Value Creation vs. Value Extraction: A Tale of Two Healthcare Startups

The success or failure of any capitalist system, as Adam Smith pointed out 250 years ago, rests on its ability to reward value creation more than value extraction. Both creation and extraction can make you rich, but only one improves our world. If I invent a better mousetrap and you pay me for it, that’s value creation. If I charge you rent on the mousetrap that you already have, that’s value extraction. The first one makes the world better. The second one simply transfers money from one party to another. This may be the single most important issue in healthcare policy today. At at time when we desperately need more innovation, most of the intellectual energy within healthcare corporations is going to extractive rather than creative activities.

Here’s a real world illustration, using two financially successful genetics companies headquartered in my own community. Both were founded in the early 1990s at the University of Utah. Both continue to be celebrated by the university as technology transfer successes. But only one of them improved health and healthcare through a business model based on value creation, while the other actually held back health and innovation through its model of value extraction.

Accelerating Nucleic Acid-Based Diagnostics

The first is Idaho Technologies (now BioFire), co-founded in 1991 by a friend and colleague of mine, Dr. Carl Wittwer. (Here's a link to my 2018 interview with him.) Back then Carl was a young assistant professor working in a genetics lab at the University of Utah. The polymerase chain reaction (PCR) that he used for analysis of DNA had been revolutionizing biology, and Carl thought it could revolutionize medical diagnostics as well. But existing PCR methods using thermocycling heat blocks were slow. Carl figured out that by using very thin capillary tubes to hold the samples, he could shorten the PCR process from about a day down to about 30 minutes, something that could make a huge difference for rapid diagnosis of infectious diseases.

Carl’s vision turned out to be way ahead of his time, and the established diagnostics companies like Abbott, Siemens and Roche didn’t show much interest at first. So Carl turned to a college friend who proposed that they manufacture the devices themselves. The friend’s parents loaned them space in their potato farming equipment plant in Idaho, and thus was born Idaho Technologies. Carl’s rapid PCR devices eventually caught Roche’s attention, and Roche licensed the patent and began building and selling LightCycler instruments to clinical labs around the world.

Carl and his team at Idaho Technologies continued to refine and expand on their techniques, eventually developing a cartridge-based device (the FilmArray) that hospitals and clinics could use to detect many different bacteria and viruses at the same time without requiring a traditional PCR lab. The company was rebranded as Biofire and sold for $450M to BioMérieux, the French diagnostics giant, in 2014.

What happened next was interesting. Typically when a small technology company gets acquired, they’re folded into the parent company. BioMérieux could easily have closed down Biofire’s Salt Lake City location and moved R&D and manufacturing operations to either one of their other US locations or their global headquarters in Lyon, France. But instead they massively expanded the Salt Lake City campus. Why? Because BioMérieux recognised the culture of innovation that Carl Wittwer and his business partner had created there.

Restricting Genetic Testing

Now, if you walk out the front door of Biofire’s headquarters and walk a few hundred meters north, you’ll come to Myriad Genetics. Myriad was founded at roughly the same time as Idaho Technologies, also with the assistance of the University of Utah Technology Transfer Office, but with a fundamentally extractive rather than creative business model. Myriad’s story begins with the discovery of the BRCA1 gene sequence by scientists at the University of Utah, Myriad, and the NIH. (The BRCA1 gene location, but not the actual sequence, had been discovered four years earlier by Mary-Claire King of UC Berkeley). Patients with mutations in this gene have a dramatic increase in their risk of breast and ovarian cancer. After using the University of Utah’s attorneys to patent the gene sequence, Myriad set up a testing lab and began offering BRCA1 analysis commercially to doctors and patients.

Years later I attended a Utah Technology Council awards banquet at the Grand America Hotel in downtown Salt Lake City. Every year UTC would honor the founders of a different Utah-based company, and this year they’d selected the Myriad founders. I watched, disgusted, as these men were praised for their supposed contributions to women’s health. When the slide show shifted from photos of the testing lab to photos of the villas in Tuscany they'd purchased through sale of Myriad stock (“Look how culturally sophisticated these men are!”) my disgust turned to anger.

Here’s why I reacted that way: Other than speeding up the discovery of the BRCA1 sequence (noting that if Myriad hadn’t succeeded, other NIH-funded research groups would have gotten there within a year or two), Myriad hadn’t contributed much to women’s health. What they had done instead was use their control of the gene patent to prevent other US laboratories from performing BRCA1 testing. In theory, Myriad could have offered licenses to those labs, allowing competition to lower the testing prices while taking a modest royalty for themselves. Why did they instead insist that all BRCA1 testing had to take place in their own facility? The answer, most likely, has to do with their database of sequence variants. The BRCA1 gene is unusually large, and many, many variants have been discovered over the years. Some are known to cause cancer, some have been determined to be benign, and others remain uncertain. If a patient has a variant of uncertain significance, then determining the patient’s cancer risk and followup (in particular, should they get prophylactic mastectomy and oophorectomy?) requires tracking down other patients with the same variant, and investigating the patients’ and family members’ cancer histories. In other countries that didn’t recognise gene patients, geneticists set up public databases to help with these followups. But in the US, because Myriad controlled almost all of the testing, they were the only ones who knew the patient identities and the significance of many of the variants. So that even after their gene patent was invalidated in 2013, and other labs began performing BRCA1 testing, Myriad was able to pressure doctors to continue ordering their more expensive version by tying it to access to their proprietary database.

So here’s Myriad’s real legacy with respect to women’s health: Until 2013, Myriad reduced access to BRCA1 testing, keeping the price roughly double what it would have been in a competitive market. (Myriad’s price, to my memory, was ballpark $4000.) And by refusing to share their variant database with the larger clinical and scientific communities, they also impeded BRCA1 science and made it harder for some women to know their true cancer risk.

So to summarise:  These are two health tech companies that are similar in terms of size, financial success, and the circumstances of their founding at a major university.

• One created new and useful tools for diagnosing disease, whereas the other restricted the ability of medical laboratories to use widely-available existing technologies to analyse an important cancer risk gene.
• One advanced the science of testing, publishing countless scientific articles along the way, while the other inhibited science by keeping their clinical database proprietary.

One story here is obviously about the patentability of human gene sequences. The Myriad case study shows why this was always a horrible idea. Unfortunately this horrible idea has recently been resurrected by Senators Thom Tillis and Chris Coons (thanks to heavy lobbying by biotech trade groups) as the Patent Eligibility Restoration Act of 2023. So please contact your senators and tell them to vote against this.

The larger story, though, is about the difference between value creation and value extraction. One benefits society, and the other holds it back. This is a huge theme in American healthcare. Pharmaceutical companies are extractive when they abuse the patent system through evergreening and through fraudulent use of the FDA “Orange Book”. PBMs are extractive when they use contractual arrangements to reduce competition and raise the cost of drugs. Meanwhile, hospitals extract money from consumers through abusive billing, and insurance companies extract through abusive claims processing practices. The vast majority of the healthcare industry’s collective intellectual effort goes to extractive activities such as these. None of them add any clinical value whatsoever.

As a country, we need to stop rewarding healthcare corporations for being big and powerful, and start rewarding them for actual innovation and improvement of the nation’s health.