November 22, 2021 at 5:00 am ET
Capitol Hill is awash in proposals to stem allegedly out-of-control drug prices, but in their zealousness to rein in drug prices, policymakers risk imperiling drug innovation to the detriment of patients and the economy. The better way to produce more medical cures at lower cost over the long haul will be to double down on innovation, not deter it.
Forcing prices down in the near term through regulation will likely backfire, because developing new drugs is a risky, lengthy and expensive process. It takes at least a decade of research and development and clinical trials to develop an innovative new drug, and the average cost for large drug companies nearly doubled over the prior decade from $1.19 billion to $2.17 billion.
We cannot take for granted the fact that America’s biopharmaceutical industry is the world’s most R&D-intensive sector — investing nearly 22 percent of its sales into R&D. Companies are taking tremendous risks with those investments because most of the drugs they attempt to develop never make it to market. The Congressional Budget Office estimates pharmaceutical companies need to make a return of 62.2 percent on successful drugs to average just a 4.8 percent rate of return on all their assets.
The profits from one generation of drugs for cholesterol, diabetes or hepatitis C are essential to finance the high development costs for the next generation of drugs to address challenges like Alzheimer’s, pancreatic cancer or COVID-19. That’s why the Organization for Economic Cooperation and Development has found there is “a high degree of correlation between pharmaceutical sales revenues and R&D expenditures.” Indeed, previous-year profits are closely correlated to current-year R&D expenditures, and at the end of the day, every $2.5 billion of additional revenue leads to one new drug approval.
Many peer-reviewed scholarly studies find that reducing drug revenues decreases R&D and new drugs. One found that a 10 percent decrease in drug prices would lead to a 6 percent decrease in pharmaceutical R&D spending. Columbia University’s Frank Lichtenberg found a 10 percent decrease in cancer drug prices would likely cause a 5-6 percent decline in both cancer regimens and research articles. Likewise, researchers Golec and Vernon have shown that if the United States had used an E.U.-like drug-pricing system from 1986 to 2004, it would have resulted in 117 fewer new medicines’ being developed.
The converse is also true. One study found that if government price controls in non-U.S. OECD countries were lifted — then the number of new treatments available would increase 9-12 percent by 2030, equivalent to up to 13 new drugs. That would add 6-18 months to the life expectancy of the average OECD citizen who is 15 years old today.
That is obviously great for the 15-year-old — and it is hugely beneficial for society. For instance, Lichtenberg found not only that pharmaceutical innovation accounted for 73 percent of the increase in life expectancy across the United States and 29 other countries, but also that, in 2015, biopharmaceutical innovations produced $115 billion worth of economic value by reducing disability time so people use less medical care and delay collecting Social Security.
None of this is meant to suggest that policymakers are wrong to wish drug prices were lower. But as the White House Council of Economic Advisers has written, taking a red pen to reimbursement prices would “make better health costlier in the future by curtailing innovation.”
Instead of trying to slash prices, lawmakers should turn their attention to the other side of the industry’s ledger — the staggering cost of R&D — by spurring the kinds of innovations that can radically improve R&D productivity. A new slate of biomedical technologies, including artificial intelligence, CRISPR gene editing and biologics manufacturing, is transforming how new drugs are discovered, developed and clinically tested. Capitalizing on these trends to lower the cost of drug innovation is the only viable way achieve what everyone wants — a long-term trend toward producing more cures (and more ancillary economic benefits) at less cost.
Congress could start by restoring funding for the National Institutes of Health to early 2000s levels as a share of gross domestic product, which would only cost about $12 billion. Lawmakers also should expand public-private partnerships investing in biomedical R&D and technology commercialization, including by significantly expanding investments in biomedical-focused Manufacturing USA centers, such as the National Institute for Innovation in Manufacturing Biopharmaceuticals, and expanding the National Science Foundation’s industry-university research centers that work on biopharmaceutical production technologies.
The critically important Prescription Drug User Fee Act, which helps fund the Food and Drug Administration, is due for renewal in 2022. Congress should work with industry to refine the legislation to ensure we continue to have a safe, timely and efficient process for evaluating drugs with best practices in regulatory science that support America’s global leadership in biomedical innovation. Lastly, Congress should commit to controlling individual patients’ out-of-pocket costs, in part by capping costs for Medicare Part D beneficiaries.
Congress’ actions this fall will determine the trajectory of the U.S. biomedical innovation engine for years to come. Policymakers should focus on maintaining an environment that produces cures for present and future generations alike.
Stephen Ezell is vice president of global innovation policy at the Information Technology and Innovation Foundation.
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