Regulatory Arbitrage for Medical Research: What I Know So Far

Epistemic status: pretty ignorant. I’m sharing now because I believe in transparency.

I’ve been interested in the potential of regulatory arbitrage (that is, relocating to less regulated polities) for medical research for a while. Getting drugs or devices FDA-approved is expensive and extremely slow.  What if you could speed it up by going abroad to do your research?

I talked to some people who work in the field, and so far this is my distillation of what I got out of those conversations.  It’s a very rough draft and I expect to learn more.

Q: Why don’t pharma companies already run trials in developing countries?

A: They do! A third of clinical trials run by US-based pharma companies are outside the US, and that number is rapidly growing — a more than 2000% increase over the past two decades. Labor costs in India, China, and Russia are much lower, and it’s easier to recruit participants in countries where a clinical trial may be the only chance people have to get access to the latest treatments.

But in order to sell to American markets, those overseas trials still have to be conducted to FDA standards (with correspondingly onerous reporting requirements.) Many countries, like China, are starting to harmonize their regulatory standards with the FDA.  It’s not the Wild West.

Q: Ok, but why not sell drugs to foreign countries and bypass the US entirely?

A: The US is by far the biggest pharmaceutical market. As of 2014, US sales made up about 38% of global pharmaceutical sales; the European market was about 31%, and is roughly as tightly regulated. The money in pharma comes from selling to the developed world, which has strict standards for demonstrating safety and efficacy.

Q: Makes sense. But why not run cheap, preliminary, unofficial trials just to confirm for yourself whether drugs work, before investing in bigger and more systematic FDA-compliant trials for the successful ones?

A: I don’t know for sure, but it seems like pharma companies are generally not very interested in choosing their drug portfolio based on the likely efficacy of early-stage drug candidates.  When I’ve tried to do research into how they decide which drug candidates to pursue through clinical trials, what I found was that there’s a lot of portfolio management: mathematical models, sometimes quite complex, based on discounted cash flow analysis.  A drug candidate is treated as a random variable which has some distribution over future returns, based on the market size and the average success rate of trials.

What doesn’t seem to be involved in the decision-making process is analysis of which drug candidates are more likely to succeed in trials than others. Most drug candidates don’t work: 92% of preclinical drug candidates fail to be efficacious when tested in humans, and that attrition rate is only growing.  As clinical trials grow more expensive, failed trials are a serious and increasing drag on the pharma industry, but I’m not sure there’s interest in trying to cut those costs by choosing drug candidates more selectively.

On the few occasions when I’ve tried to pitch to large pharma companies the idea of trying to “pick winners” among early-stage drugs based on data analysis (of preclinical results, the past performance of the drug class, whatever), the idea was rejected.

Investors in biotech startups, of course, do try to pick winners among preclinical drug candidates; but an investor told me that, based on his experience, it wouldn’t be much easier to raise money if you had a successful but non-FDA-compliant preliminary human trial than if you had no human trials at all.

My impression is that (perhaps as a rational reaction to high rates of noise or fraud) decisionmakers in the industry aren’t very interested in making bets based on weak or preliminary evidence, and tend to round it down to no evidence at all.

Q: So are there any options left for trying to do medical research outside of an onerous regulatory environment?

A: Well, one option is legal exemptions. For example, the FDA’s Rare Disease Program can offer faster options for reviewing applications for a drug candidate that treats a life-threatening disease where no adequate treatment exists.

Another option is selling supplements, which do not need FDA approval. You need to make sure they’re safe, you can’t sell controlled substances, and you can’t claim that supplements treat any disease, but other than that, for better or worse, you can sell what you want.  One company, Elysium Health, is actually trying to develop serious anti-aging therapies and market them as supplements; Leonard Guarente, one of the pioneers of geroscience and the head of MIT’s aging lab, is the co-founder.

The problem with supplements, of course, is that you can’t sell them as treatments. Aging isn’t legally a disease, and the FDA is not approving anti-aging therapies, so Elysium’s model makes sense. But if you had a cure for cancer, you’d have a hard time selling it as a supplement without running afoul of the law.

There’s also medical tourism, which is a $10bn industry as of 2012, and expected to reach $32bn by 2019.  Most medical tourism is for conventional medical procedures, especially cosmetic surgery and dentistry, as customers seek cheaper options abroad.  Sometimes there are also experimental procedures, like stem cell therapies, though a lot of those are fraudulent and dangerous.  It might be possible to open a high-quality translational-research clinic in a developing country, and eventually collect enough successful results to advertise it globally as a medical tourism destination.  The key challenge, from what people in the field tell me, is to get the official blessing of the local government.

Q: Could you do it on a ship?

A: Maybe, but it would be hard.

Yes, technically international waters are not under any country’s jurisdiction.  But if a government really doesn’t want you doing your thing, they can still stop you. Pirate radio (unlicensed radio broadcasting from ships in international waters) was technically legal in the 1960’s, where it was very popular in the UK, but by 1967 the legal loophole had been shut down.

Also, ships are in the water. If you compare a cruise ship to a building of equivalent square-footage, the ship needs to be staffed with people with nautical expertise, and it needs more regular maintenance.  In most situations, I’d expect it to be much more expensive to run a ship clinic than a land clinic.

There’s also the sobering example of BlueSeed, which was to be a cruise ship where international entrepreneurs could live and work in international waters, without the need for a US visa. It was put “on hold” in 2013 due to lack of investor funding.  And, obviously, a “floating condo/office” is a much easier goal than a “floating clinic.”

Q: Would cryptocurrencies help?

A: Noooooo. No no no no no.

You’re probably thinking about black markets, which are risky in themselves; and anyway, cryptocurrencies do not help with black markets because they are not anonymous.

Bitcoin helpfully points out that Bitcoin is not anonymous.  It is incredibly not anonymous.  It is literally a public record of all your transactions.  Ross Ulbricht of Silk Road, tragically, didn’t understand this.

Q: So, can regulatory arbitrage work?

A: It’s definitely not trivial, but I haven’t ruled it out yet. The medical tourism model currently seems like the most promising method.

I think that transparency would be essential to any big win — yes, there’s lots of shady gray-market stuff out there, but even aside from ethical concerns, if you have to fly under the radar, it’s hard to grow big.  If you’re doing clinical research, it’s impossible to get anything done unless you’re transparent with the scientific community.  If you’re trying to push medical tourism towards the mainstream, you have to inspire trust in patients.  Controversy is inevitable, but if a model like this can work at all, the results would have to be good enough to speak for themselves.