not be investing 2 and 1/2 billion dollars in an Alzheimer's project. We would be much more cautious. We would do a phase 2 trial. We would mitigate that risk. And so we would still do it, but we would take longer and we'd be more cautious about how to do it. So this will have an impact.
And if you just think about Alzheimer's disease and the impact-- and I have some figures here on Alzheimer's disease-- there are in the world, an estimated 44 million people with Alzheimer's disease. And if you think about the economic cost, the human cost, the suffering of the patients, their families, their caregivers, the only way that we're going to deal with this is by drug. There's no other way to stop the progression of Alzheimer's disease.
So I think at this point in history, and the evolution of the industry, and the evolution of science, it would be a shame if we were prevented from doing that by short term populist thinking about drug cost. There are parts of the world which have decided they're not going to pay for innovation. Europe, for example. Free rides on the US. The prices that Europeans pay for drugs is a fraction of what Americans pay for drugs.
All European countries have a single payer. The government pays for the drugs, the government negotiates the price of the drug. If you want to sell your drug in that country, you sell it for what the government says you can sell it for, period. And those prices are very low. And if the US prices were the same, we would have no biotech industry.
So Europe has decided they don't want to pay for innovation. Or, that the US is paying, so why do they have to pay too. They'll just free ride on the US. Japan has a good policy. Japan is willing to pay for innovation. But it's only Japan and the US that so far have accepted the price of drugs that they are, in order to fund the innovation that's necessary for the next generation for drugs.
So it is a legitimate right of society to say we do or we do not want to pay for that. And that's a choice that the society can make. But the question is, if you don't want to pay for it, you should be clear about what the consequences are. The consequences will be fewer new drugs for ourselves in our old age and for our children. And that's a trade off we have to make.
So I will stop right there. And I don't know how long I talked, but I think that's about right. And happy to take some questions.
[APPLAUSE]
SPEAKER 1: We do have questions, maybe I'll take the prerogative to ask the first one. As you were speaking about this issue of the public perception cost, it struck me the parallels with education [INAUDIBLE] viewed as rising at a rate that's unacceptable by the public. Similarly to the situation with drugs, we have a situation where much of the cost of tuition is not the real cost. It's the retail price. But the discount is for many, many of our students-- almost half of our students are on financial aid. And many other parallels. Obviously, [INAUDIBLE] et cetera. I guess the question is, how do you address that? You're going to be the Chair of PhRMA. How do you communicate this issue, for one thing, to the public? And what part does lobbying play in that process?
DR. GEORGE SCANGOS: Well, look. Lobbying does play a part in the process. And I've been spending time in Washington, and it's an amazing place. And every trade organization, every industry has what they call advocacy groups, which are lobbyists who sit in Washington and make the case for that industry to members of Congress, and to the administration.
And some members of Congress are, for whatever reason, more interested in some issues than others. So every industry finds friends in Congress who are supportive of its position, and works with those people. So the pharma industry, the biotech industry, have certain members of Congress who are very supportive. The insurance industry has other members of Congress who are very supportive. And you make the best case you can for your point of view.
And there's a lot of money involved in that process as well, because it's not just the congressional elections, but things happen in the states that also can impact issues. So it's a very complicated situation. But the argument is really, you have-- and I think it's the same for education-- what you actually pay is not the list price. You said that already. And that's true for drugs as well. That the prices you see listed for drugs, almost no one pays those.
And a great example for me this is a drug called Nexium. And there's another drug called Prilosec. Prilosec is an older drug that now is OTC and cheap. Nexium is still under patent and expensive. They do very similar things. And they're so close to each other in what they provide. So the question is why would anybody pay for Nexium? Of course, not why does the company charge so much, because they can charge what they want. But why does anybody agree to pay it?
And the answer is in the system. That the list price of Nexium, no one pays that. That they give huge discounts to the pharmacy benefit managers. The pharmacy benefit managers pass on some, but not all of those discounts, to the end users, and make money on it.
So I think you have to get to the nub of where the money actually goes. And if you trace the flow of money through the system of where it goes, and you trace the flow of goods through the system, and you have boxes with arrows, it looks like a wiring diagram. It's really complicated. And it looks like a wiring diagram-- I suspect the iPhone's wiring diagram is no more complicated than that one, it's really complicated system-- and so you just have to make the case that the long term value is worth what you're paying.
The value of a good education-- why does the US have the leading biotech industry in the world? Because we have the best educational system in the world. We have a great, the NIH and the NSF have the better-- you can complain about funding levels-- but the mechanisms by which they give out the money are better than other countries. So they go hand in hand. You can't have a vibrant economy over a long period without a good education. And so it's arguing for the long term benefit, I think, in both cases.
AUDIENCE: George, I wonder if you can give us a sense of how much of the drug work comes out of [INAUDIBLE] through NIH research, [INAUDIBLE] drug companies that [INAUDIBLE] versus in house development? For example, the sodium channel [INAUDIBLE].
DR. GEORGE SCANGOS: Yeah, look. So obviously the channel is identified through NIH funding, I'm sure. The drug was made by a small company in Cambridge, UK, which are a bunch of electro physiologists who come out of one of the pharma companies founded a little start up in the UK. And they made the drug. They don't have the resources to develop it. And so we bought them. And so that's how we get that drug.
So there are a number of different contributions. And that's fairly typical. The Tecfidera, the oral drug, came out of this crazy story, right? There's a patient who showed up at a pharmacy in Switzerland with some white powder and said to the pharmacist, this white powder clears up my psoriasis. Can you tell me what's in it? And they analyzed it and they found-- they identified the chemicals in there. They tested them, and sure enough, one of them did clear us psoriasis. It's dimethyl fumarate.
It's not exactly a world beating, complex molecule. That's Tecfidera, dimethyl fumarate. So that's where it came from. And I think our antibodies came from another small company in Switzerland. Lingo came from our internal research. So it's a mixture. In Lingo we identified the target, and that we did entirely in house, and made the antibody. So it's really a mix. It depends on the drug. Yes?
AUDIENCE: So you said that for these pharmaceutical companies and biotech companies, investors, after paying money, expect some kind of profit off whatever the development is. So I was just wondering, is it possible to separate the funding for [INAUDIBLE] with the sale of the drugs? Because it just seems to me that if you are the consumer of drug and part of what you're paying for the drug is going to future research for a drug you may not necessarily benefit from, that could be problematic for some people. So maybe there is an alternative way for these companies to secure funding. Have you ever thought about that?
DR. GEORGE SCANGOS: What would an alternative way be?
AUDIENCE: Well, I was thinking that maybe the patient that want to see [INAUDIBLE] provide the funds.
DR. GEORGE SCANGOS: So it would be voluntary?
AUDIENCE: Well, I'm not too sure.
DR. GEORGE SCANGOS: Yeah. The point you're raising, that the patient who's taking the given drug might not want to pay for drugs that would benefit others, is the same argument that a guy named Zeke Emanuel just made. He said, I'm not sick, but my insurance premiums are subsidizing all these sick people who take the drugs. And I don't like that. But that's what whole insurance is about.
I think there is a certain amount of social contract in this. That I can't think of a way to do this on an individual patient better. I think the society has to decide whether the people in that society are wanting better drugs in the future, or not. And if they do, then you have to pay for it. And if you don't, you don't. Obviously, I'm not a disinterested party here. But I would be very disappointed if the US made the decision that we thought better drugs in the future were not an important thing for ourselves when we get older, and for our children.
AUDIENCE: [INAUDIBLE] in 2010 [INAUDIBLE] in San Diego, and I was wondering what factors do you consider when you [INAUDIBLE] focus of your drug development [INAUDIBLE]?
DR. GEORGE SCANGOS: Yeah, that's a really good question. We did that just after I came to Biogen Idec. And Biogen had oncology research, cardiovascular research, CNS research, immunology research. It just isn't a big enough company to be good at all of those things, and have the resources to actually be aggressive and competitive in all of those areas. The oncology research, which was what where Rituxin came out, was great at one point. It had really good people.
The company had started it, stopped it, they'd fund it one year, they wouldn't fund it the next. And so the company had made some mistakes. And a lot of good people had left. Programs languished, they got behind the competition, and so the oncology programs in 2010 we're just not competitive. They were costing $100 million a year, and that was just money down the drain. And so it was fairly clear to me that we had to just stop those, and put that $100 million to work in areas where we could be competitive.
You know, it's a question of where do you think you have a right to try and compete. Where can you be confident that you're competitive, that no one is an order of magnitude better than you, that you have a reasonable chance, that you're sophisticated enough to make sophisticated decisions about mechanisms, about drugs, about clinical design, and we didn't have that in oncology. So we stopped it.
AUDIENCE: Despite that you showed the increase since 2013 with the cure for hepatitis, given the new development of new drugs, are there other likely cures that will be coming down the line in the near future where we see more frequent spikes like that?
DR. GEORGE SCANGOS: The one that people are worried about right now is a mechanism called PCSK 9, which is a way to reduce cholesterol in people who are resistant to statins. It's an incredibly effective mechanism. Drugs are very-- the first ones are now approved, very high priced.
And if they get abused, if patients, if they're reserved for patients who truly have off the chart cholesterol levels, and are resistant to other kinds of drugs, then they're useful. If they get abused because patients jump right to those and even though they could be helped by statins, then that's going to be a bad thing. And the jury's still out as to how they'll be used. They're brand new. So that's the near one.
People are also worried about Alzheimer's drugs. I mean, you don't have to charge a lot per patient to have that be a huge impact on the system. It will save money for the system, but not in the year that you start taking the drug. You'll save that money over time. And so we've already started to have discussions with some of the big payers in the US about how we might think about introducing that drug in a way that we can make money on it, but that doesn't bankrupt the system. And maybe more creative ways to price the drug.
SPEAKER 1: The last question.
AUDIENCE: Hi, my name is [INAUDIBLE], and you mentioned financial and political environment in which [INAUDIBLE] exist. I was wondering if you can comment on valuations of biotech companies, and also tax inversions that are going on in the biotech space. Pfizer is supposedly [INAUDIBLE].
DR. GEORGE SCANGOS: Well, first, valuations in biotech companies that don't sell anything yet, that are just research stage biochemistry, are fashion. That they are only partially rational. Now immuno oncology is a hot new field at the moment. So and because it's shown some ability in some patients to actually cure certain types of cancer. And so it's very hot. There are a lot of immuno oncology companies, biotech companies, that have started up now.
Some of them have a billion dollars of valuation for every patient they've treated, right, in an early clinical trial. It makes no sense. But it's hot, and it's fashionable, and people are excited about the potential. Other companies have been around for a while, which are kind of yesterday's news, but might have also good potential, or are valued much lower. It's hard to set a rational value until you actually start selling something.
Right now, for the past few years, biotech valuations were crazy. They were really high. And they've come down some now, and they're probably reasonable where they are now, I'm guessing, in most cases. Inversions, very complicated topic. And that really has to do-- this is a problem with tax structure in the US. So in the US, there's a 38% corporate tax rate, so every dollar we make, we pay $0.38. And we get some deductions, so say we pay $0.28 after deductions in taxes in the US.
If you're a company in Ireland or Switzerland, you pay $0.10 in tax. So for every dollar made by a company in those countries, you get to keep $0.18 more cents. So it's 18% increase in your profitability, just because of the tax structure. And that's caused some companies to invert. So an inversion, for those of you know don't know, means a US company will buy a foreign company, an Irish company or a Swiss company, but structure the transaction as if that foreign company had bought it. So the US company now becomes an Irish company, and pays Irish taxes.
The other advantage is if you're an Irish, or if you're a foreign company, you can use your money to buy things in the US. If you're a US company and you make money outside the US, it's much harder to bring that money back, again, because of the tax structure. So you get business advantages by doing that inversion. I think it's a terrible thing for the country to do that.
And so some smaller companies have done that. Pfizer, one of the biggest pharma companies, tried to do that last year, as you mentioned, by trying to buy AZ Astra Zeneca, a British company. That didn't work. Pfizer is now trying to buy Allergan, which is an Irish company. And look, the CEO of Pfizer, Ian Reed, is a feisty guy. And he thinks the tax structure in the US is absurd, and the Congress ought to change it. And that if they don't change it, this is the price they have to pay. And so that's the attitude of that particular company.
Most other companies are not inverting. But if you look at what's-- I think there's another problem with that tax structure. For a US company that has a certain level of profits, that company's worth a certain amount to US investors if it pays US taxes. It's worth more to foreign investors if it pays taxes in their country. So if you look at the biotech industry in Cambridge, and you look at acquisitions that have taken place, most of the biotech companies get bought by foreign companies, not by US companies.
And so inversion is one aspect of the tax structure. The other aspect of the tax structure is that increasingly, US companies are getting bought by foreign companies. And so I don't know what the solution is. It's easy to say tax reform, but that's a complicated topic. But that's--
SPEAKER 1: Why don't we thank George again.
Biogen CEO Dr. George A. Scangos ’70 presents an overview of the company's business model, drug development and strategy for future innovation, as well as a discussion of pricing and financial returns for biotechnology companies and the expectations of patients, physicians, investors and politicians.
Biogen is a global biotechnology company that specializes in the discovery, development and delivery of therapies for the treatment of neurodegenerative, hematologic and autoimmune diseases. Scangos is chairman-elect of the Board of Directors of Pharmaceutical Research and Manufacturers of America (PhRMA).
