Biden’s Perilous Policy Prescriptions for Pharmaceuticals

By SBE Council at 1 September, 2021, 7:50 pm

Executive Order on “Competition” Would Damage Innovation, Endanger Health Consumers

by RAYMOND J. KEATING –

I’ve said it before, and I’ll say it again: I’m always bewildered by the political attacks on pharmaceutical companies. After all, these businesses produce medicines, drugs and vaccines that improve and save lives. Why attack and undermine such worthy endeavors?

Nonetheless, during my three-plus decades of working in the public policy arena, attacking pharmaceutical companies has been one of those rare constants in politics.

And in July, President Joe Biden chimed in, once again, with his “Executive Order on Promoting Competition in the American Economy.” This ranked as a sweeping call for increased regulation on big businesses, while of course ignoring that businesses in the marketplace can only gain market share by serving consumers well, and that no matter the intentions, the burdens of increased regulation, one way or another, fall heavily upon smaller enterprises.

Specifically, regarding the pharmaceutical industry, the Biden EO says the following:

● “Americans are paying too much for prescription drugs and healthcare services — far more than the prices paid in other countries… And too often, patent and other laws have been misused to inhibit or delay — for years and even decades — competition from generic drugs and biosimilars, denying Americans access to lower-cost drugs.”

● “This order affirms that it is the policy of my Administration to enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony — especially as these issues arise in labor markets, agricultural markets, Internet platform industries, healthcare markets (including insurance, hospital, and prescription drug markets)…”

● “It is also the policy of my Administration to support aggressive legislative reforms that would lower prescription drug prices, including by allowing Medicare to negotiate drug prices, by imposing inflation caps, and through other related reforms.”

● “The Secretary of Health and Human Services shall … submit a report to the Assistant to the President for Domestic Policy and Director of the Domestic Policy Council and to the Chair of the White House Competition Council, with a plan to continue the effort to combat excessive pricing of prescription drugs and enhance domestic pharmaceutical supply chains, to reduce the prices paid by the Federal Government for such drugs, and to address the recurrent problem of price gouging; (v) to lower the prices of and improve access to prescription drugs and biologics, continue to promote generic drug and biosimilar competition…”

● And the accompanying “Fact Sheet” for the Biden regulation EO declared support to “Lower prescription drug prices by supporting state and tribal programs that will import safe and cheaper drugs from Canada.”

The Biden EO misses key points that reveal a vibrant, competitive, entrepreneurial pharmaceutical industry, as well as missing or ignoring basic points of economics regarding governmental impositions such as price controls.

Market and Industry Realities

Let’s consider some key points. Notably that the industry is competitive, entrepreneurial and driven by small businesses.

As is the case across other industries, leading pharmaceutical firms compete against current, emerging and future competitors. And the data on the number of firms operating in this sector reveal an industry overwhelmingly populated by smaller, entrepreneurial firms.

According to the latest U.S. Census Bureau data (2018), consider the breakdown of the pharmaceutical and medicine manufacturing sector by firm size:

● A significant share of employer firms in the pharmaceutical and medicine manufacturing sector – that is, 34.2 percent, or more than a third – have fewer than 5 employees.

● Nearly half – i.e., 47.6 percent – have fewer than 10 employees.

● 59.4 percent of employers firms in the pharmaceutical and medicine manufacturing industry have fewer than 20 employees.

● Almost eighty percent – i.e., 78.9 percent – have fewer than 100 employees.

● And finally, 91.3 percent of employer firms in the pharmaceutical and medicine manufacturing industry have fewer than 500 employees.

Imposing price controls (including via Medicare price dictates, reimportation of drugs, “inflation caps,” and other avenues), and undermining property rights by weakening and/or raising doubts about the patent system, work to undermine entrepreneurship and investment in the biopharmaceutical industry.

Keep in mind that a key reason why the U.S. ranks as the global leader in pharmaceuticals is due to the lack of price controls, and the strength of our intellectual property rights and protections.

Bringing a drug to market is a process fraught with risk and uncertainty. According to a report from PhRMA, it takes 10 to 15 years on average to bring a drug to market, and only 12 percent of medicines entering clinical trials get approved by the FDA.

The cost to get to market? Some $2.6 billion on average, including the costs of drugs that failed.

Even given those formidable challenges, the U.S. leads the way in investment, research and innovation. As noted again by PhRMA:

● “The United States is recognized as the global leader of biopharmaceutical innovation… The industry’s advanced manufacturing presence is key to maintaining U.S. leadership in innovation. As the complexity of drug development evolves, manufacturing process innovations have become just as important as product innovations themselves.”

● “The tremendous investments America’s biopharmaceutical companies make to research and develop new medicines are what drive the far-reaching economic impacts of the industry. The biopharmaceutical industry is the global leader in R&D, and its research intensity is unparalleled in the U.S. economy. Relative to other manufacturing industries, the biopharmaceutical industry invests 12 times more in R&D per employee and employs the largest share of all manufacturing R&D workers in the United States.”

● “America’s robust R&D enterprise is the envy of the world. Not only does the United States lead in both overall clinical trial activity and early stage clinical research, but it also claims the intellectual property (IP) of nearly 60% of all new medicines. Likewise, it is not surprising that almost three-quarters of worldwide venture capital investments in biopharmaceutical startups are made in the United States, where the biopharmaceutical R&D enterprise thrives.”

A Policy Playbook that Would Harm Innovation and Consumer Health

What policies would rank among the surest ways to undermine this industry that is critical to the economic and health well-being of Americans and people around the globe?

Impose price controls; weaken intellectual property protections; and raise taxes.

That’s exactly the Biden agenda. While we’ve already noted the intentions on price controls and undermining property rights, it also must be noted that the Biden administration and Members of Congress are pushing hard for tax increases, including a higher corporate income tax (increasing the rate from 20 percent to 28 percent) and increasing the top capital gains tax rate from 23.8 percent to 43.4 percent, and a global minimum tax.

The economics are straightforward. What happens when the potential returns on entrepreneurship and investment are reduced by limiting prices and therefore potential earnings; by failing to protect the essential value of intellectual property enterprises, such as pharmaceutical companies, via weakening of intellectual property protections; and reducing resources and further disincentivizing investment thanks to tax increases?

The results of such an agenda feature less entrepreneurship, less investment, and less innovation, which in turn means fewer life-enhancing and life-saving medicines, drugs and vaccines.

The answer to drug pricing issues is not to have government step in and undermine the entire industry. Instead, emphasis should be placed on reducing government costs – including taxes and unnecessary regulations – so that investment and entrepreneurship will be further incentivized, thereby spurring greater competition and innovation, and expanding choices in the marketplace.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.