Join us next week in LA for Riskgaming
If you are near Marina Del Ray on Wednesday night and curious about the future of biotechnology and healthcare (more below in the column), we’d love to see you at our next Riskgaming runthrough. Laurence Pevsner, Josh Wolfe, Shahin Farshchi and Shaq Vayda will all be joining as hosts alongside yours truly. Despite the image above, I think we are down to just 2-3 spots remaining, so please sign up urgently.
- Marina Del Ray, Los Angeles, Wednesday February 26 from 5:00pm PT to 8:00pm PT
The complex aftershocks of ripping out the FDA’s 1962 authorities
Last night, Laurence and I hosted more than 50 people in New York City for our brand-new Riskgaming scenario, Experimental Automata (a wink to “cellular automata”). The goal was simple: help everyone in the room understand the complex incentives that affect the global biotech and healthcare industries, with a dash of cocktail-induced fun to boot.
Embodying personas from the head of the Chinese Academy of Sciences to a lead scientist focused on the reindustrialization of the United Kingdom, players fought over public health financing, the ethics of animal experimentation, a global patient data commons for AI training and whether to geoengineer the Earth’s atmosphere to compensate for AI’s gas-guzzling data centers (heavy on technologists, geoengineering won — results I don’t expect to replicate on Capitol Hill).
The impetus for the game is that Lux increasingly forecasts that Congress and the executive branch could rip up the 1962 amendments that dramatically expanded the regulatory authority of the Food and Drug Administration this year. Most notably, the amendments mandated that the FDA determine the efficacy of new drugs in addition to their safety. Today, these are known as Phase III clinical trials, and they are the most laborious and expensive phase in the long journey to drug approval due to the high patient enrollments required to reach statistical significance. The 1962 amendments also authorized the FDA to regulate many aspects of lab and clinical experimentation as well as the packaging and marketing of drugs.
Since the 1962 amendments and Phase III trials were adopted, the cost of new therapies has skyrocketed, although identifying the prime cause of that inflation is still hotly debated. New therapies are harder to discover than ever, despite advances in sequencing and other lab techniques. The expense of identifying and enrolling trial patients has grown, even though electronic medical records are now the norm in the United States (a slew of startups including Lux’s own Trial Library and Paradigm are working on aspects of this problem). Meanwhile, failure rates for some targets like the central nervous system are as high as 90% and often happen at the end of Phase III, when most costs have already been borne.
Outside trials, there’s the replication crisis in the life sciences and also outright scientific fraud, which has even killed entire lines of disease research, including for Alzheimer’s drugs (which I covered all the way back in 2022 in “Fabricated Knowledge”).
In short, there are diverse explanations, but we have many reasons to suspect Phase III trials themselves are a key impediment to innovation in biotech. In this time of DOGEing the government, the question echoing around DC’s health policy shops is whether the 1962 amendments should be fully or partially rescinded, and if they were, how the economics and organizational design of the biotech industry would transform.
Today, biotechs raise prodigious venture capital, acquire strategic investment from large pharmaceutical companies and debut early on the public markets in order to maintain solvency across the decade or more it takes to reach the end of the new drug process.
The immediate effects of a repeal would be dramatic. Instead of a decade-long slog, drugs would instead just go through safety trials and then be automatically available for doctors to prescribe — barring an intervention by the FDA. This model is similar to the way another regulatory body, the Securities and Exchange Commission, handles a new IPO application, where an S-1 or F-1 filing is automatically approved unless the commission halts it.
The grand hope of a repeal among biotech executives and some prominent VCs is that such a system could radically change the cash flows across the useful patent life of a therapy. Earlier revenues could reduce the equity capital and dilution that a biotech needs to take on in development, since physicians could prescribe a drug years earlier. As we saw from the wave of SaaS startups a decade ago, early revenue can dramatically enhance the equity returns to founders, employees and VCs. Plus, those early patients could ultimately offer the exact same efficacy data presently required by the FDA in Phase III trials.
The logic makes sense. Yet, one reason that we build Riskgaming scenarios at Lux is to understand the emergence of behavior that may not be obvious to any individual, but can only be seen through the complex interactions of individuals negotiating and responding to each other’s actions collectively through incentives and systems dynamics.
Take healthcare payers. Today, therapies are offered through insurance plans based on the decisions of an omnipotent oligopoly of pharmacy benefit managers (PBMs) like CVS Caremark, Express Scripts and OptumRx. These managers determine what drugs will be offered to insurance beneficiaries, and they negotiate the net price an insurance plan will reimburse for that drug. This is no simple exercise: hundreds of billions of dollars will be determined through this bargaining.
PBMs (and the insurers that employ them) are incentivized to push doctors and patients toward the most performant drugs for a particular disease. That’s why a patient typically must start with a widely-prescribed option (often generic) before receiving authorization for a more advanced therapy: insurers want proof that the more expensive option is worth its price.
Right now, Phase III trials give pharma companies a leg up: they have proven efficacy to the FDA and can use that evidence as leverage in their negotiations with PBMs. While doctors, patient advocacy groups and politicians each have their own incentives, the successful approval of a drug by the FDA is a stamp that can be wielded to force insurance companies to cover treatments they might otherwise not wish to pay for.
What happens without those Phase III trials? Presumably, many more drugs will come to market for major diseases, given that safety trials are faster and enroll many fewer participants. That’s great for the competitive pace of the marketplace, but it also means that many more therapies will be vying for attention from healthcare’s middlemen, from PBMs to the actual doctors prescribing a drug to a patient. How will they decide between the options on offer? Someone has to determine efficacy, and without the FDA, who will it be? Will PBMs conduct their own efficacy trials? Will biotechs work with private organizations to prove efficacy more efficiently than they could to the FDA?
Outside major diseases, there are also markets that don’t exist today that could suddenly materialize with repeal. While the FDA has programs for compassionate use, treatments for rare diseases have traditionally struggled, since there may not be enough patients to enroll in a study in order to reach the statistical power required to prove effectiveness in a Phase III clinical trial. With a repeal of the 1962 amendments, those markets could potentially cross a threshold into profitability, offering a lifeline for many patients who would otherwise have no therapies to choose from.
The big theoretical question in my mind (and I am still very much in the preliminary phase of exploration) is whether opening up the pharma market with a repeal of 1962 could completely reinvent our model of drug development. The fusion of artificial intelligence technologies like OpenAI’s Deep Research with the popularity of biohacking, online medical discussion forums (particularly for rare or neglected diseases), globalized clinical networks, entrepreneurial physicians and more could alter the fundamental organizational structures of drug discovery. Would we see decentralized and regional drug pipelines? Would opening up the system allow competitors from China, India and elsewhere get a new foothold that they couldn’t when the FDA’s stricter mandates are in force? I don’t know, but I want to find out.
Nonetheless, that’s the type of completely open-ended, complex and interdependent evolution of an industry that reeks of Riskgaming. Dozens of actors with cross-incentives have to bargain with each other, but with such a level of uncertainty and access to asymmetric information and actions that academic game theory can’t apply. What we’re trying to forecast here is the emergence of behavior and outcomes from a complex social system: and that can only happen with well-designed simulations that bring all-too-human characteristics into the scenario.
Last night’s game in NYC offered a small taste of those interactions. The president of the Chinese Academy of Sciences walked in an hour late — and nearly won the game against dozens of competitors. Is that the efficacy of the game or reality? Thankfully, I don’t need a Phase III trial as proof.
Podcast: How America holds it all together
Laurence and I talked with Tufts’ Michael Beckley about the United States’ surprisingly durable hegemony on the world stage even as problems mount at home — all based on his recent essay in Foreign Affairs, “The Strange Triumph of a Broken America.” We talk about the historic roots of President Donald Trump’s foreign policy, the United States’ true advantages abroad, and how to define American interests. Below is a short and edited excerpt of the wider conversation.
🔊 Listen to “How America holds it all together”
Laurence Pevsner: “Hollow internationalism” implies that you think it is a bad idea, that we should be much more focused. And we've seen various administrations try to be, right? I'm thinking of the Obama administration’s pivot to Asia, which didn't really work out. They didn't end up pivoting to Asia because all of a sudden, they were tied up in Ukraine, they were tied up in the Middle East. So how would the United States avoid a hollow international policy?
Michael Beckley: I've compared it to a traffic light, where you can either give foreign adversaries a green light to do whatever they want or you can give them a red light. But what the United States consistently does is give them a yellow light. That’s like saying, "Yeah, we don't really want you to do this, but we're not going to do much to stop you." And so adversaries say, "Okay, the United States is hostile, but also vulnerable." And you've seen this result in failures over and over again.
I'm a big fan of the idea that you just have to pick one. Either you're going to draw a line in the sand, in which case you need to be ready to back up all of that tough talk. Or you need to stop talking tough and radically scale back your interests.
I would be sympathetic to either option. This country has so much going for it, and it controls so much of global wealth, that I tend to lean toward the idea that it has a special responsibility to try to create security around the globe. But I'm also sympathetic to people who say, "Why is the United States sticking its neck out for the Taiwanese and risking World War III?"
What I would like to see is more decisiveness about picking one avenue in each hotspot so you don't go stumbling into conflicts like so many times in U.S. history.
Danny Crichton: Another big challenge in the United States is our pendulum swing between different parties, different ideologies.
The pendulum swings may make sense domestically. Theoretically, there's balance. In the foreign affairs realm, though, it is really hard because it means that strategic tradeoffs are constantly shifting. And if you're another country, you’re always asking, "How do I even respond when I know that in three to four years I'm going to get an entirely different policy?"
Michael Beckley: This is another good example of how the United States’ greatest strengths are also some of its critical weaknesses. You're right that it does make it harder for allies to really feel comfortable throwing their lot in with the United States. One election cycle, even a midterm, can radically alter where they stand vis-a-vis the United States. The irony, though, is that it makes it harder for adversaries to deal with the Americans, too, because they have to deal with this moving target as well.
But frankly, a lot of U.S. advantages are so structurally driven that the country can have a highly engaged foreign policy or retrench and, in relative terms, it's still going to do quite well. It's just other countries, I think, that are going to bear the brunt of its swings.
🔊 Listen to “How America holds it all together”
Lux Recommends
- Asimov Press has been a delight since it launched, and I doubly enjoyed this long essay by Larissa Schiavo on “The Battle for Better Air.” Talk about complex Riskgaming: “For about a millennium, most Europeans made do with either shutters or open holes for windows — a wealthy few could shell out for stained glass. By the 17th century, glass windows were becoming more commonplace. However, because they were relatively expensive to make and maintain, windows often served as a proxy for wealth that could be tallied from the street by inspectors. After England began to tax windows in 1696, as with chimneys, many people blocked them off to avoid this taxation — though their indoor air quality paid the price.”
- Our scientist-in-residence Sam Arbesman and I both loved this piece by Marcin Wichary on "The hardest working font in Manhattan.” “One day, I saw what felt like Gorton on a ferry traversing the waters Bay Area. A few weeks later, I spotted it on a sign in a national park. Then on an intercom. On a street lighting access cover. In an elevator. At my dentist’s office. In an alley. These had one thing in common. All of the letters were carved into the respective base material – metal, plastic, wood. The removed shapes were often filled in with a different color, but sometimes left alone.”
- I’m a bit obsessed with analyzing AI’s impact to the labor markets, so I was delighted that Anthropic built something it dubbed “The Anthropic Economic Index.” “Our analysis found that very few occupations see AI use across most of their associated tasks: only approximately 4% of jobs used AI for at least 75% of tasks. However, more moderate use of AI is much more widespread: roughly 36% of jobs had some use of AI for at least 25% of their tasks. As we predicted, there wasn’t evidence in this dataset of jobs being entirely automated: instead, AI was diffused across the many tasks in the economy, having stronger impacts for some groups of tasks than others.”
- Sam recommends Kevin Kelly’s essay on “The Handoff to Bots.” “The curves of progress and the curves of population increase are highly correlated. And of course, they are mutually reinforcing. More progress enables more children to live, and older people to live longer, which gives everyone more chances to improve the world. So increased populations increase progress which increases population which increases progress. That was before. Now suddenly, in the coming decades of this century we are entering a new regime of humanity. We want increasing living standards and progress while we decrease population.”
- Finally, we end with a recommendation from Laurence. Venkatesh Rao is a star in tech circles, and he announced the launch of a new Substack magazine called Protocolized. But I enjoyed this observation: “Our north star for this magazine is something I like to call Chiang’s Law, after the science fiction author Ted Chiang. This law can be stated compactly as: science fiction is about strange rules, while fantasy is about special people.” Now, isn’t that prescient?
That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.
