Before the IRA established price negotiations on behalf of Medicare, industry insiders were concerned the cost cuts would bring about an exodus in pharma investment. But according to a new analysis, those estimates were likely exaggerated.
Even with global pharma revenue reductions of up to 10%, the industry could maintain the current level of drug approvals, and large companies can strategically allocate their R&D spending in a way that would sustain both current levels of product approvals and profits, the analysis found.
The paper, from researchers at Bentley University’s Center for Integration of Science and Industry, showed that for smaller biotech companies, which sponsor the majority of clinical trials, there was no relationship between R&D spending and revenue. Rather, these companies usually acquire most of their R&D capital through new investment in equity offerings.
It’s not the first time research has questioned the link between R&D spending and drug prices. According to a report published last year, drug prices are “not justified” by R&D investments.
Biotech blues
Using publicly available financial reports from 1999 to 2018, the 2023 study revealed 15 of the largest biopharma companies spent $1.4 trillion on research and development. By contrast, those same companies spent significantly more — $2.2 trillion — on costs relating to selling, general and administrative activities.
The newest study found a relationship between revenue and R&D spending for the biggest pharma companies, defined in this study as having a market capitalization of more than $7 billion, but those larger companies were not responsible for most of the new product innovation.
Instead, researchers pointed to data showing smaller, emerging companies have originated 67% of new drugs, sponsored 64% of late-stage clinical trials and were responsible for 40% to 69% of new drug approvals in recent years.
Other research backs this up — large pharma companies were the sole originators of only 14% of the 50 first-in-class oncology drugs approved by the FDA from 2010 to 2020, according to a 2023 study by Clarion Healthcare researchers. The bigger companies more often play a different role: Getting those new drugs over the finish line through acquisition or licensing. Large pharma companies launched or were involved in launching 76% of first-in-class oncology drugs during that 10-year period, according to the study.
The common industry practice of acquisition and licensing could help maintain revenue among larger companies, even with revenue reductions of up to 10%, the new study showed. Researchers used financial modeling to show how large companies could target cost reductions in their own early-stage trials and maintain late-stage pipelines through drugs acquired from smaller companies.
“Pharmaceutical innovation is not adequately described by conventional economic theories that fail to account for the distinct business models of small, science-based biotechnology companies,” Fred Ledley, senior author of the study and director of the Center for Integration of Science and Industry, said in a statement. “Our work suggests that established management and investment practices could preserve both the industry’s profits and current levels of drug approvals in face of the reductions in drug price anticipated by the Inflation Reduction Act.”
The study’s model hinges on the 10% revenue reduction threshold, and estimates vary regarding how much revenues will ultimately drop, though research suggests they wouldn’t even be that high.
The U.S. government last week said the negotiations stand to save taxpayers $6 billion off the list prices for 10 widely used prescription drugs.
But the prices for the drugs, which include two popular blood thinners, several diabetes treatments and a cancer pill, won’t take effect until 2026. In addition, the biggest savings won’t come until about 2027, according to new CMS projections.
