If Dems in Congress pass legislation to lower drug prices, it’s likely to help their chances of reelection. There appears to be far less downside than Pharma would like people to believe. A new report by Gregory Vaughan and Fred Ledley of Bentley University on the effects of legislation that would lower drug prices concludes that there is no necessary link between lower drug prices and drug innovation. Based on the data, it argues that Congress should feel free to make prescription drugs affordable without worry about any effects on innovation.
Yes, it is true that there is a statistical link between revenue of large pharmaceutical companies and the amount they invest in research and development. But, if they wanted to, they could better manage their revenue and expenses to offset the effect of drug price reductions on their profits.
Further, this new analysis looks at the role played by small biopharmaceutical companies in the development of new drugs. It finds that companies with a small amount of revenue generate 40 percent of the new drugs on the market.
The researchers find that the smaller pharmaceutical companies, with a market capitalization of $7 billion or less, invest in research and development independent of their revenue. To put it differently, the researchers did not see a meaningful link between reductions in these pharmaceutical companies’ earnings and their expenses for research and development. If drug prices were to come down, there’s no evidence to suggest that it would effect their research and development activities or reduce their research and development spending.
Moreover, it could be the case the large pharmaceutical companies might not choose to spend less on research and development if their revenue were reduced. They have very large returns on invested capital, larger than companies in other sectors. One 2019 West Health Policy Center and Johns Hopkins Bloomberg School of Public Health paper concluded that even with a large reduction in revenue stemming from drug price negotiation legislation, the pharmaceutical companies would still return more than any other market sector if they continued to invest in research and development at the same level they do today. And, research and development would be a better investment than other possible capital investments.
Biopharmaceutical companies with market capitalizations under $7 billion are undertaking the majority of clinical trials today. About six in ten clinical trials for new drugs were sponsored by these smaller companies. And, they are responsible for seven in ten products in phase 3 trials.
The researchers conclude that policymakers will not be harming innovation if they reduce drug prices to ensure people can afford them. Their finding is in sync with the Congressional Budget Office, which recently projected at most a small decrease in innovation from lower drug prices.
Here’s more from Just Care:
- Lowering drug prices will not affect innovation
- Congressional candidates beware: Oppose lowering drug prices at your peril
- One way to bring down the cost of drugs: Reference pricing
- Hundreds of new drugs are harmful or ineffective
- Debt among older Americans increasing in good part because of health care costs
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