The U.S. Can Lower Drug Prices Without Sacrificing Innovation

Summary.    With Congress considering legislation to allow Medicare to use its bargaining power to negotiate lower drug prices, large pharmaceutical companies are once again waging a campaign that contends that doing so would seriously harm the development of...

Legislation giving Medicare the ability to negotiate drug prices in the United States would make their life-saving potential immediately available to millions of Americans who cannot now afford them, thus extending lives and alleviating suffering. The pharmaceutical industry, however, has done a masterful job of arguing that these Americans must suffer in the short term since lower prices would gut long-term innovation in drug development.

This is a false choice. We need not trade the certainty of saved lives now for the possibility of saved lives in the future.

The reason: Large pharmaceutical companies are nowhere near as important to real drug innovation as they purport to be. Furthermore, smart policy changes can sustain and increase the pace of life-changing breakthroughs in biomedicine through increased funding of the National Institutes of Health (NIH), cutting the costs and accelerating the speed of clinical trials, and reforming patent law to stop innovation-blocking abuses used by Big Pharma to prevent new drugs from entering the market.

The Congressional Budget Office estimated that reducing the pharmaceutical industry’s revenues would result in two fewer drugs in the next decade, 23 fewer in the following decade, and 34 fewer drugs in the third decade. Predictions 20 to 30 years out are necessarily imprecise, but in any case, many of those projected new therapies would likely be neither novel nor more valuable than existing drugs. That is, they wouldn’t be innovative.

Many would be modified versions of existing drugs, created merely to extend patent protections and thus monopolies over existing therapeutics. When Medicare Part D dramatically increased the pharmaceutical industry’s revenues 18 years ago, major drug companies directed their drug-development efforts primarily at drug classes where there were already five or more products on the market. Currently, the majority of new patents filed by large pharmaceutical companies are modifications of drugs already on the market.

Historically, many breakthrough products did originate with large pharmaceutical companies, but the innovation process in biomedicine has changed fundamentally. Truly innovative therapies — like the mRNA vaccines for Covid-19 that are saving untold number of American lives — now originate in small companies that are spinoffs of university research efforts mostly funded by the NIH and philanthropies. In 2018, such small firms accounted for nearly two-thirds of the brand new drugs patented in the United States and nearly three-quarters of drugs in the late stage of the development pipeline. The mRNA technology underlying the Moderna and Pfizer-BioNTech vaccines came out of NIH labs, the University of Pennsylvania, and MIT.

To be sure, large pharmaceutical companies play a critical role in the end stage of drug development, funding and running essential clinical trials and navigating regulatory approvals. But they are no longer the dominant source of true innovation, and maintaining their enormous profits at current levels — which, at 15% to 20% of revenues, well exceed market standards  — is no longer an efficient way to promote biomedical innovation. And it is worth remembering that Big Pharma spends its revenues on many less productive activities than clinical trials and regulatory approvals, including lobbying and political contributions (more than $800 million in the 2016 to 2020 period) and marketing (tens of billions of dollars annually).

The United States needs a new strategy for drug innovation that recognizes the new reality of the biomedical innovation process, and the true, limited role of Big Pharma. We could start by reinvesting a substantial fraction of the hundreds of billions of dollars that could be saved from pending drug-payment-reform legislation into the most powerful engine of innovation in drug development: the NIH and its academic research partners. This would likely generate a flood of truly innovative, life-saving products — not a flock of me-too drugs — that small companies could perfect and Big Pharma could steer to market.

Policymakers and regulators should also develop innovative ways to reduce the cost and increase the speed of clinical trials needed to demonstrate the safety and efficacy of new agents. Operation Warp Speed showed how this is possible through government-industry partnerships. The federal government not only funded the research needed to make the mRNA vaccines but also assumed some of the financial risk associated with the vaccines’ clinical trials. Our pandemic experience should precipitate new policymaking to make clinical trials cheaper and faster.

Also critical will be reforms of patent law to reduce the frivolous use of patents by Big Pharma to inhibit innovation. Current patent law enables large pharmaceutical companies to spend billions of dollars annually on legal maneuvering to protect existing patents and preserve their market monopolies.

One strategy they use is creating so-called “patent thickets” around existing products. These consist of large numbers of often meaningless patents — for such things as moving to a time-release formulation — that competitors have to challenge in court before they can market competing products. For example, AbbVie, which markets the world’s best-selling drug, Humira, has filed 257 related patent applications. Such challenges can take years to adjudicate and cost huge sums in legal fees. Meanwhile, Big Pharma maintains its monopolies and pricing power for decades longer than the 17 years contemplated under current law.

The United States needs an effective strategy for maximizing drug innovation and the huge benefits to humanity that it promises. Protecting the revenues of Big Pharma is not that strategy.