This won't hurt a bit

Alex Lash and Cheryl Meyerby Alex Lash and Cheryl Meyerfrom The Deal.com

In any other year, healthcare and the $2.2 trillion Americans spend on it each year, might have been the signature issue of the 2008 election. But a funny thing -- several, actually -- happened on the way to the voting booth: the worst financial crisis since the Great Depression, mounting evidence of perilous climate change, the military overextended in two wars.

Healthcare still got its play, of course. Talk this year usually centered on the high costs to average citizens and government coffers. Medical bills cause more than half of personal bankruptcies. But a host of other related problems were also on the table: the nurturing of today's basic science, the extent and wisdom of safety regulations and the health industry's power to shape our public policy.

In the following story, we break the healthcare world into five pieces and examine the twin effects of President-elect Barack Obama's and the Democratic Party's surge on Nov. 4 and the looming recession with its as-yet unknown bottom.

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First, we look at sources of funding for the early stages of medical research -- the National Institutes of Health and venture capitalists -- and lay out their concerns for the next couple of years. Then we examine the fate of the struggling pharmaceuticals industry, especially Big Pharma, which, after years of getting its way in Washington might now face more opposition. Next is a look at Obama's chance for major changes. Then comes the Food and Drug Administration. Woefully underfunded, it stands to get a lot more cash. Finally, there is the Supreme Court's take on healthcare, with a spotlight on the current Wyeth v. Levine, the so-called pre-emption case, in which a guitarist whose arm was amputated after an improper injection of Wyeth's anti-nausea drug is suing the drugmaker. The case could have a profound effect on the drug industry and beyond. How will the justices rule -- and how much will the new president be able to reshape the court?

THE EARLY STAGES

Where will the money come from? Like thousands of scientists-turned-entrepreneurs, Erik Schwiebert asks that question every day. The former University of Alabama at Birmingham researcher is scrambling to push his startup, Discovery BioMed Inc. of Birmingham, past the seed-funding stage even as investors and government funders, two potential sources, face a fierce economic headwind.

"I can't imagine starting up right now what we started a year or two ago," says Schwiebert, who says he has raised $1.2 million from a local venture fund and with only a year of operations behind him hopes to hit six figures of revenue next quarter.

Like so much biotech research, Schwiebert's work -- genetically tweaking diseased human tissue into "immortalized" cell lines that can survive in a lab and be used as a test bed for drugs -- has also benefited from government funding. In Schwiebert's case, it's a $100,000 small-business grant for his startup, with more perhaps to come.

After the nearly $70 billion in annual industry research, the next highest source of funding comes from the National Institutes of Health, which makes up 75% of the government's health research budget. But as the industry continues to pare research, NIH becomes even more crucial in feeding the earliest exploratory work. Most NIH money goes to its own labs, to academia and to other nonprofit research, though some is funneled into small-business grants such as Discovery BioMed's. That work flows downstream into venture-funded startups and ultimately into drugs, devices and other healthcare products.

After a double-the-budget effort in the mid-1990s, the NIH's budget has been more or less flat since 2003 and now stands at $29 billion. Advocates say it's not enough. Stacie Propst, vice president of policy at Research!America, a well-funded Washington proponent of medical research, estimates U.S. health research spending at $116 billion in 2006 and $122 billion in 2007, 5.5% of the nation's total healthcare outlay.

She wants to see the NIH's budget outpace the cost of inflation, for starters, then get another 3% boost, and she hopes Congress might be amenable to a one-time allocation in a stimulus package. She might get her wish: The Obama campaign pledged to double federal funding over 10 years for key science agencies, including the NIH.

More NIH funding also means more research projects for venture capitalists to choose from, but it's unclear how new tax policies will affect VC enthusiasm. Will an attempt to treat carried interest as earned income blunt the incentive to invest? What about a change in capital gains rates? If they go up, might early-stage investors be granted an exception as a way to encourage innovation?

The campaign's "small business rescue" platform says Obama wants to "eliminate all capital gains taxes on investments made in small and startup businesses." (Attempts to reach Obama economic advisers for comment were unsuccessful.)

A venture lobbyist in Washington is cautiously optimistic. "There's acknowledgment by the Obama team that there's a difference between investing long term and early stage, and investing in established corporations," says National Venture Capital Association president Mark Heesen. A key detail to monitor, says Heesen, is the eventual difference between the capital gains and earned income rates: "If cap gains are 30% and the ordinary rate is 34%, why put your money into a risky biotech? They have to get the tipping point right."

Because of the recession, major tax changes might not be part of the early agenda. For shorter-term help, the extension of the R&D tax credit tucked into October's bailout bill won't help biotech rank and file, since most biotechs don't have revenue. More helpful could be a change in the treatment of net operating losses for which industry group BIO and others are lobbying.

One significant change in the first year will come from the overturn of the Bush-era ban on federal funding for embryonic stem cell research. Once Obama lifts the ban, as expected, federal money could boost the research funds already dedicated by states, particularly California, and private funders.   Continued...