Consumer access to affordable and effective medicines is an important issue. As the cost of many drugs continues to rise, sometimes astronomically, some have suggested imposing price controls on the U.S. pharmaceutical industry. Doing that risks crippling our only hope of curing the many serious diseases that still plague us.
The global pharmaceutical industry is among the most profitable, driven by its ability to price to value, especially in the United States. High profits attract investors and generate money for research. The global pharmaceutical industry’s investment in research and development is second, barely, to the computer and electronics industry and well beyond that of most other industries. For comparison, the top 10 pharmaceutical companies spend five times more on research and development as a percent of sales than do the top 18 U.S. chemical companies.
The pharma industry’s efforts have been quite productive in attacking some of the most vexing problems in medicine. Cardiovascular mortality in the U.S. has declined more than 50 percent since the introduction of propranolol, the first beta blocker, in 1964. Many cancers, such as childhood leukemia, have almost been cured. AIDS is now a chronic disease, as the death rate has declined from near 100 percent to near 0 percent. Hepatitis C is now curable. Even metastatic melanoma, formerly a death sentence for 95 percent of its victims, is now curable for many. Lung cancer may be next. All these miracles have been brought through the clinic and into the market by commercial pharmaceutical companies.
Yet there remain huge unmet needs for new and better treatments for most cancers; all neurological problems, especially Alzheimer’s disease; most autoimmune diseases; most major gastrointestinal disorders; macular degeneration; and diabetes — not to mention the global scourge of drug-resistant bacterial and viral infections. Advances in these areas will come if money continues flowing to pharmaceutical companies and their primary sources of innovation, biotechnology startups.
But if U.S. drug prices come under bureaucratic control, as they have in most of Europe and Japan, it will be a different story. Little pharmaceutical innovation occurs in price-control jurisdictions. The United States has always, by a large margin, led the world as a source of new drugs, and that lead has widened as Japan and Germany have imposed price controls over the past few decades. All major international pharmaceutical companies, without exception, have instituted R&D and commercial operations in the U.S. to take advantage of its pricing environment.
If price controls pressure the U.S. industry into a more conventional process industry model, like that of the chemical industry, pharmaceutical R&D budgets would be slashed. To achieve the chemical industry’s rate of R&D spending, as would be required to achieve profitability competitive with the chemical industry, top pharmaceutical companies would have to reduce their R&D budgets by 80 percent — almost $50 billion in total. This reduction in spending would take a few years to realize, but would be completely evident by 2023 or earlier.
An important corollary is that, if profitability and value creation opportunities for new drugs declined, the appetite of the venture community for risky, long-term biopharmaceutical investments would shrink exponentially. Price controls on drugs would have the surprising effect of accelerating the flow of investment into high technology, where timelines to market are shorter, less regulated, and less risky. The venture capital community is flush with cash and anxious to invest where high returns can be achieved — ideally within a much shorter time than is typically possible in the realm of drug R&D.
As a society, if we force pharma into a chemical industry model, where there is no biotech equivalent and no venture investing, we will be trading better and sooner effective drugs for better and sooner virtual reality devices and self-driving cars.
Squeezing pharmaceutical R&D spending down to one-fifth of what it is today would also have an enormous impact on the problems that drug developers often choose to address. Orphan diseases would be deprioritized, as the returns under price controls would not warrant the investment. Complex diseases would also be deselected. While Alzheimer’s disease and diabetes have huge patient populations, the extremely high cost of conducting the difficult research and the need for huge and complex clinical trials would dissuade all but the largest companies from pursuing those illnesses if the potential pricing upside was to be significantly constrained. Moreover, for difficult diseases like schizophrenia, where today’s treatments are mostly inadequate, the flow of more effective new treatments would slow from a trickle to a rivulet, depriving those with these conditions from the possibility of relief.
The upshot is simple. Forcing drug prices down would surely shave a few percentage points off what we spend on health care today. By 2032, drug prices could be half of what they are today, as every drug would be a generic. But our ability to treat or cure the many serious diseases that still afflict us will have been crippled and squandered. In my view that is terrible policy.
Robert J. Easton is co-chairman of Bionest Partners, a global medical business consultancy serving pharmaceutical, medical device, and diagnostic firms and their investors.
I am not an expert in the field, but I have the distinct impression that I am being misled by this article. Why not consider a law that limits advertising expense to 10%, 25% (choose a reasonable percentage) of research expenditure?
In addition, I do not see why Americans are obligated to pay for everyone else’s medicine (that seems to be the intent of the author).
Finally, as another comment noted, other countries seem to be leading the US in several areas of medical research, e.g. treatment of prostate cancer by 177 Lu attached to prostate specific membrane antigen.
According to a study by @NatRevDrugDisc analyzing 252 drugs approved by the U.S. FDA between 1998 and 2007, the U.S. was the largest contributor to drug discovery accounting for 47% of the total 252 drugs. It was also the leading contributor of scientifically novel and priority review drugs. Of the 123 priority review drugs in the study, 63% were of U.S. origin. While the U.S. remains the most single most important nation with regards to drug discover, half of all drugs originated in either Europe, UK or Japan – markets under the auspices of universal-healthcare and/or single payer. Drug innovation is not tethered to any one single country or healthcare system.
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