One of the fundamental principles on which the U.S. economy is based is that the expectation of a positive return drives one’s willingness to invest time and money. Individuals investing in a portfolio of stocks hope that some stocks’ gains will offset others’ losses. Yet Congress threatens to dismantle this framework, extinguishing an ecosystem that employs millions of people and serves as a global leader in creating new medicines for deadly diseases.
Legislators in Washington are considering a reconciliation package that would ostensibly enable Medicare to “negotiate” the price of medicines it covers for American seniors. Negotiation is a core principle of any market. We support that and want all insurance plans, including Medicare, to negotiate with competing companies to win the best prices. But the proposed policy does not entail true negotiation. What it actually does is redefine the word to mean that the government can force a company to accept any price under threat of a ruinous 95% penalty tax.
This proposal scores well with the Congressional Budget Office (CBO), something Congress likes. But its calculus ignores the true cost of taking the “market” out of a market-based economy. The CBO focuses on Congress’s intent to cut $450 billion in drug spending over a decade but fails to understand that the means it is using to do this is lethal to investment in risky research and development.
The approximately $200 billion torrent of biopharma R&D investment will slow to a trickle, focusing on BARDA-contracted projects that have revenue guarantees or on low-risk variations of existing medicines. But diseases that are crying out for new treatments — cancer, diabetes, Parkinson’s, Alzheimer’s, pediatric conditions, many infectious diseases, and more — will be ignored. Investors will have no incentive to fund small companies, and large ones will be compelled by activist investors to stop funding what would then be deemed wasteful R&D. Shareholders would milk the existing profit streams of marketed drugs until all have gone generic, leaving behind only a generic drug industry, which does not create or invest in novel medicines.
Investors cannot fund a portfolio of risky projects knowing that after they have risked their capital the government could dramatically cut down the returns of the successes that make the whole portfolio worthwhile. There’s no example of investors funding R&D on that premise anywhere in the world.
Congress won’t be inventing a new type of economic model for making medicines by redefining “negotiation” to mean what it does not — it will be legislating away the model we have.
The consequences will also be felt in adjacent industries. For example, research hospitals will lose revenue from running drug trials and replace it by charging more for their regular services. As we fail to develop and invest in new medicines, we’ll continue to rely on hospitals to treat conditions that new medicines could have prevented. Unlike drugs, hospitals do not go generic.
Cutting investment into new medicines turns out to be no way to save.
People who understand where medicines come from are sounding the alarm. In the largest grassroots effort in the history of the drug industry, we — alongside hundreds of biotech entrepreneurs, academic luminaries, patient advocates, and prominent investors — sent a letter to Congress explaining the drastic consequences of redefining the word “negotiation.” Others continue to add their names. The signers collectively represent nearly $187 billion in science-focused capital, 21,000 Americans employed in life sciences, and hundreds of drug candidates in clinical trials. We are motivated by a concern that Congress is about to extinguish the fight against disease and suffering that our community has dedicated itself to for decades.
To help people afford today’s medicines, as well as all those yet to be invented, we ask Congress to mandate that insurers pass along negotiated drug discounts to their beneficiaries and curb the excessive out-of-pocket costs that make medicines unaffordable, even to Americans with insurance. We also ask Congress to extend proper insurance to all Americans.
We and our colleagues have signed this letter in support of true negotiation. This means letting companies with similar products compete on price in order to win market share — and recognizing that insurers can walk away when they consider products overpriced. That’s a market, and we respect the true negotiations on which it’s based. We draw attention in the letter to the actual market failure of drugs that don’t go generic when they should and we propose a solution to ensure that all drugs go generic and become inexpensive without undue delay. That would generate the savings Congress is looking for while preserving the biomedical R&D that creates new medicines.
These are sound policy prescriptions for drug affordability. We call upon Congress to protect our nation’s global biomedical leadership. The nation’s health is at stake.
Peter Kolchinsky is a founder and managing partner at RA Capital Management and author of “The Great American Drug Deal” (Evelexa Press, 2020). Daphne Zohar is the founder and CEO of PureTech Health, a biotherapeutics company that has created 25 novel therapeutics for serious diseases.