The Real Impact Of Drug Price Legislation On Biopharmaceutical R & D

As outcry around drug prices rages, arguments continue to surface that limiting corporate revenues via price controls will have little impact on biopharmaceutical innovation. The latest salvo comes from academics at Rutgers Law School. In an article published by STAT, the authors claim that the industry grossly overstates the impact of price controls, likening the industry to Aesop’s boy who cried wolf.

“Big Pharma has cried Innovation Wolf every time Congress seeks to address its shenanigans. And the legislators keep coming to defend it. That has got to stop. It is past time for the industry to be called to account on using its get-out-of-jail-free innovation card to avoid reasonable legislation. As we get closer to the finish line of passing legislation addressing product hopping and other games, the cries about threats to innovation will grow louder and more urgent. But the industry’s history needs to be remembered. Consumers’ lives depend on it.”
One can argue that consumers’ lives have been saved by innumerable breakthroughs made by the biopharmaceutical industry in AIDS, cancer, infectious diseases, heart disease, etc., etc. But what about their rant about biopharma playing the “innovation card”? What’s the true impact that price controls could have on R&D?

The following account is a dramatic demonstration of what happens when R&D budgets get significantly cut. In late 2006, Pfizer learned that a potentially major new cardiovascular drug, a drug that essentially remodeled patients’ lipoprotein profiles, had no effect in prolonging the lives of people with heart disease. This drug had been expected to be a key driver of future revenues and propel Pfizer’s growth over the coming decade. These clinical results were devastating and led the CEO to decide that the company had to be “right sized” based on decreased future projected revenues. In other words, budgets across the entire company had to be cut – including that of R&D.
At the time, I was in charge of global R&D from the initial discovery stage through regulatory approval. My budget was just under $5 billion. (Pfizer’s overall corporate R&D budget was close to $8 billion, but this number included the R&D budgets of other divisions, the costs of post-marketing clinical trials, research expenses for outside investments, etc.) Going into 2007, R&D was seeking a 10% increase. That’s a pretty hefty number based on a $5 billion base. However, this increase was needed to maintain the ongoing programs, many of which were in key – and expensive – clinical trials. However, given the new reality, no budgets were being increased. Instead, R&D was told to cut its budget by 10%. So, instead of the initial vision of about $5.5 billion to run a global organization of approximately 13,000 people and a portfolio of over 100 compounds in various stages of development, we now had to figure out how to manage with $1 billion less.

I imagine the response of many would be “Big deal!” Large companies are inefficient and unwieldy. Certainly there must be plenty of fat that can be cut. Actually, for us there wasn’t. In 2000 and then again in 2004, Pfizer made major acquisitions, first Warner-Lambert Parke-Davis and then Pharmacia. In each case, to justify to shareholders the wisdom of these mergers, “synergies” had to be found; that is, the organization had to remove overlap and cut programs after vigorous prioritization processes. As a result, a lot of cost cutting had already taken place. Sure, there are always cuts that can be made. But simple changes were not going to provide $1 billion in savings.
It became pretty apparent that to meet Pfizer’s needs, R&D was going to not just drop programs but also eliminate “bricks and mortar” – research sites and the jobs of scientists who worked in these labs. Smaller sites were the obvious choices including two in France and one in Japan. But, this didn’t provide nearly enough savings. Eventually, we decided to close the legacy Parke-Davis labs in Ann Arbor, Michigan and eliminate that site’s 2,200 jobs. Coming at a time when the auto industry was experiencing its own economic issues in Michigan, this closure generated serious concerns across that state.
So, what does this have to do with proposals such as the government setting drug prices, cutting back patent life on drugs or even going so far as allowing “march in rights” to compel companies to license their patents to the government? Biopharmaceutical companies invest 15 – 20% of their top lines revenues into R&D – a number that’s higher than any other industry. Any legislation designed to cut drug prices will impact every biopharmaceutical company. Such legislation would theoretically have a meaningful impact on company revenues. Otherwise, why bother enacting such laws. Let’s say that such actions reduce a company’s revenues by 10%. Interestingly, that’s the same number I had to deal with – and look at the impact that had on cities around the world. Now, envision that on a global scale.
Certainly, innovation didn’t dry up at Pfizer when the episode described above occurred. In fact, over the years, Pfizer has rebounded pretty well. However, at the time, these closures had a dramatic impact on the R&D organization. A significant number of programs were dropped and fewer scientists were available to exploit the opportunities for new drug discovery and development. A 10% budget cut in R&D across the board for the biopharmaceutical industry would be felt not just in the U.S. but around the world. There will still be innovation – but significantly less of it. Ironically, this is a time when we should be increasing R&D given the enormous opportunities that exist for new medicines and cures. Instead, industry critics are proposing to go in the opposite direction.
By all means, let’s continue to look for ways to have affordable drugs. But some of the schemes being bandied about, if enacted, will have an “Ann Arbor” like effect in many parts of the country. It is also important to remember that over the years advances in new drugs have saved us way more in hospital costs than have been spent on drugs. New medicines may be the best levers we have in reducing overall healthcare costs.
https://www.forbes.com/sites/johnlamattina/2019/10/02/the-real-impact-of-drug-price-legislation-on-biopharmaceutical-r–d/#4d19fa722ba2