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Archive for March, 2010

Fourteen States Launch Constitutional Challenge to Health Care Reform Bill

Written by on Wednesday, March 24th, 2010

Fourteen states filed suit yesterday to challenge the constitutionality of the health care reform bill.

The states of Florida, Alabama, Colorado, Idaho, Louisiana, Michigan, Nebraska, Pennsylvania, South Carolina, South Dakota, Texas, Utah, and Washington joined together in a suit filed in Florida.

Virginia filed its own suit separately.

The crux of these suits is the constitutionality of the new health care legislation, which will now increase the federal government’s regulatory powers into health care insurance, which had been traditionally regulated at the state level (along with most private insurance), and will impose penalties on individuals for failing to purchase private insurance policies.

If you have been following the commentary on this issue at all, you know that this argument is basically a classic states’ rights debate: that the legislation deprives the states of sovereignty and violates the 10th Amendment to the Constitution, which says that powers not delegated to the federal government are reserved to the states.

Of course, the other side of the argument says that the bill is constitutional because Congress has the power to regulate interstate commerce under the commerce clause of the Constitution.

As most lawyers recall from our Constitutional Law courses in law school, the commerce clause has been read in recent years to provide the federal government greater and greater powers to regulate interstate commerce in various ways.   For this reason, many commentators are predicting that the legislation will stand up under constitutional scrutiny.

But should it withstand constitutional scrutiny?   There is no question that insurance generally, and particularly health insurance, has up until now been entirely within the purview of state regulation.  Each state has its own regulatory requirements for what can be in health insurance plans offered under that state, each state has its own insurance commissioners, and each state makes independent regularly decisions about the activities of individual insurers.  We haven’t even been able to buy insurance over state lines–if you move to a new state, you have to get a new policy entirely.  So, clearly insurance has long been viewed as falling under the purview of the states.

Moreover, this legislation now allows the federal government to mandate that you buy health insurance, and if you do not, you will be penalized by the IRS.  While supporters argue that this is like state laws requiring that you buy car insurance, I think that there is a valid argument that this is different.  In the case of car insurance, states are imposing these requirements on residents of their state who choose to avail themselves of the privilege of driving, in order to protect other drivers from injury.  It’s hard to see the parallel when this is a federal instead of a state exercise of power, and when there is no privilege like driving involved with health care, which Democrats are now calling a “right.”

The bottom line is that the IRS is entwined in this bill, and there is a good chance that the Supreme Court will read this bill to be a valid exercise of commerce clause powers–even more so because a taxation component is involved.

However, if that happens, I think supporters of this bill should look beyond the current legislative debate and consider how continuing to broaden the commerce clause powers might be used in the future.  Extending the commerce clause is going to someday make it that much easier for a Republican Congress to use the new enhanced commerce clause powers in a way that may not be quite so palatable to Democrats.  Continuing to allow an encroachment of states’ rights does have consequences and they are consequences that may very well cut in both directions.   I think it is an open question as to whether we as Americans want to continue to see the commerce clause powers continuing to encroach on states’ rights.   The line is moving further and further over into the traditional purview of the states: where is the hard stop?  Do we as Americans care enough to draw a line in the sand and say it stops in any particular place or are we okay with the states’ powers continuing to dwindle?

Clearly, this challenge raises some very interesting constitutional and societal issues.  So, whether you support health care reform and this particular piece of legislation, or you oppose it, I would urge you to tune into this Constitutional debate.  How the issues are decided will have an impact that goes far beyond our recent health care reform debate. The California Biotech Law Blog will continue to follow this issue as it unfolds.

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Biotech Industry Evaluates Anticipated Impact of Health Care Reform

Written by on Monday, March 22nd, 2010

Well, unless you have spent the last few weeks stranded on a desert island, you probably know that yesterday was the big health care vote.  As expected, the Democratic majority in the House passed the health care reform bill–despite the fact that the bill was vigorously opposed by a large percentage of the American public.

While the legal battle challenging the constitutionality of the law is just getting started and is likely to continue for some time, the biotech industry is just starting to process what yesterday’s vote will mean for its industry.

BIO,  the biotech industry organization, released a statement on the vote yesterday, which took a decidedly positive tone.  In support of its position, BIO cited three key benefits of the bill:

  1. The bill provides hope for Americans living with debilitating diseases.
  2. The bill created a pathway to enable the U.S. Food and Drug Administration (“FDA”) to approve biosimilars.
  3. The bill included a Therapeutic Discovery Project Tax Credit, which is designed to provide financial relief to some biotech companies that are suffering in tight credit markets.

Why was BIO so positive about this legislation?

Well, the remarks suggest that BIO is happy with several of the carrots that were thrown at the industry in this bill: biosimilar legislation and a tax credit for biotech companies.

Noticeably absent in the BIO statement, however, was any statement to the effect that health care reform will advance the biotech industry in any way.  Instead, the only reference made to reform itself was that it will bring “hope” to Americans suffering from diseases.  Is this an oversight on BIO’s part?  In my opinion, no.

While there is no doubt that most biotech industry members applaud the idea of providing health care to all Americans, and you can certainly say that reform will increase the potential customer base for biotech products, it is a definite  stretch to say that this reform bill will prove beneficial in any way to the biotech industry.   How could it?  Any enterpreneur in the biotech space knows that the U.S. market has always been the most lucrative due to compensation issues–the U.S. consumer finances the world’s drug development costs.  What happens when you impose drug price controls, which are inevitable in government-controlled health care?  It doesn’t take an expert to see that the world’s most lucrative market will become a lot less lucrative.  It will become like most of the other markets in the world, which have price controls, too.  This kind of change will inevitably impact entrepreneurship in the biotech space.  Launching a biotech company requires huge risk and tremendous investment capital.  Will the capital be there when the huge  potential payoff is not?  It will take a huge amount of increased business to make up for the loss of revenues in the U.S. market due to price controls.  Will what is left be enough to encourage drug development?

While the answer to that question is still unclear, I think it is a safe bet that true entrepreneurs will find away to adapt to the new realities of the market.  Many entrepreneurs–me included–have had to do this in the past year to survive the recession.  I have adjusted my business model completely to deal with the new realities of the legal market,  and I think it is a safe bet that many other small businesses who survive this recession will have done the same thing for their markets.  I am sure that there will be biotech entrepreneurs who can adjust their business models to the new realities of the U.S. market after the passage of this bill as well.

Having said this, there is no question that this bill is going to have an impact on the industry.  Change is coming to biotech–and it may not be the kind of change that members of the biotech industry wanted.

So, what about the carrots that got thrown into this bill for the industry?  What kind of impact will those carrots have on the industry?

Well, the tax credit may be beneficial to some companies, but my guess is that it will have a minimal impact on struggling companies who are unable to land the capital they need to survive this recession.   It seems a stretch to say that a tax credit is going to “save and create thousands of jobs across our nation” as the BIO statement claims.  A tax credit only helps if you are generating revenue to pay taxes with, and many stuggling biotechs likely need investment capital more than they need a tax credit at this point in time.

As for the biosimilars piece to the legislation, this topic has been heavily debated for some time and remains controversial.  It is legislation that is going to benefit some companies at the expense of other companies, so it is difficult to say it really will “benefit” biotech.  The legislation will benefit companies seeking to manufacture biosimilars at the expense of the brand.  The California Biotech Law Blog will explore this issue in more detail in a separate blog entry.  The bottom line is that BIO is supporting the legislation simply because it creates a pathway for the approval of biosimilars, which previously did not exist, and BIO is taking the position that this is the right decision for biotech.

All in all, the impact of this bill on biotech is one that may be debated and evaluated in the months to come.  The California Biotech Law Blog will continue to follow the developments as they unfold.

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California Biotech Law Blog Named to List of Top 50 Biotech Blogs

Written by on Wednesday, March 3rd, 2010

Medicareer has named the California Biotech Law Blog to be on its list of Top 50 Biotech Blogs.

The California Biotech Law Blog joins  a number of well-regarded publications, which also made the list such as the  In Vivo Blog and the  BioHealth Investor.  The list also includes a number of blogs that I have not previously come across, which we at the California Biotech Law Blog look forward to checking out.

The California Biotech Law Blog thanks  Emily Johnston of Medicareer for letting us know that we were included on this list!  It is an honor to be recognized among so many other biotech publications on the Internet.

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Carl Icahn Makes Move to Raid Genzyme Board

Written by on Wednesday, March 3rd, 2010

Billionaire Carl Icahn is at it again.  Icahn, who has a history of engineering board takeovers and initiating corporate sales at the corporations in which he invests, now has focused his efforts squarely on the Genzyme board.

Various media outlets are reporting that Icahn plans to nominate four new board members, including himself, when Genzyme’s nine director seats open up for election at the 2010 annual meeting scheduled for May.   This move would allow parties friendly to Icahn to control just under 50% of the Genzyme board.

What accounts for Icahn’s new interest in assuming control of the Genzyme board?

First of all, as Mass High Tech reported,  Icahn owns 4.8 million shares, which as of December, 2009, amounted to just under 2 percent of Genzyme.  This obviously is enough of a stake in the company to have a strong interest in its future.

Second of all, as Fierce Biotech reported, Genzyme has recently been plagued by some fairly serious problems, and Icahn seems to have lost confidence in the leadership of the company.  Its Allston Landing facility in Boston has suffered a series of setbacks resulting in shortages of Genzyme’s durgs Cerezyme and Fabrazyme.   Moreover, Shire and Protalix are close now to finalizing development of several competing drugs, which will likely give  those companies the opportunity to take over a significant portion of Genzyme’s existing market share.

According to Reuters, Genzyme has taken actions lately designed to fend off an Icahn move and to address investor sentiment generally, but it may very well be “too little too late.”

Reuters reported:

[Genzyme] recently announced an overhaul of its compensation system and added Robert Bertolini, previously chief financial officer at drugmaker Schering-Plough Corp, to its board.

The company also hired new managers to oversee quality control and agreed to appoint Ralph Whitworth of Relational Investors, another activist shareholder, to its board. In return, Whitworth agreed to support Genzyme’s slate of nominees.

So what is next for Genzyme? It seems likely that some significant changes are in its future.

The California Biotech Law Blog will continue to watch this story and keep you posted.

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