Negotiating Big Pharma’s Prices Won’t Stifle Innovation—They Don’t Use the Money to Innovate!

It’s no secret: Americans are getting fleeced on prescription drugs. We fork over three times more than folks in other countries for the same meds while Big Pharma makes massive profits.

Yet President Biden’s modest attempt to address this travesty with a list of 10 drugs up for Medicare price negotiations through the Inflation Reduction Act (IRA) has the drug industry seething. Lobbyists are sparing no effort or expense to convince the public that price negotiations will crush innovation and keep us from getting the new medicines we need. The standard line: lower prices mean lower profits, hindering the ability of drug companies to invest in researching and developing new products.

Big Pharma has been spouting this argument for a long time. Does it hold any water? Two experts who closely study the pharmaceutical industry explain why it doesn’t. Fred Ledley and colleagues show how much taxpayers pony up through agencies like the National Institutes of Health (NIH), which fund research and provide resources for promising projects to the drug industry. William Lazonick exposes how the Wall Street-focused business models of contemporary pharmaceutical giants inhibit innovation and depend on exorbitant prices.

Bottom line: big drug companies rake in enormous profits without prioritizing investments in medication development or innovation. They simply snap up drug rights that the federal government paid for (us, in other words), focus on boosting their stock prices, and overcharge the public. Surely, Americans deserve better.

Big Pharma’s Focus on Innovation Changed Decades Ago

Fred Ledley, director of Bentley University’s Center for Integration of Science and Industry, is the senior author of a recent study of drug pricing that reveals how much taxpayer money went into research and development for the 10 drugs currently up for negotiation. Public investment, the researchers found, totaled an eye-popping $11.7 billion in NIH funding. This largesse from taxpayers saved drug the industry $1,485 million per drug.

Ledley and his colleagues are unimpressed by the argument that the IRA will have a negative impact on innovation. Why? Because the biggest drug companies haven’t been doing much innovation in a long time.

“This is a very centralized industry with the top 25 companies accounting for well over 70% of all the sales,” notes Ledley. “That’s not where the innovation is happening.” He points out that since major companies prioritize marketing and selling drugs rather than developing them, a revenue dip will hardly make a dent in innovation.

Ledley gives the example of Imbruvica, a cancer drug developed first by a small biotech company called Pharmacyclics in 2015. He points out that Pharmacyclics’ primary focus wasn’t product development but rather investing in pure innovation. “They hit on a great drug, and then they were acquired by AbbVie, which is a very large, very successful company,” says Ledley.

He explains that while AbbVie is marketing the drug, it was never the innovator, stressing that much of today’s innovation reaches Big Pharma through acquisitions. “It’s not happening organically,” he explains. “The small companies are better positioned to innovate because they aren’t as dependent upon revenues as the large ones.”

Ledley’s study shows that Imbruvica received $566 million of NIH funding as it was developed.

“It’s these little companies where the investment in innovation is happening,” underscores Ledley. “We don’t think they’re going to be adversely affected by the types of fair pricing that’s likely to come out of the Inflation Reduction Act.”

More Wall Street Schemes, Less Innovation

Economist and business historian William Lazonick argues that Big Pharma is more focused on Wall Street games to enrich executives and shareholders than making medicines.

The name of the game is stock buybacks.

Few practices have generated as much controversy and debate in recent years as that of companies inflating their stock prices by repurchasing shares of their own stock from the open market – stock buybacks, as they are called. Lazonick, who has been at the forefront of the debate, has long warned that buybacks come at a significant cost to innovation and long-term growth. He warns that resources diverted to buybacks come at the expense of productive investments like research and development, employee training, and capital expenditures. As he sees it, this myopic focus on stock manipulation tactics in the name of immediate shareholder returns and stock-based executive compensation is what really stifles long-term innovation.

Surprise! Big Pharma is a big fan of buybacks.

Lazonick delves into the case of pharmaceutical giant Merck, a company extensively examined by him and colleague Öner Tulum. He highlights that Merck’s shift away from investing in new drugs was influenced by the biotechnology revolution of the 1980s, a period when startups began attracting venture capital and going public on the stock market, often yielding substantial returns for investors even before product development. “The startups basically became the research entities,” explains Lazonick, “attracting both the university knowledge and the scientists – the people who once might have worked for Big Pharma.”

Commencing in the late 1990s, the pharmaceutical landscape witnessed a significant consolidation trend, with mergers of Big Pharma companies: “The goal was for one Big Pharma company to merge with another one that had blockbuster drugs that could mean a billion dollars a year or more in sales, with lots of patent rights left on them,” says Lazonick.

According to him, Big Pharma’s strategy boils down to this: big companies demand high prices on blockbuster patented drugs and then use profits to pay dividends and do stock buybacks rather than their own innovation. “That’s what shoots down the argument that the big companies need high drug prices for innovation,” he says. “They need high drug prices to keep up stock prices to further enrich the executives and Wall Street.”

He cites Merck’s cancer drug Keytruda as an example of Big Pharma’s reliance on a small number of blockbuster drugs for revenue. Keytruda was first developed by a company called Organon, which was acquired by Schering-Plough in 2007, itself acquired by Merck two years later. “Merck got a hold of it not by developing the drug, but by acquiring Schering-Plough in 2009,” says Lazonick. He notes that Keytruda now represents 47% of Merck’s total sales, but its original patent expires in 2028.

The problem with this business model is that when the patents on the blockbuster drugs expire, the big profits disappear. Moreover, as the consolidation of the industry has evolved, the availability of big companies with blockbuster drugs has declined, and the remaining behemoths have had to turn to investing in their own pipeline or acquiring small biotech companies to survive. The question is whether, after decades of focusing on boosting their stock prices, companies like Merck and Pfizer possess the organizational capabilities to be successful in internal drug development.

Lazonick observes that some of the major pharmaceutical firms have begun to rethink stock buybacks, realizing their situation’s precariousness. Exploring alternative revenue streams, some are considering that redirecting buyback funds to internal drug development might actually be a smart move—if they can pull it off.

Political Money Talks, Loudly

If the industry’s longstanding assertion that exorbitant drug prices are necessary for innovation is unfounded, how do they get away with exploiting the public with price-gouging?

Political scientist Thomas Ferguson, a leading expert on money and politics, explains that the main thing preventing the taxpayers from getting fair drug prices and a return on their investment is the enormous sums Big Pharma has invested in buying the favor of politicians.

Getting fair drug prices is not a technical problem at all,” says Ferguson. “It is almost entirely a question of political will, and that is a question of political money to the leadership of both major parties.”

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