Killing Private Enterprise
One start-up at a time
The first federal regulator I ever knew was a fellow named Ernie. This was 40 years ago, a few weeks after I'd first landed on these shores.
I'd run out of money and taken work as kitchen help at a small family firm in New Rochelle, New York. The firm made frozen kosher TV dinners. They had a kitchen of course, a preparation room with half a dozen big stainless-steel tables where we made up the dinners, and a couple of freezer rooms where we stored them. The dinners were shipped out to hospitals, nursing homes, and some retail outlets.
Because we sold to places in Connecticut and New Jersey, the Commerce Clause kicked in. The earthly incarnation of the Clause was Ernie, who had a couple of assistants.
Ernie was a power freak. If you showed him the respect he thought he was entitled to, he was generally harmless. If you crossed him, however, his wrath was terrible.
The boss of the firm was a no-nonsense former Marine. He ran a clean, efficient operation. He put up with Ernie as best he could, but sometimes the forbearance required was too great. The U.S. Marine Corps inculcates many fine virtues, but suffering fools gladly is not necessarily prominent among them.
On one occasion the boss lost it and yelled at Ernie. Ernie then had his minions go round the firm "tagging" all the preparation tables with what looked like old-fashioned white luggage tags. Peered at up close the tags revealed printed messages saying that no food product could go anywhere near the tagged table until the tag was removed, with ferocious federal penalties threatened against transgressors. The tags could, of course, only be removed by Ernie. The tables were out of commission. We had to scrub those suckers three or four times over with green scouring pads and Comet before Ernie would deign to remove his tags and let the firm get on with their business.
Another time, after some other go-round with the boss, Ernie determined that the firm's zip code was printed on the dinner boxes in too small a font. The boss had to get rolls of stick-over labels printed up, and we menials spent a couple of days working our way through the freezer rooms re-labeling the dinners so the zip code was in the FDA-approved font size. I guess this was real important to the nation's health.
Federal regulation? Been there, done it. Baptism of fire. (Actually of ice: it was darn cold in those freezer rooms.)
I have therefore been casting a very jaundiced eye on these reports about the FDA regulators' recent interest in genetic-testing firms.
The story seems to have begun early in May. A firm named Pathway Genomics, based in San Diego, is one of many that have come up in the past few years offering to scan a person's DNA and report on any significant disease-risk or drug-response markers. You swab your cheek with a sterile Q-Tip they provide, or spit into a sterile plastic tube, and you send the saliva sample off to them. They scan it and send you back the information. The cost of a test can be from $20 to $500, depending on how many markers are scanned for.
Earlier this year Pathway entered into a deal with Walgreens, a nationwide drugstore chain with 7,500 outlets. The deal would have allowed Pathway to operate counters at 6,000 of those outlets, selling their service. Instead of signing up with Pathway via their website and sending in your saliva sample through the mail, you could do the thing right there in your local drugstore.
Health reporter Rob Stein at the Washington Post did a story on the Pathway-Walgreens deal. The story appeared in the May 11 edition of the newspaper. By way of researching it, Stein called the FDA to ask them for a quote. This is everyday journalistic practice — any reporter would have done the same. The call, however, woke the FDA from their dogmatic slumbers. They sent for Ernie — who, at some point between 1973 and 2010, changed his name to Alberto:
In response to a query from the Washington Post, an FDA official said that the agency planned to investigate the test.
"We think this would be an illegally marketed device if they proceed," said Alberto Gutierrez, director of the FDA's office of in-vitro diagnostics. "They are making medical claims. We don't know whether the test works and whether patients are taking actions that could put them in jeopardy based on the test."
The regulocrats lumbered into action. A letter went out to Pathway warning them that their test was a "medical device" likely subject to FDA oversight and pre-marketing approval. Hearing of this, Walgreens canceled the deal with Pathway.
Close behind the FDA, like jackals following tigers, came Congress. Henry Waxman, head of the House Energy and Commerce committee, demanded a comprehensive document dump from three of the firms — every letter, every lab report, every email. Last week the FDA escalated the war, sending letters out to five more of the firms (23andMe, Navigenics, DeCode, Illumina, and Knome) couched in similar terms to the original Pathway letter.
Explaining himself to Newsweek, Ernie claimed that the FDA only wants to protect the poor, clueless, gullible consumer from the possibility he might make a bad medical decision based on results from one of the tests.
If you're making a claim about [a genetic variant that affects the metabolism of the anticoagulant drug] warfarin, and somebody decides based on the result they get that they want to change their dosing, that is a fairly risky decision. That could affect their health. If they're not feeling well on their current dose and the drug is expensive, we don't know what they would do.
Heaven forfend that a consumer be left to make his own decisions without a federal employee present to hold his hand!
The logic of classifying these DNA scans as "medical devices" bears a closer look. What actually is a "medical device"? Answer: A medical device is anything the FDA declares to be a medical device. The humble tongue depressor, for example (known to English schoolchildren of my generation as an aah stick, from the doctor's instruction to "Say 'aah'"), is a Class I medical device. I suppose the FDA would argue that there is a tiny risk the consumer will swallow his tongue depressor and choke on it.
You might still think it's a bit of a stretch to call these tests "medical devices." They are, after all, merely informational. Consumers are not being dosed with anything, or having anything attached to or implanted in their bodies, nor even inserted into their mouths for purposes of tongue depression. "Medical device"? Huh?
Part of the answer to this little conundrum is buried in the Patient Protection and Affordable Care Act, a.k.a. the health care bill signed into law by President Obama in March. Somewhere in the bill's thousand-odd pages is a wee clause imposing a 2.3 percent excise tax (a tax, that is, on sales, not on profits) on medical devices.
So not only are the DNA scanners going to have to submit to the attentions of Ernie and his pals, with years-long delays over niggling points of order, passive-aggressive temper tantrums over perceived slights, and business-stalling, privacy-invading document dumps, they're going to be subject to a brand-new tax!
(Senator John Kerry justified the tax to the medical-device companies thus: "We've just expanded their marketplace by 32 million people who will now buy products from them. This is going to work out just fine." Of course it is! When has anything enacted by Congress not worked out just fine? Some of the companies remain skeptical, but no doubt a few sessions of compulsory re-education will rectify their thinking.)
Lest you should think this is a straightforward tale of power-crazed regulators and tax-hungry politicians killing off an infant industry, please let it be noted that Big Government is by no means the only predator that struggling start-ups must face. There is also Big Business.
In seeking to widen its regulatory scope, the FDA has some support from big, established biotech companies. Back in 2008, biotech giant Genentech petitioned the FDA to expand its authority into products involving "laboratory-developed tests" (LDTs). An LDT is one with an expert in the loop. An example of a non-LDT would be a home pregnancy test — no expert between test and interpretation. LDTs are more lightly regulated than non-LDTs, for understandable reasons.
One of the early DNA-testing firms, Genomic Health, slipped through the LDT loophole back in 2001. (How? How do you think? It was a Republican administration, not much interested in killing businesses.) Where Genomic Health had found a gap in the fence, the other start-ups of the last decade followed, treading the less-regulated LDT route.
It was natural for Genentech and other established companies to look with disfavor on impertinent startups taking advantage of regulatory loopholes. Big Business is just as capable of hating entrepreneurial startups as is Big Government.
A business can only lobby, though. Government can act. Barack Obama's government is mobilizing in major force against the scattered start-ups of the Genomics Age. A Congress with key committees chaired by the likes of Henry Waxman is of course ready to supply new laws; but really, no changes to the law are required, just brute executive power. As Pathway found, you can take a major business hit just by getting a letter from the FDA. Or, as a principal in one of the other firms told me bitterly: "You find out you're illegal from reading the Washington Post."
One cannot help but suspect, too, that along with normal Ernie-style bureaucratic cussedness at the FDA, combined with the business-killing instincts of red-diaper babies like Barack Obama and law-school socialists like Henry Waxman, there is deep cultural hostility on the liberal left to the whole business of DNA scanning.
We have at present merely skimmed the surface of the human genome. (The June 19-25 issue of The Economist has a good layman-level survey, though possibly subscriber-only.) Who knows what we shall find as we go deeper?
A great many people would rather not know. There is a sense in which DNA scanning is, for Obama and his people, what stem-cell research was to George W. Bush and his people: a zone of science seeded with ethical and ideological landmines.
As with stem cells, the work will get done anyway. A genomics start-up put out of business by Ernie and his pals will move to Singapore, whose government, far from harassing them, will give them a lab, a grant, and a tax break.
The U.S.A. is a real nice place to have a job in government, and still a pretty nice place to work for a big corporation — especially one designated "too big to fail." For the start-up entrepreneur in an ideologically-fraught field, however, the environment is increasingly hostile. Why do they even bother?