Just when you thought the value of a robust pharmaceutical industry couldn’t be more obvious, politicians now want to “kill the goose that laid the golden egg.” A year ago, we were desperate for a new vaccine to protect us from the Covid-19 scourge, and now some want to undermine the system that brought us vaccines in record time.
The Wall Street Journal editorial board puts it this way: “It’s one of the strangest, and most destructive, juxtapositions in political history. Even as vaccines are saving the world from Covid, the Democratic Party wants to rob these firms of the reward for innovation that is essential to developing future cures.”
The backstory on this fiasco is that Democrats are scrambling to pay for their massive $3.5 Trillion (or more) expansion of the entitlement state. Even taxing the rich even more (the top 1% pay 40% of all taxes) will only find $2.2 Trillion of new revenue, so they’re desperate to find more. They believe they can fill the gap with $500 billion in savings from price controls on drugs.
Democrats claim the bill would simply allow Medicare to “negotiate” what they deem “fair” prices as foreign governments with national healthcare systems do. The bill sets a price ceiling of 120% of the average drug price in Australia, Canada, France, Germany, Japan and the U.K. The HHS secretary could decide to pay less.
The bill directs HHS to focus on the 250 most expensive and common brand-name drugs without generic competitors. The secretary would be required to “negotiate” at least 25 drugs in the first year of the program (2025) and 50 in future years. If companies refuse the government’s price, they must pay a 95% excise tax on all revenue they generate from that drug in the U.S. They would also have to offer the government price to private insurers. This can hardly be described as a “negotiation” when the government is pointing a gun at their heads.
To analyze the impact of such legislation, the Journal of the American Medical Association (JAMA) published a study that estimates drug spending in the U.S. would have been 52%, or about $83.5 billion, less in 2020 based on the bill’s formula. The research company Vital Transformation estimates the bill would reduce bio-pharmaceutical earnings by $102 billion a year.
If you’re like most people, you think pharmaceutical companies can easily afford such cuts in their revenue and the public will never notice the difference. But consider that major pharmaceutical companies invested $91 billion in research and development in 2020. In other words, Democrats would be confiscating nearly all the profits companies use to finance their clinical research. Simply put – no profits, no research, no new drugs. No new vaccines when the world is desperate to fight the next pandemic.
WSJ says, “This tax on innovation would damage big pharma companies like Pfizer and Merck, but it would be a death blow to small biotech firms where many breakthroughs originate.” How important are these smaller biotech firms? Biotech startups patented nearly two-thirds of new drugs in 2018, and in their early stages they rely almost entirely on venture capital. Later they often cooperate with or license their discoveries to large drug makers. Only about 15% of drugs and vaccines that enter clinical trials are approved. The rate for oncology therapies is only 3%.
Most people think the new Covid vaccines were developed just since the start of the Covid pandemic. But these hugely successful mRNA Covid vaccines are the result of approximately ten years of study and billions of dollars invested in that research. Without this kind of R & D, there will be no new vaccines the next time a new virus emerges.
The bill would “immediately have the effect of putting many early-stage biotech companies out of business,” says Strand Therapeutics CEO Jake Becraft. He adds that Moderna would never have been able to raise capital if the bill had passed 10 years ago.
WSJ summarizes: “American drug innovation leads the world, and during the pandemic it has shown its capacity to save millions of lives. It would be a harmful act for the ages against public health if Democrats steal this vital industry’s incentive to produce the cures of the future.”
There’s an old saying, “There’s no such thing as a free lunch.” Add to that, there’s no such thing as new drug innovation without paying the cost of the research.