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Congress relying on flawed model to set drug pricing policy

CBO model ignores impact on preclinical biotechs, underestimates effects of price controls on drug development

A CBO model ignores impacts on preclinical biotechs and underestimates the effects of price controls on drug development.

Aug 28, 2021 | 12:47 AM GMT

The Congressional Budget Office’s model for analyzing how legislative proposals may affect new drug development disregards impacts on early-stage biotech companies, and as result dramatically underestimates the effects of price controls on the development of new medicines, an economist who advises the CBO, a life sciences venture capitalist, and an executive at BIO told BioCentury.

The CBO model is important because members of Congress treat its projections as gospel. It is difficult to see something that hasn’t happened, so a decline in the number or quality of drugs under development might not be obvious. The long development cycles for drugs could obscure the consequences of a reduction in investment.

Even if it becomes clear that investment in drug development has declined, it will be politically difficult to remove price controls. Politicians are loath to take actions that could increase drug company revenues. The calamitous decline in antibiotic drug development, as well as the need to provide funding to incentivize targeted antibiotic drug R&D, have been known for decades, but Congress has only recently seriously considered enacting legislation to mitigate the crisis.

CBO’s model estimates that price controls similar to those proposed in the Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3) would reduce pharmaceutical industry returns in the top quintile of Medicare Part D drugs by 15-25%. The bill would give HHS power to “negotiate” drug prices and impose civil and tax penalties on companies that fail to agree to prices CMS proposes. Revenue reductions similar to those envisioned by H.R. 3 would, CBO projects, “lead to 2 fewer drugs in the first decade (a reduction of 0.5 percent), 23 fewer over the next decade (a reduction of 5 percent), and 34 fewer drugs in the third decade (a reduction of 8 percent).”

Effects on VC investment

Much of the debate about the model has focused on whether losing 59 drugs over 30 years is an acceptable trade-off for an estimated savings of $900 billion, but H.R. 3 would in fact result in a much larger reduction in the number of drugs developed, and it would inadvertently target the most transformational drugs, according to Harvard’s Amitabh Chandra.

Chandra is director of health policy research at the Harvard Kennedy School of Government, a professor of business administration at Harvard Business School, and a member of CBO’s Panel of Health Advisors.

“There are four problems with drug pricing: high patient out-of-pocket costs, medicines getting approved with dubious evidence, others not going generic or biosimilar, and Medicare Part B being unable to negotiate. I don’t see how H.R. 3, which targets high-revenue medicines, reduces these problems,” Chandra told BioCentury.

One of the flaws in CBO’s model is its failure to recognize that reducing revenues from highly profitable drugs will deter VCs from making high-risk investments in biotechs, he said. “VC’s invest about $22 billion every year and the outcome is 30 or 40 drugs many years later. That $22 billion is going to be very sensitive to the upper tail of profits being lopped off.”

Chandra added that “a transformational drug for Alzheimer's — not Aduhelm — or diabetes, is almost definitely in this tail.”

CBO’s report acknowledges that its model does not consider the health impacts of reducing the number of drugs developed or of increasing access by reducing costs. This isn’t CBO’s mandate, but it is something Congress should consider, according to Chandra. “CBO’s mandate is to count dollars, but Congress’s mandate is to count lives.”

Dan Durham, EVP of health at BIO, notes that CBO’s model intentionally ignores most of the biotech industry. “The report only takes the large company perspective. CBO states that it takes preclinical decision-making as a given. Specifically, it looks at decision-making for a company with drugs in the clinic making decisions about whether to stop development after Phase I, II or III based on estimates of profitability. It leaves out preclinical development, which is where most BIO companies are.”

As a result, Congress is relying on a model that “completely misses out on the incentives of VCs and others to invest in prerevenue, preclinical companies,” Durham said.

CBO’s report states that there is a great deal of uncertainty about the accuracy of its estimates. Members of Congress, however, do not delve into the nuances of CBO estimates.

“CBO at least acknowledges the dramatic uncertainty in their models, but Congress just looks at the point estimates,” Durham said.

Peter Kolchinsky, managing partner at RA Capital, says that while reducing revenues from the most profitable drugs sounds reasonable to politicians and the public, the policy would undermine the incentives that lead VCs to invest in biopharmaceutical companies.

“They are focused on individual drugs, whereas we’re managing entire portfolios,” Kolchinsky told BioCentury. “They are going to go after the biggest winners after it’s clear what they are. What they’re basically doing is saying, we’re going to wait for you to invest in the seeds of all these drugs and then, after you’ve risked all that money, and it’s clear which of those are the biggest winners, we’re going to clip those.”

He added, “CBO’s report grossly underestimates the impact of gutting expectations of return on willingness to invest. We would feel it viscerally.”

The CBO model does not adequately consider the effects on VCs of price controls on the most successful drugs, Kolchinsky said.

“Funds like mine will get defunded. My investors will run for the hills and my companies will get defunded and patients will have the drugs we already invented at whatever price CMS dictates, but there won’t be new drugs,” he said. “People don’t notice what they don’t have, not for a while. All of a sudden, the dog won’t bark anymore, and many people won’t notice.”

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