As Art Laffer so eloquently illustrated with the Laffer curve, if you tax something you get less of it.  Whenever you reduce the return on some economic activity whether by taxes, price controls or some other government mischief you will get less of it.  That is an immutable law of economics…and human nature.

Common sense, no?  So one can only conclude that America wants fewer new drugs.  Because that will be the inevitable effect of the price control legislation now making its way through the United States Senate.  

It is counter-intuitive, to say the least, that the government should propose major disincentives for the industry which, in record time, gave us, not one, but two highly effective vaccines for Covid.  And for good measure developed an antiviral therapeutic, Paxlovid, which President Biden is currently gobbling down.

Some wag once said, no good deed goes unpunished.  That certainly is the case with the American  pharmaceutical industry.  Its reward for saving literally millions of lives with its scientific ingenuity and its willingness to risk capital will be a government mandated reduction of profitability of its patented medications.  This isn’t merely unjust, it’s illogical.

If you are suffering from cancer, Alzheimer’s, ALS, or any other life-threatening condition, the chances of receiving good news about a breakthrough cure just went out the window.  Perhaps the Senate is worried about the solvency of the social security system and wants to make sure Americans don’t live longer.

Ha, how ingenious.  What will they think of next?  

The record of the American pharmaceutical industry, operating under the present regulatory environment, has been exemplary.  I speak as a customer and investor. The desire to address unmet health needs, as well as to generate an attractive return for investors, has turned HIV from a death sentence into a chronic disease, manageable by medications, with minimal impact on life expectancy.

Similar motives have led in the last fifteen years to a cure for Hepatitis C.  Immuno-oncology breakthroughs, like Keytruda, are adding years to the lives of patients with lung cancer, triple-negative breast cancer, and advanced melanomas. Our pharmaceutical industry doesn’t appear broke — but Congress is going to fix it.

These are the same people who wring their hands about our international competitiveness. In pharmaceuticals we are the world leader.  Nobody is getting in line to get a jab of the Chinese vaccine for Covid, or Russia’s Sputnik. Why would you want to make this industry less profitable, less attractive to investment?

With this kind of national policy pharmaceuticals will one day end up like semiconductors, and we will find Congress wants to invest $75 billion (or is it $250 billion) of taxpayers’ money to restore its global competitiveness.

Make no mistake, the Senate bill is a direct assault on the industry’s profitability.  The bill has a specious appearance of being reasonable.  For small molecules, price control wouldn’t kick in for nine years. Fair enough?  Actually no; if you look at the pattern of pharmaceutical revenues the highest inflows are in the later years. This is because it takes years of marketing expense to build these revenues so an attack on the final five or six years of patent life would likely affect at least 50 percent or more of the expected revenue/profitability of a given drug.  

This would negatively impact drug development in two ways.  First, the return on investments in any particular drug would plummet.  That means fewer drugs would be developed.  Given the uncertainty of therapeutic effectiveness of any one drug, you want to start with a portfolio of drug candidates. Multiple shots on goal. This bill would shrink the size of that portfolio.  

Second, the reduced profitability of each drug affected by these price controls obviously means fewer dollars coming in for a drug company to use for whatever purposes.  Given the reduction in return on drug development it is likely that scarcer dollars will be invested elsewhere.  In lobbying perhaps?

Another effect of this bill will be to divert what money is available for R&D toward biologics, away from small molecules.  For some inexplicable reason the bill gives biologics 13 years of protection as opposed to nine.  Biologics — pioneering anti-inflammatory drugs — are harder to make and are accordingly almost always more expensive.

So this bill will have the presumably unintended consequence of raising the cost/price of the fewer pharmaceuticals still being produced. Nice trade: fewer therapeutic options, but at a higher price.

We should also note biologics don’t cross the blood brain barrier. Thus the incentives, if you can call them that, in this bill make it even less likely that neurologic conditions like Alzheimer’s, Parkinson’s, or ALS will receive any investment in new therapies. Hard to think of worse news for an aging population.

For years life insurance companies have benefited from a steady increase in life expectancy.  With this proposed legislation the insurance world may morph into the golden age of annuities.