Biotech innovation is key to gene editing.

Unfortunately, in this zealousness to rein in drug prices, policymakers risk imperiling future generations of biomedical innovation, to the detriment of both patients and the broader economy. That’s because the link between revenues and R&D investment is intrinsic to the biopharmaceutical industry. It’s why the OECD has found that “there exists a high degree of correlation between pharmaceutical sales revenues and R&D expenditures” and why there’s a statistically significant relationship between a biopharma enterprise’s revenues in the previous year and its R&D expenditures in the current year.222 Indeed, every $2.5 billion of additional biopharmaceutical revenue leads to one new drug approval.223

And this explains why academic studies consistently demonstrate that a reduction in current drug revenues leads to a decrease in future research and the number of new drug discoveries.224 For instance, one study found that a real 10 percent decrease in the growth of drug prices would be associated with an approximately 6 percent decrease in pharmaceutical R&D spending as a share of net revenues.225 Similarly, Columbia University’s Frank Lichtenberg found a 10-percent decrease in cancer drug prices would likely cause a 5- to 6-percent decline in both cancer regimens and research articles.226 Likewise, Golec and Vernon show that if the United States had used an EU-like drug pricing system from 1986-2004, this would have resulted in a decline in firms’ R&D expenditures of up to 33 percent and the development of 117 fewer new medicines.227

The CBO examined the potential impact of the proposed House legislation H.R. 3, which among other provisions would require drug companies to negotiate lower prices with the government. CBO’s preliminary conclusion was that reducing manufacturers’ revenues by between $500 billion and $1 trillion over the next decade could result in 8 to 15 fewer new drugs coming to market over that time (out of about 300 that would otherwise be expected), reducing the number of new drugs by 3 to 5 percent over the ensuing decade.228

Put simply, drug price controls decrease future biomedical innovation. Fortunately, the converse is true, which is why one study found that if government price controls in non-U.S. OECD countries were lifted—that is, if other countries paid their fair share for innovative medicines— the number of new treatments available would increase 9 to 12 percent by 2030, equivalent to 8 to 13 new drugs in that year, with this dynamic increasing the life expectancy of a 15-year-old OECD citizen today by 0.6 to 1.6 years on average.229 All this explains why the U.S. Council of Economic Advisors has written that while lowering reimbursement prices in the United States would reduce the prices Americans pay today for biopharmaceutical products, it would “make better health costlier in the future by curtailing innovation,” thus failing to achieve the goal of reducing the health care prices, by reducing incentives for innovative products in the future.230

Moreover, policymakers seeking to impose strict price controls on drugs have a natural experiment to learn from: When many European nations went down the same road in the 1980s, the result was dramatic—a transfer of global competitive advantage and jobs to the United States. There is no reason to believe that if U.S. policymakers follow Europe’s lead by price controls the result would not be a weakening of U.S. competitive advantage, and likely a shift over the next two decades of biopharma leadership to China.

Instead of trying to slash prices on the dubious theory drug companies can make do with lower revenues, lawmakers should turn their attention to the other side of the industry’s ledger—the staggering cost of R&D—by spurring the kinds of innovations that can radically improve R&D productivity. A new slate of biomedical technologies including AI, CRISPR gene editing, and biologics manufacturing is transforming how new drugs are discovered, developed, and clinically tested.231 Capitalizing on these trends to lower the cost of drug innovation is the only viable way to achieve what everyone wants—a long-term trend toward producing more cures (and more ancillary economic benefits) at less cost.