Monday, June 27, 1994
The new Congressional Budget Office report, "How Health Care Reform Affects Pharmaceutical Research and Development," is must reading for any member of the biotech community looking for corroboration of the highly political nature of the attack on drugs, or the sheer ignorance of politicians of the true economics of the drug sector.
The summary of the document, the subject of a BioCentury Extra last Wednesday, lays out the report's conclusions about the impact of the Clinton administration plan on drug R&D in numeric terms. Under universial coverage and with a Medicare drug benefit, total spending on drugs could increase by 4-6 percent; average returns would rise slightly, with profits falling 14 percent on drugs for the over-65 population and rising 11 percent on drugs for the under-65 group. Once half of the market for a drug consists of the over-65 population, returns would fall.
But the underlying premises of the report are even more interesting, providing ammunition for the industry's contention that it has been singled out unfairly by the administration and critics.
While still concluding that the pharma industry generates "a small amount of excess profits," the report nevertheless presents a much more sober set of numbers than the inflated figures on pharmaceutical price gouging that have been taken as gospel in the health care debate.
CBO makes a strong case for the arguments that drug companies have been laying out all along - that it's not outrageously profitable, and that drug prices haven't been rising at rocket speed. As such, it lays the groundwork for a more rational discussion of the industry by more accurately depicting the historical situation.
Sin of omission
The report does have one critical shortcoming as far as the biotech sector is concerned: it ignores the dependence of the sector on the capital markets to fund its projects, assuming that R&D is funded from revenues on a pharmaceutical industry model.
Taking that sin of omission first, the report was based on a model of a drug industry that doesn't exist any more, one in which the only sources of innovation are large, well-funded multinational pharmaceutical companies. As such, it provides members of Congress with the equivalent of a rear-view mirror but no road map with which to navigate.
Lawmakers may not realize that the report doesn't reflect the impact on small, entrepreneurial biotech companies.
The analysis was prepared based solely on the drug industry as it existed in the early and mid-1980s, according to Philip Webre, a co-author of the CBO study. No consideration was given to the unique structure of the biotechnology industry, its unique funding mechanisms, and the different impacts policy changes might have on biotech-related drug R&D.
Webre told BioCentury that the administration's reform proposals wouldn't have a significant impact on biotech companies' ability to access capital markets. "These are small, single-product companies that have a very high risk," he said. "Too many things are happening in the market to ascribe much impact to one or another provision" of the administration's proposals.