The world will need to stop piggybacking on US pharma

Receive free Drug prices updates

We’ll send you a myFT Daily Digest email rounding up the latest Drug prices news every morning.

When it comes to drug spending, there is one 500lb gorilla in the room: America. The US market has long been the heavyweight player — Americans shelled out more than $600bn on medicines last year, almost half the global total.

The country also dominates the research pipeline; its research and development spending accounts for nearly two-thirds of the OECD total. Last year, the US had 10,265 drugs in the works, more than double both China and the EU, and four times as many as the UK.

While this means that US priorities play an outsized role in setting the research agenda, other nations quietly benefit from piggybacking on American innovation. This week’s move by the Biden administration to target 10 top-selling medicines for tough price regulation will rock this global market.

The drive to cut the prices paid for blockbuster heart, stroke, diabetes and cancer treatments will not just trim drugmaker profitability. It could also reshape drug discovery, affecting what medicines are available to patients worldwide.

Americans, who pay three times as much for branded drugs as the OECD average, overwhelmingly support the idea of their government negotiating for price cuts. But policymakers everywhere should be on their guard against subsequent market distortions. There is now a risk that R&D switches focus from the drugs that are most needed, to those that avoid US price controls.

Unlike most of Europe, the US government has not previously controlled medicine prices. Last year’s Inflation Reduction Act authorised Medicare, the taxpayer-funded healthcare system for retirees, to bargain directly with drugmakers. It plans to seek cuts of 25 per cent or more to list prices, focusing on top-selling drugs nearing the end of patent protection. This is expected to save Medicare nearly $100bn over the course of a decade, while reducing out-of-pocket costs for many older Americans.

Drug companies, which must negotiate or pay punitive taxes, have questioned whether this is constitutional; some have sued. They expect private insurers will try to push down what they pay too, sharply cutting revenue. As the list of covered medications expands, the industry warns this will put pressure on R&D budgets and limit the number of drugs in development that it can back.

Price caps may also make it harder to attract venture capital investment because the potential pay-off will be lower. This is particularly concerning because so much early stage drug research is now done by start-ups that later sell out to Big Pharma.

The impact is already starting to be felt beyond America’s shores. “We have decided that we are not going to do certain trials, or that we are not going to do a merger or acquisition or licensing [deal] because it is becoming financially not viable,” Thomas Schinecker, chief executive of Swiss drugmaker Roche, said on a recent media call.

Treatments for the elderly and research into new uses for drugs nearing the end of patent protection are most likely to be affected by the price caps. And manufacturers may prioritise large-molecule treatments, such as gene-therapy drugs or vaccines, over traditional ones simply because the former are exempt from price negotiations for longer.

Much of Big Pharma’s warnings may be scaremongering. The Medicare programme is limited to wildly popular drugs that have already earned back their development costs many times over. And the current system of uncontrolled pricing is not covering itself with innovative glory. Critics say it rewards extremely similar “me-too” drugs that offer little advantage over pre-existing treatments as well as minor reformulations to extend medicines’ patent life. One recent study found that fewer than a third of new drugs approved in Europe and the US between 2007 and 2017 were rated of “high therapeutic value”.

Manufacturers may also benefit from another prong of the IRA reforms that caps out-of-pocket costs for drugs. Some 30 per cent of Medicare patients do not fill new cancer prescriptions because of cost concerns. “They might make up in an increase in volume for the decrease in price,” explains Stacie Dusetzina, a Vanderbilt University professor.

The US has several years to work out the kinks in its new system: the first negotiated prices will not go into effect until 2026. But the upheaval should serve as a wake-up call for both Americans and everybody else.

Sky-high US prices are not the only way to fund global medical progress. Other countries will have to contribute more, but it does not have to be expensive for patients. Governments can give drugmakers a leg up by funding research into the causes of disease as well as the pathways and receptors that can be targets for treatment. They can also reduce risk by helping fund clinical trials and guaranteeing sales. Recent experience with Covid vaccines demonstrates that this can work.

The US drug industry’s size, wealth and scientific prowess mean that it will always play a big role. But it should no longer be the only gorilla in the room.

[email protected]

Follow Brooke Masters with myFT and on Twitter