Start-ups, not big pharma, are responsible for pharma innovation—high prices aren’t key

In this paper, we undertook a detailed review of 1,589 clinical trials, 410 FDA drug approvals, and 10 years of biopharmaceutical company financial data in order to examine trends in drug innovation. We found the following:

Low R&D costs, not high prices, are the primary driver of pharmaceutical innovation. The U.S Food and Drug Administration and its counterparts around the world require drugmakers to undertake large, costly clinical trials if they study common diseases with tens of millions of patients, like diabetes and heart disease. By contrast, companies that study ultra-rare “orphan” diseases affecting a few thousand patients endure far lower R&D costs and upfront financial risk. As a result, companies are increasingly focusing on orphan diseases and abandoning work on large public health problems. 48% of all drugs in phase III clinical trials in 2020 are for treatments of orphan diseases, despite the fact that orphan drugs represent 11% of U.S. drug spending and currently treat 0.5% of the U.S. population.

The majority of new drug development now takes place at startups with little to no revenue. Contrary to the claim that raising prices on old drugs drives innovation, large incumbent pharmaceutical companies are rarely the discoverers of new drugs. Large companies have bureaucratic R&D processes, in which scientists have comparatively little incentive to innovate, whereas researchers at startups share more fully in the economic rewards of successful drug development. As a result, the majority of new drugs are now discovered and brought into human clinical trials by pre-commercial-stage companies funded by venture capital and hedge funds. In 2020, 60% of new drugs approved by the FDA were first brought to the clinic by early-stage, unprofitable companies.

The best way to spur pharmaceutical innovation is not to increase prices, but to reduce the cost of bringing drugs to market. Drugs that successfully gain FDA approval are almost always profitable, regardless of the exact price, especially when drugs treat unmet medical needs where price competition is absent. 90 percent of the cost of drug development is in phase III trials. The FDA allows drugs treating terminal diseases like AIDS and cancer to conditionally come to market after successful phase II studies. This policy should be expanded to include the largest public health challenges, like metabolic and cardiovascular disorders.

In 2020, 60% of new drugs approved by the FDA were first brought to the clinic by early-stage, unprofitable companies.

Large pharmaceutical incumbents benefit from high R&D costs. Incumbent drugmakers with billions of dollars in revenue can afford to undertake costly phase III clinical trials, whereas unprofitable startups less frequently can. As a result, large drugmakers benefit greatly from the present system, in which startups are forced to sell the rights to their drugs to the large companies, after the smaller startups have taken the risks of successfully completing earlier-stage studies.

Congress has a legitimate role in increasing pharmaceutical competition, and in countering exploitative drug pricing practices. Drug companies take advantage of patent law and monopoly power to charge the maximum amount they can, rather than simply seeking to gain a fair return on their R&D expenses, especially when it comes to biologic drugs where federal law restricts true competition. Congress can do more to lift restrictions against competition, and to empower private insurers and taxpayer-funded programs to push back against exploitative pricing practices.