Drug price controls will be more pain than gain

President Trump and House Democrats may not agree on much, but both seem eager to slash the price of prescription drugs. The most recent signal came shortly before the election when the president hailed plans to experiment with a new way of setting prices for most drugs administered through Medicare’s Part B program.

A few months earlier, Rep. Nancy Pelosi (D-Calif.) reportedly delivered a blunt warning directly to the bio-pharmaceutical industry’s representatives in Washington that her party is developing an ambitious price-cutting agenda; so watch out in 2019. Given the increasing costs of health care coupled with an aging population and soaring budget deficit, the instinct is understandable. But make no mistake: Price controls will slow the pace of drug innovation and patients will pay the price for it in the long run.

{mosads}Developing a new pharmaceutical compound takes an average of 12 to 14 years of research, development and clinical trials at a cost of about $2.6 billion. That’s why the U.S. life-sciences sector invests more than 21 percent of its revenues in R&D — over $56 billion in 2014, according to the latest data from the National Science Foundation.

Drug revenues enable that investment. Indeed, the Organization for Economic Cooperation and Development has found there is almost a one-to-one correlation (0.97) between drug sales revenues and R&D expenditures and economists have repeatedly found the connection extends to pharmaceutical output, too. The inverse also will be true: If bio-pharma companies’ revenues decline because of price controls or other policy measures, their R&D also will decline and the pace of drug innovation will falter.

So, the debate about price controls isn’t really about whether to lower prices at drug companies’ expense. It’s about whether society should lower drug prices now in exchange for less and slower drug innovation for our children.

One aspect of the U.S. bio-pharma industry that many advocates of price controls overlook is the extent to which the industry contributes to the global “commons” of knowledge development. In their view, drug research only benefits the companies doing the research, so the consequences of any reduction in R&D that may come with price controls aren’t likely to be all that bad. But the evidence shows otherwise.

Even though new discoveries are protected with trade secrets and patents — which provides the incentive for drug companies to assume the risks involved in developing a new drug — a considerable share of bio-pharma industry research spills over, contributing to knowledge discovery and drug development overall, not just in the labs of the firms that conduct the research. In fact, these knowledge spillovers are very much like public knowledge generated by government agencies such as the National Institutes of Health.

This knowledge dissemination occurs in three main ways. First, many of the benefits of firm-level R&D spill out to the rest of the industry. In fact, economists Nicholas Bloom, Mark Schankerman and John Van Reenen find that spillovers are significantly greater in large bio-pharma firms compared with smaller ones, because the latter “tend to operate in technological ‘niches’” where fewer other firms operate.

The industry also supports broader knowledge generation at American universities. While it accounts for 16.8 percent of U.S. business R&D, it accounts for 61 percent of business R&D funding for universities. In 2016 bio-pharma companies provided over $2.5 billion in life sciences research funding to universities in all 50 states, ranging from $366,000 in Maine to $329 million in California. 

Finally, the industry is a prolific contributor to open science through publications in science journals. In fact, the largest number of partnerships between corporations and academic institutions in the 2016 Nature Index was in the life sciences — 13,114 collaborations. One reason for this is intellectual property protection. By obtaining patents for their drugs, companies are more assured their discoveries will be protected, thus lowering the risk of direct copying from information being shared in scholarly journals.

The Information Technology and Innovation Foundation examined the top 93 companies that, in 2016, accounted for 76 percent of global life science R&D. In 2017, researchers from these companies were authors or coauthors of 12,792 papers, many in leading journals such as the Proceedings of the National Academy of Sciences, Nature, Cancer Cell and Nature Medicine.

That was up from 8,322 papers in 2007 — an increase of 54 percent. This works out to 116 articles for every $1 billion of R&D invested and 8.8 articles per 1,000 employees. To be sure, this is less than the 95,000 peer-reviewed journal articles published by researchers who had received NIH funding.

But given that the vast majority of NIH recipients are academic scholars whose bread and butter are peer-reviewed journal articles, it is not surprising this number is as high as it is. What is perhaps more surprising is that the industry numbers are 13.4 percent of NIH’s numbers.

Biomedical innovation is critical to addressing human health challenges. And a healthy life-sciences innovation system depends on robust funding of biomedical R&D, both public and private. 

Not only are drug company revenues strongly correlated with the amount of R&D they invest in, but much of the R&D they fund spills over both to other firms and to the public domain, thereby helping to spur even more life-sciences innovation. Price controls and other steps to reduce revenues, like weakening intellectual property protection, would stifle knowledge generation and sharing, leaving future generations less access to effective new drugs than would otherwise be the case.

Robert D. Atkinson is the president of the Information Technology and Innovation Foundation, which is a think tank for science and technology policy and author of the new report “How the Biopharmaceutical Industry Contributes to Open Scientific Knowledge.”