The "Shadow Pharmaceutical" Sector

The business of medical biotechnologies operates within an extraordinarily complex regulatory system.

The SEC and the IRS are only the beginning of the story…

In the United States, the Food and Drug Administration determines what can legally be sold. It even exercises control over what can be said by companies about medical therapies. Elsewhere, other regulatory authorities play similar roles.

It was not always that way, of course. Prior to the 20th century, there was virtually no regulation of medical therapies. Medical decisions were considered the domain of doctors and patients, who bore the responsibilities and risks associated with the use of any product. Even currently banned Class A drugs used for recreational purposes were available for sale without limitations.

Today, the average cost of bringing a medical product from conception to market is around $400 million, according to The Cato Institute. The time required can be as long as 10 years.

As a result, the FDA is widely considered in need of major reform, though the nature of those reforms is a matter of debate. Responding to criticisms, the FDA has implemented some programs to accelerate review procedures.

For example, Big Pharma is allowed to directly pay the costs of the process in some cases, which can result in a faster ruling. The FDA’s response to criticisms has often focused on the need for more money to accelerate reviews. Given budgetary pressures created by the financial and entitlement crises, this is unlikely. The FDA’s desire to expand oversight is, therefore, not likely to be accomplished, in the near term at least.

The FDA currently controls only the initial approval of a therapy. It does not prohibit the use of approved therapies for uses other than which they were approved, though many in the agency would clearly like to take over what is a far-less-regulated market than many believe. These unapproved, but legal, uses are referred to as off-label.

Currently, biotechs typically target applications with the highest probability of approval, knowing that a drug or device will be widely used for unapproved purposes as soon as it is available for sale. However, the FDA prohibits the advertising of uses other than those for which a therapy was approved.

The FDA has also become very aggressive policing the publication of unapproved medical information by companies that do not sell drugs. Recently, for example, the FDA sent Diamond Foods a letter stating, “your walnut products are drugs,” because the company had publicized well-documented research about the benefits of omega-3 fatty acids found in walnuts. Diamond was threatened with “seizure” if the company did not immediately stop educating the public to the benefits of walnuts.

The move is rife with irony, as the National Institutes of Health has lagged decades behind nutritional researchers regarding fats in general. For many years, the federal government officially endorsed the old, simplistic food-pyramid philosophy based on the notion that all fat consumption should be reduced. Researchers have shown, overwhelmingly, that most people are deficient in certain essential fats… especially omega-3s, which play an important role in reducing heart disease and other diseases.

Many consumers don’t have that understanding and could benefit from it, but the FDA frequently prevents companies from talking about the benefits of their products. This, by the way, is an example of what my dietitian wife calls regulatory “information hoarding.”

Diamond Foods, of course, quickly complied with the FDA’s ban on unapproved educational activities. However, the event highlights the tension between the agency and providers of natural products that may have health benefits.

This tension was codified in the Dietary Supplement Health and Education Act of 1994 (DSHEA). Sponsored by Sens. Tom Harkin (D- Iowa) and Orrin Hatch (R-Utah), the law specifically excludes naturally occurring substances, sold as dietary supplements, from the FDA approval process.

This was, in a sense, the birth of the modern American nutraceutical industry. Combining the words “nutrition” and “pharmaceutical,” nutraceuticals are foods or substances derived from foods, either synthesized or purified, and sold for health benefits. In Japan, the nutraceutical market emerged in the 1980s. Today, almost half of all Japanese consume nutraceutical products. The US, however, is catching up. Drug and health food stores have long stocked a wide range of nutraceuticals.

Increasingly, even grocery stores dedicate shelf space to natural products ranging from natural vitamin supplements to electrolyte- rich sports drinks.

Furthermore, we are also seeing nutraceuticals increasingly appear in foods to promote good health. Many foods are now being fortified with health-promoting ingredients. These include cereals with added omega-3 fatty acids, fruit juices with herbal ingredients that have biochemical properties and milk with vitamin D.

Even more esoteric products are sold in GNC and sports-oriented supplement stores. While many products may have little or no real value, it’s also clear that some have powerful biological effects.

One such product is creatine, 2-(methylguanidino) ethanoic acid. Creatine is a nitrogenous organic acid that occurs naturally in vertebrates, thus qualifying the product for nutraceutical status. It helps supply energy to all cells in the body, though most users are probably primarily interested in its effects on muscle cells…

Creatine increases the formation of adenosine triphosphate, which transports chemical energy within cells. The result for many, especially those who do not eat a great deal of meat, is increased muscle mass and anaerobic strength. For that reason, creatine is widely and legally used as a supplement by athletes who rely on strength, as opposed to aerobic abilities.

Creatine is the subject of scientific inquiry for other reasons as well. There is some evidence that it assists in muscle-damage repair experienced during intense training. One study has demonstrated increased cognitive abilities in humans, and animal studies point to potential in the treatment of ALS and Huntington’s disease. Some people are taking creatine for those reasons, but because it is a nutraceutical, manufacturers cannot publish any such possible benefits. To get permission to do so would cost many millions of dollars.

Today, the US nutraceutical market is worth approximately $87 billion in sales, but is expanding rapidly.

There are many reasons for this growth.

In part, the nutraceutical movement is an expression of the widespread desire to take control and responsibility for one’s own health in an increasingly impersonal and bureaucratized health care system. As such, the current state of the nutraceutical industry is very similar to the pharmaceutical market in the 22-year period between the institution of the Pure Food and Drug Act of 1906 and the Food, Drug and Cosmetic Act of 1938. Government can monitor for purity and certain aspects of commercial speech, but not much else. Though this was not planned, this minimal regulation has actually increased public confidence in nutraceuticals.

Moreover, public perception of nutraceuticals is changing as more and more validated therapies appear. This is certainly my experience. Not that long ago, the health food store industry offered little of real benefit except basic dietary nutrients. More often than not, natural products were ineffective placebos at best, and harmful at worst. This has changed, and this change will accelerate for one reason — exponential growth in science, powered in large part by rapid improvements in information technology.

Given the frustrations of those who feel, often rightly, that they have been prevented from bringing important drug therapies to market because of onerous regulatory hurdles, it was predictable that many innovators and entrepreneurs would turn to nutraceuticals as an avenue of exploration. In this endeavor, there have been notable successes that have changed the face of biotech.

Serious scientists are applying the latest and most-sophisticated technologies to the uncountable natural molecules that exist in our biosphere.

Bioinformatics, molecular biology and nutrigenomics are contributing to this new field outside the bureaucratic hand of the regulators — with all the opportunities and risks that it implies. You do not want to ignore companies best positioned to profit from this disruptive revolution…


Patrick Cox
for The Daily Reckoning

The Daily Reckoning