False Choice: Drug Price Reductions Won’t Undermine Innovation, Bentley Researchers Argue
Executive Summary
Paper by Bentley University researchers and West Health considers the impact of drug pricing reforms on large and small biopharma companies if Medicare is authorized to negotiate drug prices.
Arguments that drug price controls will necessarily lead to reduced innovation raise a “false choice” that does not hold under close scrutiny of the relationship between revenues and research and development spending, according to a white paper by researchers at Bentley University’s Center for the Integration of Science and Industry and the West Health Policy Center.
“Policy makers do not need to make a false choice between reducing prices to ensure the availability of pharmaceutical products currently on the market and the innovation required to bring new products to market in the future,” Gregory Vaughan and Fred Ledley of Bentley conclude in the paper, which was released 12 August.
The analysis considers the industry experience if House bill HR 3 is enacted and Medicare is authorized to directly negotiate drug prices. The researchers push back against concerns such a policy would crush innovation.
“Drug makers have hidden behind the unproven notion that skyrocketing drug prices are necessary to sustain innovation,” West Health president Tim Lash said in a release. “This research debunks that myth.”
Lower prices and resulting revenue reductions will not impact small companies, which are responsible for an increasing amount of innovation in the industry, because they are not dependent on sales. And large companies, which are dependent on revenues, are “agile” enough to compensate for lower prices without a drop-off in innovation, even if R&D spending goes down, the paper states.
The paper takes aim at the biopharma industry argument that price controls will significantly undermine innovation as leaders in Congress and the White House are mounting a major push for legislation to authorize the Health and Human Services Department to negotiate Medicare drug prices directly with manufacturers.
(Also see "Biden Pitches Medicare Price Negotiations That Acknowledge R&D Costs, Allow ‘Significant’ Profits" - Pink Sheet, 12 Aug, 2021.)
‘Another Point Of Reference’ For Price Control Impact Analysis
The paper notes the Congressional Budget Office has projected that government price negotiation as described in HR 3 would reduce biopharma revenues $500bn to $1tn and mean eight to 15 fewer new drugs over the course of a decade. (Also see "The Absurd Innovation Debate: Dueling Views Of HR 3 Miss The Point" - Pink Sheet, 6 Dec, 2019.)
But it also “provides lawmakers and the CBO with a new point of reference to consider when further evaluating and scoring the impact of HR 3 and other drug spending policies on the industry – especially given that the research currently available on industry profitability and innovation tends to be older in nature and skewed with some pharmaceutical influence,” West Health says.
The researchers reviewed the historical relationship between revenue changes and R&D spending at 1,379 public biopharma companies from 2000 to 2018. Large companies, defined as those with a market capitalization greater than $7bn, were considered separately from small companies with a market cap below $7bn.
Among the large companies, changes were associated with proportional changes in R&D. The researchers found that reductions in revenue of up to 10% were associated with a reduction in R&D spending of up to 8%. The authors also modeled approaches to reducing spending in different phases of the drug pipeline to show that, even with a 10% drop in revenues, “large companies may mitigate any negative impact of drug price reductions on pharmaceutical innovation and strategic allocation of cost reductions.”
Small companies are largely dependent on equity investments by public and private investors as well as partnerships with large pharmaceutical companies for operating capital, the paper notes. To assess the relationship between R&D spending and the capital available to small companies in a given year, “we examined the relationship between R&D expense and the sum of cash and short-term investments at the beginning of the fiscal year, revenue, and sale of common and preferred stock,” it explains.
“Periods when pharmaceutical prices have been subject to the greatest pressure have been some of the best years for investment in biotechnology,” the paper argues.
On that basis, “we observed no significant association between R&D expense and this estimate of available capital.” Thus, “this analysis does not support the assumption that R&D spending in these companies would be decreased in response to a reduction in drug prices,” the researchers said in the paper.
The authors acknowledged that “additional studies of the relationship between the availability of capital and R&D spending in smaller companies is warranted.” They noted the calculation of capital is complicated by the fact that capital investment may fund R&D over multiple years and that partnerships with large pharma companies may include up-front payment, licensing fees or milestone payments that are not necessarily recognized in the year received.
Furthermore, the authors recognized that “investment analysts have expressed concern that decreasing drug prices would decrease private and public investment in early-stage biopharma companies.” However, “we are not … aware of empirical evidence for such an association,” they maintained.
“There is no evidence for it and it’s hard to know how you would do the experiment either,” Ledley said in an interview with the Pink Sheet. “I do definitely understand the logic” that if an acquiring company appraises the value of an asset, “you will get a smaller number if drug prices are going to be lower someday,” he explained. On the other hand, “it makes the value of that drug to the acquirer even higher” if a large company has cut back on in-house R&D spending in response to price controls – "and we think they will" – and needs to in-source R&D from a smaller biotech, he added.
History Suggests Biotech Investment May Be Enhanced By Pricing Pressure
The researchers looked to historical trends to support their thesis that investing would not be significantly impacted by price controls. “Periods when pharmaceutical prices have been subject to the greatest pressure have been some of the best years for investment in biotechnology,” the paper argues.
Specifically, the period (1993-1994) when the Clinton health plan was under consideration in Congress, and large pharma companies reduced R&D spending, “has been described as one of the best IPO windows in history.” Similarly, despite the slowing growth of drug sales over the past decade (prior to COVID-19) and numerous policy initiatives aimed at lowering drug prices, “the last seven years have seen record investment activity and valuations for both early-stage, private biotechnology companies and emerging public companies,” the authors pointed out.
The analysis differs from earlier studies of the potential effect of reducing drug prices on the pipeline of pharmaceutical innovation by incorporating a focus on smaller companies, the paper says. “Previous studies have focused primarily on limited sets of large pharmaceutical companies and have often failed to address the contributions of the much larger numbers of small, early-stage or emerging biopharmaceutical companies,” it points out.
That’s a shortcoming because small companies are becoming increasingly important in the drug development process, the authors noted. They currently sponsor approximately 60% of all clinical trials of new drugs and in the past five years, have been responsible for 40% of all drug approvals.
The Pharmaceutical Research and Manufacturers of America challenged the notion that small companies would not feel the impact of policies like HR 3 in a statement responding to the study.
“Larger biopharmaceutical companies partner with and collaborate with smaller, emerging biotechs to bring new medicines to patients as soon as possible,” the group notes. "Any changes in the market that impact one part of the ecosystem will have a ripple effect throughout the entire ecosystem, causing uncertainty, which chills investment in innovation. As CBO clearly states, policies that set medicines prices will lead to a reduction in medicines developed across the industry.”