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We might be even less prepared for the next public health emergency than we were for the last one.

After all the billions of dollars on pandemic era upgrades to labs and data and surveillance, after all the studies and convenings and white papers about emergency preparedness, the U.S. still lacks two crucial things in the public health arsenal.

The American Recovery and Reinvestment Act — President Obama’s 2009 stimulus package — required doctors to store patients’ medical records digitally rather than on paper. If they refused to comply, the government would cut their Medicare reimbursements.

The Affordable Care Act, passed in March of the following year, strengthened this mandate and incentivized doctors to adopt electronic health record software that makes patients’ information available to physicians across many different practices. These systems were supposed to eliminate paperwork and reduce miscommunication.

As complex as the physician-shortage problem is, it’s not insurmountable, Baackes says. For example, a July 2020 report from the California Health Care Foundation that used data from 2014 found that 11.2 million people in the state were living in an HPSA. A September 2021 report from the Kaiser Family Foundation found that number had shrunk to about 7.8 million. Baackes says that this 31% reduction from 2014 to 2021 demonstrates that California has made progress in addressing the physician shortage. The state has been implementing many strategies, such as expanding technology, to address the physician shortage. But more needs to be done.“It’s about having the bandwidth to provide good patient care,” Holliday says. “We don’t want our patients to have poor outcomes and to struggle to get the right provider for their needs.”

Biotechnology is at the center of a long-term contest for power between the United States and China. A technological edge in biological engineering and manufacturing will provide a substantive and lasting advantage that spans the full economy and the entire planet. The management of biotechnological trade and information flows in the near term will have consequences that will play out over decades.

Biological engineering should be viewed as critical infrastructure for the twenty-first century that will underlie and enable the entire economy. Biotechnology is already a substantial component of the economies of the United States and China, although analyses are hampered by the quantity and quality of information, and neither country officially tracks the contribution of biotechnology to their gross domestic product (GDP). After assembling data from a variety of sources, we conclude that in the United States, biotechnology revenues exceed those of better-measured sectors, such as semiconductors, mining, and utilities.1 As detailed below, we estimate that US biotechnology revenues now exceed $400 billion, or 2 percent of GDP. Chinese biotechnology revenues are reported to be of a similar size. Our standard assumption is that product revenues are a useful proxy measure of technical capability, and thus the sum of these revenues could support the conclusion that the two countries are roughly equally matched today.

Over the last two decades, China has successfully challenged American industrial competitiveness in many industries, but as China has gone all in on its “Made in China 2025” strategy, the challenge will increasingly be to U.S. advanced and innovation-based industries. However, America still maintains competitive advantage over many nations, including China, in the biopharmaceutical industry. In fact, since 2001, while U.S. manufacturing jobs have fallen, the number of biopharmaceutical jobs has increased over 20 percent. In short, biopharma is a U.S. manufacturing success story.

However, “Made in China 2025,” as well as other plans, target life sciences for global leadership. China is taking a range of steps, including regulatory changes, funding of biomedical research and venture capital (VC), restructuring of the industry to eliminate many smaller producers, expanding medical tourism, and expediting listings on the Hong Kong exchange, to propel China to become a major global biopharma competitor—particularly by developing a world-class generics industry. However, while some of these policy actions are fair and legitimate, many are not because they are “innovation mercantilist” in nature, seeking to unfairly benefit Chinse firms at the expense of U.S. and other foreign firms. In other words, China is seeking to challenge the United States in one of the most high-value-added, innovation-intensive industries in the world—the kind of industry for which the United States has held a competitive advantage for decades.

Although the drug was never approved in the United States, the existing regulatory review process was incredibly lax, with no clear methodology for evaluating supporting evidence. To remedy this situation, Congress passed the Kefauver-Harris Amendment in 1962, which included such common-sense measures as a “proof of efficacy” requirement that is still the basis of the drug approval process today.

The immediate effect of this regulatory change was industry consolidation. With the massive investments and long lead times required to bring new drugs to market, only larger firms such as Pfizer, Merck, and Johnson & Johnson had the necessary capabilities to compete.

Technological innovation is a key engine for growth; hence, understanding the frictions that impede the development of new ideas is critical. Unlike investments in physical capital, investments in research and development (R&D) are characterized by considerable uncertainty. As a result, the forces that limit firms’ willingness to take risks may lead them to forgo innovative investments and focus instead on safer but more marginal projects.1 Our goal in this paper is to understand the extent to which firms’ risk aversion limits their investment in innovative projects. To do so, we focus on the pharmaceutical industry, an important setting in which these frictions are likely to be particularly salient.

Using detailed data on firms’ drug development decisions, we provide evidence suggesting that risk aversion keeps even large firms from investing in innovative projects. To arrive at this conclusion, we first develop a new measure of the molecular novelty of firms’ new drug candidates. Using this measure, we show that firms face a risk-reward trade-off when considering investments in novelty: novel drug candidates are less likely to be approved by the U.S. Food and Drug Administration (FDA), but they also appear to be more valuable investments ex ante. Specifically, early patents associated with novel drug molecules are more valuable than patents associated with more derivative molecules. Having established that novel drugs appear to be superior investments than me-too drugs raises the issue of why firms do not develop more novel drugs. Using variation based on the expansion of Medicare prescription drug coverage, we find that firms respond to plausibly exogenous increases in their net worth by developing riskier, more innovative drugs that are also more valuable on average. This result, which holds even for profitable, publicly traded firms, stands in contrast to the complete markets benchmark in which a firm’s willingness to take (diversifiable) risks is independent of its net worth. By contrast, our findings are consistent with a dynamic model of investment with costly external finance, in which firms favor conservative drug development strategies in order to manage the risk of their cash flows. A positive cash flow shock leads to more novel R&D not because the firm is literally cash constrained, but because the increase in firm’s net worth reduces its effective risk aversion.

Using our measure of novelty, we first show that, contrary to the popular view, large firms are more likely to develop novel drug candidates than smaller firms: novel drugs constitute 56% of large firms’ development pipelines, compared to 47% for smaller firms. This result stands in contrast with leading models of endogenous innovation and firm size (Akcigit and Kerr 2018), in which small firms are more likely to engage in radical innovation. We argue that standard models of endogenous growth typically ignore the significant uncertainty inherent in pursuing radical innovations, which combined with costs of external finance may lead firms to behave as if they are risk averse, even though the underlying risks may be diversifiable from the perspective of firm shareholders. In this world, drug development decisions become sensitive to firms’ net worth: larger firms are willing to take more risks and develop novel drugs because they are better able to weather setbacks in the drug development process. The rest of the paper examines this idea in more detail.

For clarity, sales at risk refers to a product’s annual revenue in the year before loss of exclusivity. Actual or predicted loss is the difference between that sales at risk number and the first full year of sales post expiry, as reported by companies for historic expiries or computed by Evaluate Pharma’s consensus for those still to happen.

The historic numbers in this analysis show that sales never drop as precipitously as these at-risk estimates suggest. Even small molecules, which see revenues disappear much more rapidly than biologicals, do not immediately drop to zero when copycats arrive.

What business strategies have pharmaceutical companies employed to revitalize their growth following the patent cliff? This question has been answered and supported by the research presented throughout the thesis. Among biopharmaceutical companies, Biogen, Novartis, and Sanofi used a mixture of business strategy tools to revitalize their growth following the patent cliff. Biogen’s efforts were primarily concentrated on academic collaborations and R&D investment, Novartis’s around R&D, mergers and acquisitions, and emerging markets, and Sanofi’s around mergers and acquisitions, R&D, and emerging markets. This resulted in varying degrees of success, evidenced by the upward trend in net income of the companies, and will take some time to fully be realized as revenue generated from employing these tools adds to the overall strength of the companies, considering all of the other variables that may affect net income over time. Some of these tools may be easier than others to implement, but the success of these companies suggests that using more than one tool at a time can contribute to good health in the evolving biopharmaceutical landscape. To remain competitive, biopharmaceutical companies should internally develop aggressive strategies for clinical development and marketing potential for each of their products and portfolios so they can be proactive rather than reactive in taking steps to stabilize their net incomes. If a biopharmaceutical company was to do nothing to proactively stabilize their net income, a patent cliff could set them up to lose a significant portion of revenue in a short time, becoming a target for acquisition. This lends companies to employ the tool of mergers and acquisitions to bolster their own revenues and fortify their pipelines. If the company promoted themselves to be partially acquired, this could result in their earning additional cash to employ another one of the tools, investing in R&D, to stay in business with a portfolio to better suit their needs.

Thus far, this research shows the various reactions of pharmaceutical companies to the revenue lost to the patent cliff as well as highlighting some proactive measures that could be taken to avoid these situations in the future. With these strategies, if another patent cliff did occur, companies may see less revenue loss or a shorter period of plateau in net income. Companies seem to have learned to invest in R&D of novel next generation products, valuable partnerships with other companies and academic research facilities, and take stake in emerging markets as part of their plans to guarantee long term profitability across products and therapeutic specialties. It is essential for biopharmaceutical companies to understand the historical lesson that revenue loss due to patent expiry was concentrated in mainstream treatments. In the future, a patent cliff could repeat itself by impacting a franchise of contemporary blockbuster drugs concentrated around a specific disease state such as MS. Therefore, it is advisable for biopharmaceutical companies to incrementally invest in R&D of a diversified pipeline for sustainability.

The August 2022 passage of the Inflation Reduction Act (IRA) is expected to transform the ways in which Medicare pays for prescription drugs, especially by enabling Medicare to negotiate for the prices of certain high-cost medications used by its fifty million beneficiaries, primarily seniors. The pharmaceutical industry by and large opposed the passage of the law, arguing that its drug price negotiation provisions would dramatically harm innovation,1 “propel[ling] us light years back into the dark ages of biomedical research,”2 <<<FOOTNOTE 2 BEGINS>>> 2 New drug pricing deal could propel us ‘light years back into the dark ages of biomedical research.’ BIO. Biotechnology Innovation Organization, July 6, 2022. https://www.bio.org/press-release/new-drug-pricing-deal-could-propel-us-light-years-back-dark-ages-biomedical-research <<<FOOTNOTE 2 ENDS>>> pointing to the Congressional Budget Office's (CBO’s) estimate that the law would lead to (modestly) fewer new drugs coming to market over the next thirty years (a 1% reduction).3 In our view, however, a full understanding of the IRA's impact on innovation requires considering not merely the number of new drugs that might come to market after the law's passage but the clinical value those new drugs deliver to patients, as well as other policies implemented by the Biden Administration alongside the IRA that are designed to reward and promote clinically valuable innovation. Analyzing these policies in detail demonstrates that IRA opponents’ innovation concerns are overstated and oversimplified, overlooking important dimensions of innovation for patients.

First, the IRA contains provisions aimed at minimizing negative impacts on innovation as a whole. The law directs Medicare drug price negotiations towards innovator small-molecule and biologic drugs that have been on the market for many years without generic or biosimilar competition in an effort to provide companies with time to recoup their investments and earn competitive returns. This commitment is backed by the factors that Medicare must consider during the negotiation process once a drug is selected, including the innovator manufacturer's research and development (R&D) costs for the drug and “the extent to which the manufacturer has recouped research and development costs.”4

Putting the negotiation structure in context, for drugs that have been on the market nine to eleven years and twelve to fifteen years, respectively, the IRA requires minimum discounts of 25% and 35% (although larger discounts can be negotiated). Recent CBO analyses estimate that average rebates in Medicare Part D (which primarily governs those medications seniors obtain at a pharmacy, rather than those that are administered by physicians or in a hospital setting) for brand-name drugs are approximately 35%.5 Recent research on the financing of cancer drugs also helps illustrate why these IRA provisions serve as protection for innovations that result in high cost prescription drug products. For example, one study found that those products experience a median time to recovery of R&D investments of five years.6

Drug research and development involves enormous fixed costs. As of 2013, the cost per new drug approved by the Food and Drug Administration was $2.9 billion. Historically, these fixed costs have doubled in real terms every nine years. So in 2022, the inflation-adjusted fixed cost per approved drug is close to $7 billion.

That huge cost must be spread out over a small fraction of the world’s population during a limited period of marketing exclusivity. Without wealthy American consumers and insurers who pay retail or close to it for brand-name drugs, some drugs won’t be developed at all. While it’s true that foreign governments mostly free-ride on the enormous investments in R&D made by the U.S., it’s also true that somebody has to pay. If nobody pays, many treatments that would improve and extend people’s lives won’t exist.

Virtually no products are more valuable than the modern medicines produced by the biopharmaceutical industry. They cure diseases and extend lives. We’ve all heard that Americans pay higher drug prices than people in other countries. That’s true, but only when comparing retail prices of brand-name drugs. Very few Americans pay retail prices; most pay a fraction—a copay dictated by their insurance plan. Most country-to-country comparisons also leave out generics. Nine of 10 prescriptions in the U.S. are filled with generic drugs priced lower than in most other countries.

In many countries, the government is the sole purchaser of pharmaceuticals. For a new drug to be used, the government must buy and distribute it. If the government declines, the drug won’t be available. These governments negotiate with a take-it-or-leave-it attitude. Drug companies often take it, because once research and development costs are covered, some money is better than no money.

That’s a hard number to resist. But the proposal would have other monumental and decidedly harmful implications for American society. There is simply no way for government fiat to force down costs without harming innovation, especially at the startups and small biotechs fueled by venture capital (VC).

All price control schemes have two inescapable and competing effects:

WHO SHOULD BENEFIT? THE RELATIONSHIP BETWEEN REVENUE AND R&D

The increasing share of revenues being captured by middlemen is concerning because, as Sood and Brownlee both observed, a decrease in the share of revenues accruing to drug innovators means less resources going toward investing in future cures.

That is appalling, and should drive home the point that government control of health care is far more about control than it is about care.

But another aspect struck me as well. In denying Charlie's parents the right to bring their son to the United States to try a new form of treatment for Charlie's mitochondrial depletion syndrome, the European Court of Justice said that this would expose him to "continued pain, suffering and distress," and that undergoing experimental treatment "with no prospects of success ... would offer no benefit."

This paper studies how insurance coverage policies impact pharmaceutical innovation. In the United States, most patients obtain prescription drugs through insurance plans administered by Pharmacy Benefit Managers (PBMs). Beginning in 2012, PBMs began excluding coverage for many newly approved drugs when cheaper alternatives were available. Relative to firms’ existing practices, we show that exclusions substantially reduced insurance claims for targeted drugs, lowering their profitability. This new risk of coverage exclusion reshaped upstream pharmaceutical R&D: for every 1 standard deviation increase in drug class exclusion risk, we estimate an 11% decline in subsequent development activity. This change translated into a relative decline in the development of drug candidates that appear more incremental: that is, those in drug classes with more pre-existing therapies and with less scientifically novel research.

Under the proposal, the federal government would guarantee a well-paying job, with benefits and a high enough salary to pay for rent, transportation, and food, to every citizen who wants one. Anyone who didn’t have a job and wanted one could go into a local office for a government agency — call it the Works Progress Administration, maybe — and walk out with a regular government position paying a livable wage ($15 an hour, perhaps) and offering health, dental, and vision insurance, and retirement benefits, and child care for their kids.

First, the IRA contains provisions aimed at minimizing negative impacts on innovation as a whole. The law directs Medicare drug price negotiations towards innovator small-molecule and biologic drugs that have been on the market for many years without generic or biosimilar competition in an effort to provide companies with time to recoup their investments and earn competitive returns. This commitment is backed by the factors that Medicare must consider during the negotiation process once a drug is selected, including the innovator manufacturer's research and development (R&D) costs for the drug and “the extent to which the manufacturer has recouped research and development costs.”4

Putting the negotiation structure in context, for drugs that have been on the market nine to eleven years and twelve to fifteen years, respectively, the IRA requires minimum discounts of 25% and 35% (although larger discounts can be negotiated). Recent CBO analyses estimate that average rebates in Medicare Part D (which primarily governs those medications seniors obtain at a pharmacy, rather than those that are administered by physicians or in a hospital setting) for brand-name drugs are approximately 35%.5 Recent research on the financing of cancer drugs also helps illustrate why these IRA provisions serve as protection for innovations that result in high cost prescription drug products. For example, one study found that those products experience a median time to recovery of R&D investments of five years.6