Drug price controls in the Inflation Reduction Act (IRA) will not stymie the introduction of new products, because innovative drugs are increasingly being developed and marketed by smaller companies with less capital and revenue than Big Pharma, according to the Foundation for Research on Equal Opportunity (FREOPP).
A report by Gregg Girvan, FREOPP health care research fellow, titled “No Contest: Small Pharma Innovates Better than Big Pharma,” was published on February 28. Girvan found small drug firms earning far less revenue and spending a lot less than bigger companies on research and development (R&D) produce more than half of the new drugs approved by the Food and Drug Administration (FDA).
“In 2020, early-stage, unprofitable companies brought nearly 62 percent of new industry-originated drugs approved by the FDA to the clinic, with no less than 54 percent of drugs brought to the clinic by emerging firms in each of the last seven years (2016–2022),” states the report.
Reduced Revenues
The IRA requires drug companies to “negotiate” prices for the 10 top-selling drugs covered by Medicare, initially, and 20 additional drugs each year thereafter, or face a high excise tax.
Researchers have expressed concern that price controls will discourage drug makers from innovating if they are unable to recoup the costs of R&D.
Studies have estimated pharma revenues could be reduced by $450 billion under the IRA. A University of Chicago paper by Tomas Philipson and colleagues found that 79 small-molecule drugs would not enter the market over the next 20 years under the IRA’s price controls.
Conflicting Research
The Congressional Budget Office (CBO) estimated price controls would result in the introduction of 13 fewer drugs over a 30-year period, a decrease of one percent, but other researchers, like Philipson, estimate a much bigger decrement of 17 percent fewer drugs.
“In some ways, yes, our paper refutes studies such as the [University of Chicago paper], as well as Philipson’s previous study examining the effects of a policy proposal similar to the IRA,” Girvan told Health Care News. “Our paper does not quantify how many drugs would not be developed because of the IRA.”
Philipson’s estimates do not consider how many drugs developed by startups will never hit sales so high as to be selected under the IRA rules, says Girvan.
“Our study adds valuable context that his studies ignore,” said Girvan. “Critics of our work contend that reduced revenue at larger firms hurts everyone because less capital will flow to startups, but our study shows the industry is changing, such that startups are increasingly bringing their discoveries to market and therefore do not need to be bought out by large firms for venture capitalists to get a return on investment.”
Small Company Challenges
Both large and small firms have a role in bringing new drugs to patients, says Joel White, president of the Council for Affordable Health Coverage.
“The idea that most new drugs originate at small firms is neither new nor controversial, but suggesting that larger firms can somehow be ‘cut out’ of the development process with no resulting loss in innovation demonstrates a misunderstanding of the development process,” said White. “While roughly two-thirds of promising molecules begin at small firms, this is only the first step.”
Following the initial discovery, a drug candidate must undergo additional lab testing, clinical trials, regulatory approval, marketing, manufacturing, and post-approval trials, says White.
“In general, startups lack the experience and financial resources to complete all of these steps themselves,” said White. “This is why small firms commonly partner with established firms to bring promising drugs to market. Imposing price controls on medicines that began at startups, but were later acquired and developed by large companies, will severely impact small firms’ ability to attract investment, and by extension, their ability to innovate.”
Exaggerated Impact?
According to Girvan, the University of Chicago study employed flawed methodologies, resulting in inaccurate estimates of lost R&D spending and years of life under the IRA.
Philipson calculated a loss of one statistical life year for every $2,000 less pharma R&D spending, using data on drug development from 1960-1997. An updated calculation found one life year lost for every $35,817 less R&D spending.
“These authors are therefore grossly exaggerating the negative impacts of the IRA’s drug provisions,” said Girvan.
FREOPP recommends reducing red tape at the FDA to allow drugs to get on the market sooner and more cheaply.
Ashley Bateman (bateman.ae@googlemail.com) writes from Virginia.