Americans want health care to be less expensive. We also want our health care to be the most innovative in the world. The key to simultaneously achieving both of these goals is good public policy.
Back in September, House Energy and Commerce Committee Chairman Frank Pallone (D-N.J.) introduced H.R. 3, also known as the Lower Drug Costs Now Act of 2019, into the House of Representatives with 105 co-sponsors, all Democrats. The House is set to vote on the bill this week.
H.R. 3 would adopt international reference pricing for the Medicare program in an effort to lower drug costs. In other words, it would impose foreign price controls on the U.S. market. This would indeed reduce prices, but at what cost to innovation?
To answer that question, the California Life Sciences Association, which I head, commissioned a study by Vital Transformation, an international health economics firm, to examine the impact of Medicare Part D foreign reference pricing on California as well as the overall nationwide biopharmaceutical ecosystem.
The results were eye-opening. In exchange for some short-term price reductions, the bill would drastically damage innovative companies across the country. According to the study, this policy would reduce the Part D revenues for U.S. companies by $358 billion over the next five years, a 58% reduction before interest and taxes. The Congressional Budget Office projects a similar decline — $336 billion over five years for U.S. companies overall.
Much of the revenue being lost to H.R. 3 through lower drug costs tied to international reference pricing would have been reinvested in new, potentially lifesaving therapies for patients with cancer, heart disease, diabetes, rare diseases, and many other conditions. Small and emerging companies would bear the brunt of this. The 58% reduction in Part D revenue would reduce the number of new medicines that small and emerging companies bring to market by 88% across the U.S., according to our report. What this means is that if H.R. 3 had been in effect from 2009 to 2019, California’s emerging companies would have produced only three drugs instead of the 25 that actually made it to market.
H.R. 3 would upend the investment cycle. By making draconian revenue reductions, it would drastically reduce cash flow from operations that would otherwise be used to invest in research and development, licensing, partnerships, and milestone-driven agreements. This is an enormous problem. Companies need at least $500 million, and often more than $1 billion, to take a new drug through clinical trials and ultimately receive Food and Drug Administration approval. In addition, only about 8% of drugs that make it into clinical trials achieve that agency approval. It must also be mentioned that receiving FDA approval does not guarantee that a new drug will be profitable.
Emerging biopharma companies depend on investment from larger companies, venture capitalists, and others to have any chance of getting new medicines into and through the approval process and ultimately to the patients who need them. Fewer resources mean investors would take fewer chances. The kinds of high risk/high reward therapies that could help a lot of people would be starved of support.
A recent email I received from a cell therapy company CEO provides important context. This CEO wrote that the company will need heavy investment to bring its cell therapy to market. But the price caps being envisioned in H.R. 3 would dramatically limit the return on that investment. As a result, investors would likely look to a less regulated environment, such as tech, and a promising therapy would never get a chance to help patients.
Our study shows that emerging biopharma companies like this cell therapy company produce around 70% of the medicines in the U.S. research and development pipeline. Of the 59 new drugs approved nationwide in 2018, 74% originated from small companies.
Reducing biopharma earnings by 58% would also sacrifice jobs — 80,000 or more nationwide. These losses could also deplete U.S. stock market valuations by more than $500 billion.
Life sciences innovators take these dangers quite seriously. According to the 2019 California Life Sciences Industry Report, biomedical companies in California produced more than $175 billion in revenues, employed more than 300,000 people, and paid nearly $20 billion in federal state and local taxes. These companies are an economic engine that improves health and quality of life for millions of people around the world. And that’s just California. This economic engine is running in many other states as well.
Adopting H.R. 3 would be a pyrrhic victory. Yes, it could reduce some drug costs for some people. But in the long run it would also reduce the number of new medicines being produced to help patients, especially those with current unmet medical needs such as Alzheimer’s and rare diseases. In essence, we would be robbing the next generation to help ourselves. That’s not a trade-off we should be making.
Mike Guerra is president and CEO of California Life Sciences Association, the statewide trade association for the life sciences sector in California.