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Delivering Health
Small Companies Leave Big Pharma in the Dust

Big Pharma is a victim of its own success. As it gained more market power, it became more risk averse. The industry today is largely living off profits from drugs approved prior to 2001, and it has done little to create new treatments (which now account for only 8.3 percent of profits). According to Time, smaller pharmaceutical companies and the biotech industry are stepping into the gap, doing innovative work with methods like “micro-medicine” to treat famously tricky diseases. For example:

Gene therapy goes to the heart of how our bodies fight disease: our genes. But if we’re going to change something as essential as our genetics it needs to be done safely. This is where zinc finger nucleases have proved useful. These proteins are small, DNA cutting machines inspired by the African clawed frog. They are capable of manipulating our genes at a precise molecular level. They can free an immune system of a disease-causing mutation or, alternatively, create one that is capable of fighting back. The results have been striking. Sangamo Biosciences and their collaborators are currently testing them in clinical trials for three diseases: brain cancer, HIV, and Alzheimer’s.

Advancements like these are exciting because they point to a future of more personalized and therefore more efficient medicine. As they eventually become widely available and cheap, these innovations will also disintermediate care and give patients more ability to monitor their own health. Micro health devices and gene-based therapy will streamline the process of care delivery. A gene mapping that outlines all of a person’s genetic risk factors, for example, could allow doctors to make more precise and quick diagnoses. This can’t come fast enough.

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  • free_agent

    Let me propose that this is part of a larger shift in how “industrial innovation” is done. In the old days (circa 1920 to 1970), enormous companies had research laboratories in which large numbers of researchers with what would now be called “good jobs” created new products. the new model is that new products are created by small entrepreneurial companies. A entrepreneurial company whose product is successful is acquired by an enormous company, which uses its marketing connections and reputation to sell the product. The latter model is more competitive basically because the innovation workers in small companies don’t have “good jobs”, much of the risks of product failure are on their shoulders.

    A good example of the new model is Cisco. After its first few products, most of the expansion of its business has been by acquisition of small companies to gain control of their products. The result is that it pays nothing for the new product attempts that fail.

    • rheddles

      All of the risk of research failure falls on the researchers’ shoulders, as it should. How much risk of product failure falls on them depends on the deal they strike with the enormous company. No earnout, no risk.

      But what is really redistributed is the reward. In the old model, the folks who developed the new miracle product got promotions within the corporate pay structure, a bonus and maybe some stock options. Everybody else got their salary. With the new model, the researchers who score a big hit make boodles when they sell out to enormous company. Everybody else gets what they paid themselves from their SBIR.

      This is all part of the end of average and rewarding the 1% who make a difference (and get lucky).

      • free_agent

        The “winner take all” phenomenon and the end of economic security…

        • rheddles

          I agree and more. I was reading an article, Silicon Valley needs to Lose the Arrogance and I began wondering when things changed and why. This certainly wasn’t a problem when Hewlett and Packard bestrode the valley. And I concluded it was because there was a zeitgeist of “we’re all in it together” that was a result of the Great Depression and World War II.

          With the coming of prosperity in the 60’s it was lost, perhaps because of how constricting it was for individuals. You see this percolating in the 50’s in The Organization Man, The Man in the Gray Flannel Suit and High Noon.

          By the 60’s this evolved into Liberations of all sorts. Above all liberation from The Protestant Establishment. The unfettered individual reigned supreme. And the hero left the movies. We all had the right to do whatever we wished. Former crimes were now victimless. But there was an indirect, now defenseless, victim, society. And this is part of the death of the Blue Model. All its programs changed from ways for us to help those less fortunate to entitlements everybody else owes me.

          We gained a new Establishment, the Meritocracy. It has now proceeded to an extreme which is unsustainable. We are now in The twilight of the Elites. A great challenge awaits which will restore the zeitgeist of “we’re all in it together” but that challenge will involve great cost.

          • free_agent

            You’re touching on the sociological history of the second half of the 1900s. But let me suggest that things have changed in less obvious ways. There was a certain “we’re all in it together” effect, but the “we” was a lot narrower. Certainly Hewlett and Packard wouldn’t have gotten where they were if they were not white males and most likely Protestants as well. (I read somewhere that California in 1950 was the whitest and most Protestant state in the nation.)

            The rise of meritocracy led to a much more “every man for himself” attitude, which spawned all those liberations and the breakdown of the attitude that one must exercise one’s talents for the general benefit. (A friend noted that was a major theme in Superman, that having extraordinary powers meant he had to sacrifice normal life and spend all his time solving other people’s problems.) But it also meant that one didn’t need to already be in the Establishment to gain a position of power. “The Bell Curve” noted that Harvard changed to a meritocracy system within a decade, and the result was that average (upper-class Boston) freshman of 1950 (IIRC) could not have gotten in in 1960.

            But it’s possible that (at least in the US), people will start to conceptualize the population as a single ethnic corporation that one owes allegiance to, a new form of homogeneity to replace the older conceived homogeniety of various elites and ethnic groups.

          • rheddles

            I was definitely not suggesting a return to “the good old days”, but that there was a price to the progress.

          • Fred

            Frankly, I see it more as entropy than progress. Oswald Spengler may have been wrong about a lot of things, but he was right about two things: civilizations have lifespans and ours is near the end of its.

      • Andrew Allison

        Surely the point of the post is that market dominant companies become risk-averse and succumb to more agile competition. There’s nothing new about this: GM, Kodak, Fairchild, Motorola, HP, pre-Gerstner IBM, the Federal Government, etc., the list goes on.
        I fear that I must take issue with “In the old model, the folks who developed the new miracle product got promotions within the corporate pay structure, a bonus and maybe some stock options.” The holders of those “good jobs” were, by and large, white collar wage slaves, and the rewards went disproportionately to their managers. ‘Twas ever thus. The fact is that in the new model the rewards are much more widely distributed than in the old — which may account for the productivity.

        • rheddles

          The fact is that in the new model the rewards are much more widely distributed than in the old

          I’m not so sure. The folks whose projects did not pan out continued to receive their “slave” wage, much of which came from the rewards that did not go to those whose projects were home runs. Now the Home run gets the big payday and the one whose project didn’t pan out gets bupkis.

          • Andrew Allison

            When a large company acquires a successful smaller one, it typically retains most, if not all, of the employees (not to do so would defeat the purpose). I think if you look at the distribution of stock in start-ups versus monoliths you will also see that it is more widespread.
            In other words, everybody wins (some, of course much more than others, but I stand by my argument).

          • rheddles

            In other words, everybody wins

            Sure, if you don’t count all the people at the start-ups enormous company didn’t buy that went belly up and wiped out the founders’ savings. Remember, this is about pharma and real research, not software.

          • Andrew Allison

            I apparently misinterpreted, “With the new model, the researchers who score a big hit make boodles
            when they sell out to enormous company. Everybody else gets what they
            paid themselves from their SBIR.” to mean the individuals within the company in question.

            If what you meant was the companies that fail, that is as it should be: Just like a junk bond, it’s the risk of loss which makes the rewards great.

          • rheddles

            it’s the risk of loss which makes the rewards great.

            Spoken like a man who’s never seen the family farm of a fifty-five year old entrepreneur foreclosed because the start-up crashed.

          • Andrew Allison

            GMAB! I lost half my net worth in the 2008 meltdown, and it’s nobody’s fault but mine. Ditto for the 55 year-old who make a really bad investment decision.

          • Jim__L

            “When a large company acquires a successful smaller one, it typically
            retains most, if not all, of the employees”

            Er, no.

            Most of the employees leave, for one reason or another. Many are forced out; others go when they realize exactly how much pull they have anymore; still others just cash out as soon as the change of management occurs, because they see the writing on the wall.

            If you’re one of the first in at the startup, you make a nice bundle. If you’re one of the later hires, you get a chunk of change amounting to significantly less than a years’ pay, far too little to make up for the late hours you probably had to work.

            “(not to do so would defeat
            the purpose).”


        • free_agent

          You write, “the rewards went disproportionately to their managers”.

          Let me suggest that was not the case. A considerable fraction of the rewards went to the stockholders, of course, but so did all of the losses. A large chunk of the rewards were used to pay the salaries of the failures; those wage slaves formed a mutual-insurance pool. And as can be seen by all the complaining these days, a very large fraction of the people would rather have reliable mediocrity than to get most of the rewards and failures of their actions.

          • Andrew Allison

            I meant, of course, the rewards distributed to employees (the subject of our discussion). Stockholders are a whole different can of worms.
            The difficulty of obtaining rewards commensurate with one’s contributions in large organizations may be as important as managerial risk-aversion in their ossification.

          • Jim__L

            You try supporting a family on a startup situation. It’s just short of abuse.

            Society simply can’t sustain itself like that. People won’t have kids (don’t have kids) when presented with those circumstances. The center cannot hold, and things fall apart.

          • free_agent

            You write, “You try supporting a family on a startup situation.”

            My understanding is that people who work for startups don’t support kids. Either they’re childless, have a spouse with a well-paying job, or have some sort of external income. Playing the startup lottery seems to be a stage-of-life thing, whereas the traditional corporate research laboratory was a steady job with a pension at the end of it.

          • Jim__L

            I’m confused — are you condemning people for “reliable mediocrity”, when you accept that startup life is not a good fit for those with kids (pretty much everyone, in a just world)?

          • free_agent

            I’m not particularly for it or against it, I’m just noting that commercial innovation is being done differently now, in a manner which is more like the lone inventor of the 1800s than the industrial research labs of the 1900s. (Was it Edison who created that system?)

            One consequence of the new model is that the innovater can’t be the sole breadwinner supporting children (as was the case in the 1900s), but it seems that the fraction of the well-educated population that is in that position during any particular year is fairly small, and so probably isn’t a limiting factor.

          • Jim__L

            Pardon me, but most places it now takes two incomes to support a family — particularly places where the well-educated population tends to live.

            And the idea that well-educated, well-paid people shouldn’t be supporting families is about the most toxic, self-destructive idea that today’s culture has produced. Future generations charting Western Civilization’s decline and fall will point to that simple fact (and the philosophies such as feminism and libertinism that motivate it) as pretty much summing up the problem.

          • free_agent

            I’m not sure what you’re getting at. My understanding is that people who work in startups usually do so in their twenties (before they have kids) or in their fifties (once the kids are out of college). So I suppose the point is that people’s working lifetimes are now long enough that “supporting a family” is just a phase, not the entirety of their working life.

          • Jim__L

            Sorry, I’m just in the middle of it right now — trying to raise a family with kids (ten years apart) in Silicon Valley, looking around at the kids-optional urbanist culture. It’s something of a raw nerve with me. There are just so many people out here who figure that society will get along fine if they shirk the responsibilities of making a family to support the next generation. Going without kids seems to be the main way people cope, around here. (San Fransisco culture contributes greatly to this problem.) Shoving all that expense and responsibility onto those with less resources seems to me to be both cruel and stupid.

            Looking around at job opportunities in startups, companies looking to make the jump up from startup status, and well-established companies, I’m just not seeing much of anything I would call a good life for myself or my kids. For the top 1% of the newcomer population — or people who bought houses before the bubble — life isn’t bad. Money, space, convenience, no problem. For 10% of the newcomer population, the rat race can supply $100k+/yr jobs that just might possibly give you the sort of lifestyle that MEDIAN America used to offer; and that’s if you don’t mind the hours, the job stress, and the fact that all that now applies to both Mom and Dad, instead of just Dad.

            For the other 90%? (And with three kids, one of whom is on IEP, how much chance is there that all of them (any of them??) will avoid landing there?) Living in an outrageously priced crackerbox in a high-crime neighborhood, spending hours both at work and commuting to work, unbelievable amounts of job stress, no status compared to the Leftist philosopher-kings who issue diktats about whether your groceries can come in bags or not, who spend most of their time patting themselves on the back about hard they fight for our “freedom”? When VM says that the middle class is fleeing California, my only surprise is that I’m not one of them.

            And I hope for the sake of my kids ever having families, that my kids move away. How screwed up is that? Someone hoping that their kids WON’T live anywhere nearby, for their own sake?

            Sorry about that. This whole thing just touches a real raw nerve.

          • free_agent

            I can see that you’re in a not-good position (other than, I suppose, you’re actually employed at a reasonably good job). But it seems that the problem is that Silicon Valley isn’t the place for a person like you (and probably not anyone below maybe 95% or 98%). When economists compare countries, they scale the money numbers by “purchasing power parity”, what the local cost of living is. But the same thing applies within countries. And Silicon Valley/San Francisco tops the charts in cost of living, along with having (from what I’ve heard) some of the highest total tax rates in the nation. The job market is getting better, especially in tech, and there are even startups in other metro areas, so why don’t you move out? I can even say to you, “Come to Boston, it’s cheaper here!”, because you’re in about the only place where that comparison applies.

            That doesn’t solve the larger social problem, but I think that Silicon Valley is not significant in the larger picture. It’s got less than 1% of the US population, and despite its productivity, it’s not the unique center for innovation in any field. In pharma (which is where the discussion started), I don’t think *any* of their innovation is done in Silicon Valley.

          • Jim__L

            Silicon Valley is relevant in the larger picture because of the social and financial influence the rich tech barons have already demonstrated, and are likely to continue to have, over the course of national politics. A couple of good scandals could change that, but right now, it seems that a lot of people want to emulate them.

            It would be vastly reassuring to me if it could be demonstrated that elsewhere in this country people were still, well, Americans. The aspirations of traditional America seem to me to be far more human than those of the Apple / Google axis.

        • Jim__L

          They don’t succumb to anything. They buy out the successful upstarts, either to use their product or to deep-six it, and the structure goes on pretty much without change.

          • Andrew Allison

            In fact, all the companies I listed did, as Big Pharma appears to be doing, did succumb to risk-averse bloat and ossification.

          • Jim__L

            Microsoft, Cisco, Google, Apple… the list of companies that thrive on the buyout model is also a long one.

            Talking to my biotech friends in San Diego, the model there is similar.

          • Andrew Allison

            I should have included Microsoft, Intel and Cisco, whose market caps peaked well over a decade, ago in my list of dinosaurs. The stock price of each has been static at half (one-third in the case of Intel) its peak for more than decade .

  • Boritz

    “A gene mapping that outlines all of a person’s genetic risk factors, for
    example, could allow doctors to make more precise and quick diagnoses.”

    Managers as well could use it to make hiring and advancement decisions . Of course that will probably be illegal so they wouldn’t actually be able to use the information in that manner.

    • Government Drone

      Or the IRS could use it to decide whether or not to approve a 501(c)(4) application or whether to audit you.

    • free_agent

      More financially importantly, insurance policies of all kinds would be based on much better predictions of events that are now considered random.

    • Jim__L

      Managers can prove whatever they want to prove about why they did or didn’t hire someone.

      • Boritz

        Therefore they have no use for data?

  • Fat_Man

    “This Woman Invented a Way to Run 30 Lab Tests on Only One Drop of Blood” By Caitlin Roper 02.18.14

    [At age 19, Elizabeth] Holmes, now 30, dropped out of Stanford and founded a company called Theranos with her tuition money. … Instead of vials of blood—one for every test needed—Theranos requires only a pinprick and a drop of blood. With that they can perform hundreds of tests, from standard cholesterol checks to sophisticated genetic analyses. The results are faster, more accurate, and far cheaper than conventional methods. … The company plans to charge less than 50 percent of the standard Medicare and Medicaid reimbursement rates. And unlike the rest of the testing industry, Theranos lists its prices on its website … If all tests in the US were performed at those kinds of prices, the company says, it could save Medicare $98 billion and Medicaid $104 billion over the next decade.”

    Eric J. Topol, M.D., the author of “The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care” is editor-in-chief of He is also Director of Scripps Translational Science Institute, professor of genomics at The Scripps Research Institute and Chief Academic Officer of Scripps Health. Before that he was chairman of cardiovascular medicine at the Cleveland Clinic and founder of the Cleveland Clinic Lerner College of Medicine. He wrote “Topol Reviews 2013: A Year of Revolutionizing Medicine” by Eric J. Topol, MD,

    “We send our patients to the clinic or hospital lab, or a central facility, to get their blood drawn. Typically, multiple tubes of blood are obtained; the costs are not transparent; and perhaps even worse, the results are not easily or routinely accessible for most patients. Last month, I highlighted a new entity on the scene — Theranos — and interviewed Elizabeth Holmes, the young CEO. Theranos will be in all Walgreens stores before long, leveraging microfluidic technology to do hundreds of assays with a droplet of blood, with a fully transparent cost list, and ultimately with results directly going to both the patient and doctor. After 60 years of unchanged laboratory medicine practice, this new, innovative model will help drive disruption — just the kind of shake-up that we have needed. ”

    Here is a link to the interview:

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