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?

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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.

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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.

  • Mike Guerra: I, for one, am truly ashamed of you for writing this article. For the uncountable numbers of us who have seen firsthand the devastating effects that high drug costs have on those we care about, this article is a slap in the face. When CEOs such as Gorsky and Bourla earn tens of millions in salaries each year, it’s difficult to justify the deaths of moms and dads, sons and daughters and other loved ones each day who die because they simply cannot afford a drug that costs thousands of dollars per dose. I have yet to see a pharm ceo attend even one funeral of a victim of their demonic pricing practices.
    So really, making medications affordable will have a profound effect on R&D?? Perhaps if the cash-cow dries up a bit, they will actually come up with some cures for diseases that have heretofore been nothing more than untapped sources of free money.

  • This is the kind of boo-hoo-hoo propaganda that makes me sick to my stomach. Trillions of dollars has been poured into the coffers of big-pharma over the past couple of decades. What have we seen in return? That’s right, squat! Oh sure, we have seen our token “leaps forward” that are ridiculously minor in terms of ROI. What we have seen the most of, however, are CEO’s and researchers who have become filthy rich from the billions donated each year.
    I’m all for smaller government interference, but in this case, I can’t help but go along with the spirit of the bill to lower the costs of drugs. Especially when there are stories piled high of people who have died because they could not afford to pay for their diabolically priced medications. When the combined salaries of top executives in the 20 largest pharmaceutical companies tops the hundreds of millions of dollars each year, it’s difficult to feel sorry for the effects this bill might have on them.

  • Why do drug companies sell off drugs at drastically reduced prices to foreign countries in the first place? Why is it Americans always have to foot the bill for everything? Also after decades of cancer being a major more common killer in our lives have no drug companies come up with real cures for the disease? Seems as though they don’t want to find a cure with what they charge for these cancer drugs. Like they say, there’s no money in curing someone if you can keep them coming back for more and more. Drug companies are definitely not hurting on the way of profits so like most people think we have the greatest healthcare system in the world but if nobody can afford it what good is it?

  • First of all, Americans pay the price for research into new drugs and then these drugs are sold to foreign countries cheap. They don’t contribute to the research costs only Americans do. Why should Americans pay for the research for new drugs to be literally given to foreign countries for free? Makes no sense to me. We should pass a law that says pharma cannot sell these drugs to foreign countries for say 7 years after they first come out or these countries can kick in their fair share. The huge giveaways with our money has got to stop.

  • An excellent article with only part of the story. What about the additions to this legislation that Nancy Pelosi added? Only an idiot would sign this bill.

  • So is there a way where we can lower the cost of drugs without sacrificing the continued research and development of new drugs? Or are the two directly related no matter how you slice it?

  • I am sorry but putting a ceiling on drug prices creates a lack of incentive for drug companies to continue to make new drugs. They spend a lot on R & D and not be paid? Why would they? Getting the best for nothing or getting it on the backs of American’s that pay taxes. Is a recipe for disaster. Not just with this but other programs as well.

    • Profits are in the tens to hundreds of billions of dollars, which is being held, grown, and distributed as salary for executives. A reduction in profit by as much as 92% would not harm the ability to pursue R&D at the exact same rate as the present day. Gut the bastards.

    • They spend billions on R&D because they continue to receive billions for R&D. Did you know that those who actually do the research have seen little in the way of salary increases over the decades while at the same time executives and other leeches have seen seen millions in increased payment compensations. It’s naive to live in a world where people think these defacto murderers have the best interests of the public in mind. They do not. All they have in mind is how to pay for their latest home acquisition in Key West…

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