New Data: Foreign Reference Pricing Proposal in H.R. 3 Would Slash Life-Saving R&D and Lead to Destruction of California’s Life Sciences Sector

SAN FRANCISCO & SACRAMENTO, Calif. & SAN DIEGO & WASHINGTON--(BUSINESS WIRE)-- The California Life Sciences Association (CLSA) and Biocom today released data analyzing the potential impact of international reference pricing on California’s biopharmaceutical innovation ecosystem. The CLSA and Biocom commissioned study was conducted by Vital Transformation, an international health economics firm, to examine the impact of Medicare Part D foreign reference pricing as proposed in H.R. 3, the Lower Drug Costs Now Act of 2019, on California’s world-class life sciences sector, and specifically the impact of such a proposal on investment into small company capital formation and the new drug development pipeline.

The analysis shows that implementing foreign reference pricing in Medicare Part D, as H.R. 3 proposes to do, will lead to the wholesale destruction of California’s world-class innovative biopharmaceutical sector and decimate the life-saving R&D that thousands of companies are engaged in to help develop new treatments and cures for patients around the world.

Mike Guerra, President & CEO of California Life Sciences Association, commented: “California Life Sciences Association (CLSA) is deeply concerned by proposals from the Administration, Congress and others to import foreign price controls by tying U.S. medicine list prices to those set abroad. Our new data shows that, if enacted, the foreign reference pricing provisions in H.R. 3 would have a catastrophic impact on patient choice and access to medicines and would handicap the development of new treatments for unmet medical needs. We cannot afford to short-circuit life-saving innovation occurring in California’s world-leading biomedical sector. On behalf of California’s life sciences innovators, a sector with more than 3,600 firms employing over 958,000 people, CLSA will continue to engage with our bipartisan California Congressional Delegation to advocate for alternative solutions that will demonstrably lower out-of-pocket costs for America’s patients, while protecting access to medicines, and preserving incentives for future investment in new therapies.”

Joe Panetta, President & CEO, Biocom, remarked: “The average consumer thinks drugs prices are too high, and in some cases they might be right. However, the method proposed in H.R. 3 will result in a devastating chain of events for Americans needing innovative medicines, and to suggest otherwise is wholly misinformed. If passed as written, this legislation will suffocate the innovative work of Biocom members and the broader life sciences community to find and develop cures, which has ramifications for every patient and caregiver across every disease, from our children born with rare diseases, to our family members with heart disease, cancer and immune diseases, to our parents affected with dementia. To ensure that we can continue to invest in the future of new health advances, I urge our Congressional leaders to work with life science and biotech communities to collaboratively create positive and sustainable legislation that will lower out-of-pocket costs for patients while ensuring that the American innovation ecosystem has the incentives to develop the treatments and cures of today and tomorrow.”

Duane Schultess, Managing Director, Vital Transformation, added: “The mistake that the Congressional Budget Office (CBO), policymakers, and many people are making regarding the impact [of international reference pricing] on drugs coming to market, is the fact that investment behavior is non-linear. Successful therapies require orders of magnitude more funding to bring to market, particularly in hard-to-test conditions requiring long outcomes trials, like Alzheimer’s and cardiovascular disease. Given the cost just to test a product for market feasibility is roughly a minimum of $500 million, and that product will fail 9 of 10 times, the impact of a 58% revenue reduction to the market will prevent entry of dozens of drugs per year, rather than the estimated 8-15 drugs suggested by CBO. Our analysis shows definitively that applying international reference pricing to the US market will devastate R&D, and likely cause a more than 80% reduction in successfully marketed products.”

New Data’s Key Findings on H.R. 3’s Impact to California

• Implementing international reference pricing (foreign price controls) in Medicare Part D as a method to lower drug costs will have severe negative effects on the entire U.S. biopharmaceutical economy.
• Such a policy will lower industry revenue by $71.6 billion a year ($358 billion / 5 years), representing a reduction of 58% of earnings before interest and taxes (EBIT) revenue.
  • This finding is in line with the non-partisan Congressional Budget Office’s (CBO) estimate of Medicare Part D “savings” of $336 billion / 5 years.
• The 58% reduction in EBIT revenue could result in an 88% reduction in the number of drugs that are brought to market by small/emerging companies in California due to changed investor behavior.
  • Such a dramatic decline would be felt most in the higher risk/smaller population therapeutic areas of R&D, including new drugs for endocrine, metabolic, genetic and rare diseases, and pediatric cancers.

H.R. 3’s Impact on R&D and Innovation Pipeline in California

• From October 2009 to 2019, large biopharmaceutical firms invested a total $621 billion in funding into biopharmaceutical partnerships, licensing agreements, and acquisitions in the U.S.
• During that same period, 85 small and emerging California biopharma firms received approximately 30% ($178 billion) of the total funding invested in the U.S.
• Of those 85 firms, only 25 firms (or 29%) received FDA authorization to market a new product.
  • These firms are small companies that rely on investment and partnership with large companies to bring new products to market.

• Under H.R. 3, only 3 drugs developed by those 25 firms would have likely come to market - an 88% reduction.
• Of note, while this analysis focused on California’s biopharmaceutical sector – which is the largest in the U.S. and receives nearly 30% of all investments - other U.S. markets will also see large reductions in the number of new drugs coming to market in direct proportion to that seen in California, should H.R. 3 go into effect.

H.R. 3’s Impact on Investor Behavior and Confidence in Life Sciences Investments

• Therapies require a minimum investment of $500 million (and often much more) to determine if an asset can be marketed. Therapies entering clinical research fail to reach marketing authorization 9 out of 10 times.¹
• Factoring in a 58% reduction in large company revenue due to international reference pricing, products with a higher risk profile (i.e. those that focus on smaller populations or require more challenging science to solve) will no longer be viable investments, as investors will be forced to focus on assets with a higher probability of a return of investment.
• Due to the well-established difficulty of drug development, the biopharmaceutical market entry success rate for a new product is always very low – only an 8% chance of success – any reduction in large company revenue caused by international reference pricing will mean that such a firm will be forced to make fewer investments in proportion to their drop in free cashflow.
• Investors will dedicate their reduced available capital to therapeutic targets with the highest likelihood of success, a shorter product development cycle, or the largest market potential, leaving vulnerable populations without hope for new treatments.

H.R. 3’s Impact on Jobs in California

• The U.S. currently dominates the global biotech sector, with 70% of global biopharmaceutical intellectual property owned and developed in the U.S.
• This has led to over 100% job growth in biopharmaceutical R&D and the movement of biopharmaceutical from the rest of the world to the U.S.
• A 58% reduction in total biopharmaceutic revenue will likely result in a corresponding percentage of jobs lost – more specifically, a minimum of at least 80,000+ biopharmaceutical sector jobs will be lost nationwide. (Approximately 30% of the US biopharmaceutical workforce is in California.)

H.R. 3’s Impact on the Stock Market

• U.S. firms alone account for $1.36 trillion (55%) of the market capitalization of all companies impacted by Medicare Part D international reference pricing.
• The introduction of international reference pricing will likely result in a 58% reduction in biopharmaceutical revenue, causing a corresponding decrease in excess of $500+ billion in US stock market valuation.

Earlier this month, CLSA led a multi-state and regional association letter to bipartisan congressional leadership opposing the concept of international reference pricing as a mechanism to lower domestic drug costs. Cosigned by all three life sciences associations serving California – CLSA, Biocom and SoCalBio – the letter is supported by a total of 44 state and regional life sciences associations from 41 states and territories across the country. Today’s analysis validates the concerns expressed in the letter. Learn more.

Click here to view the slide deck. Click here to view CLSA’s two pager summarizing the analysis results.

About California Life Sciences Association (CLSA)

California Life Sciences Association (CLSA) is the state’s largest and most influential life sciences advocacy and business leadership organization. With offices in Sacramento, San Diego, South San Francisco, Los Angeles and Washington DC, CLSA works closely with industry, government, academia and others to shape public policy, improve access to innovative technologies and grow California’s life sciences economy. CLSA serves biotechnology, pharmaceutical, medical device and diagnostics companies, research universities and institutes, investors and service providers throughout the Golden State. CLSA was founded in 2015 when the Bay Area Bioscience Association (BayBio) and the California Healthcare Institute (CHI) merged. Visit CLSA at www.califesciences.org, and follow us on Twitter @CALifeSciences, Facebook, Instagram, LinkedIn and YouTube.

About Vital Transformation

Vital Transformation understands the implications of new medical procedures, technologies and policies. We measure their impact on current clinical practices in close collaboration with health care professionals, researchers, and regulators. Through our web platform and client network, we are able to communicate our findings with international decision makers and stakeholders. Our Vital Transformation branded round-tables, webinars, and conferences are often oversubscribed, and are regularly presented in partnership with global thought-leaders and organizations.

About Biocom

Biocom is the largest, most experienced leader and advocate for California’s life science sector. We work on behalf of more than 1,200 members to drive public policy, build an enviable network of industry leaders, create access to capital, introduce cutting-edge STEM education programs, and create robust value-driven purchasing programs.

Founded in 1995 in San Diego, Biocom provides the strongest public voice to research institutions and companies that fuel the local and state-wide economy. Our goal is simple: to help our members produce novel solutions that improve the human condition. In addition to our San Diego headquarters, Biocom operates core offices in Los Angeles and the San Francisco Bay Area, satellite offices in Washington, D.C. and Tokyo, and has a continuous staff presence in Sacramento. Our broad membership benefits apply to biotechnology, pharmaceutical, medical device, genomics and diagnostics companies of all sizes, as well as to research universities and institutes, clinical research organizations, investors and service providers.

For more information on Biocom, please visit our website at www.biocom.org. Connect with us on LinkedIn, Facebook, and Twitter (@BIOCOMCA).

¹ https://www.sciencedirect.com/science/article/abs/pii/S0167629616000291

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