The Price of Innovation
January 22, 2020
Photo by Leslie Walker
The United States pays more for prescription drugs than any other country in the world. But whenever politicians propose lowering those prices, industry leaders claim it would harm innovation and the development of new breakthrough treatments. Can we lower prices and retain innovation?
Listen to the full episode below, read the transcript or scroll down for more information.
The Basics
By the Numbers:
Drug Prices in the U.S.
By the Numbers:
Drug Development in the U.S.
1 in 10
odds of a drug making it from clinical trials to market³
- The Changing Landscape of Research and Development, IQVIA, 2019
- PhRMA Annual Member Survey, 2019
- Clinical Development Success Rates 2006-2015; BIO, Biomedtracker, Amplion; 2016
The Evidence: The Relationship Between Drug Prices and Innovation
- Most of the new vaccines developed were not significant improvements over already existing vaccines.¹
- Most of the new drugs developed following the introduction of Medicare Part D were for conditions that already had at least five existing treatments. Few were for conditions with at most one existing treatment.³
- Many believe lower potential returns would dissuade venture capitalists from backing the biotech startups responsible for developing the majority of new drugs. Venture capitalists’ investments in pharma have tripled in the past decade.⁴
- Estimates vary widely over how many new drugs would be lost under proposed price regulations (from 8⁵ to several hundred⁶), but no estimates can predict how truly innovative those "lost drugs" would have been.
- Amy Finkelstein, Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry, Quarterly Journal of Economics, 2004.
- Margaret E. Blume-Kohout and Neeraj Sood, Market Size and Innovation: Effects of Medicare Part D on Pharmaceutical Research and Development, Journal of Public Economics, 2013
- David Dranove, Craig Garthwaite and Manuel Hermosilla; Pharmaceutical Profits and the Social Value of Innovation; National Bureau of Economic Research; 2014
- PitchBook analysis
- Congressional Budget Office Analysis of H.R. 3, 2019
- House Drug Pricing Bill Could Keep 100 Lifesaving Drugs from American Patients, White House, 2019
The Tradeoffs: Price Regulation vs. Innovation
From Lab Bench to Bedside: How an Idea Becomes a Drug
At the core of the argument over how drug prices will impact innovation is the process of researching and developing new treatments. The graphic below demonstrates a common (though not universal) path that an idea must follow to become a prescription drug. Estimates of the cost of the complete process range from several hundred millions to billions of dollars, and many drug ideas fail at every step of the process.
Drug discovery often starts with research conducted at primarily government-funded university labs.
Promising ideas or compounds form the basis of biotech startups, often funded by venture capitalists, which support continued research and development.
Large pharmaceutical companies acquire the most promising biotech startups in order to get products through clinical trials and to market.
Potential drugs are put through human clinical trials to test their safety, effectiveness and increased benefit relative to existing treatments.
A small number of medications are approved by the FDA and released to the market each year. Novel drugs receive exclusive patents, allowing companies to charge high prices upfront.
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Episode Resources
Drug Price-Innovation Relationship:
Pharmaceutical Profits and the Social Value of Innovation; David Dranove, Craig Garthwaite and Manuel Hermosilla; National Bureau of Economic Research; 2014
Market Size and Innovation: Effects of Medicare Part D on Pharmaceutical Research and Development, Margaret E. Blume-Kohout and Neeraj Sood, Journal of Public Economics, 2013
Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry, Amy Finkelstein, Quarterly Journal of Economics, 2004
Role of Venture Capital in Drug Development
The Changing Landscape of Research and Development, IQVIA, 2019
U.S. Drug Prices Compared to Other Countries
“The True Story of America’s Sky-High Prescription Drug Prices,” Sarah Kliff, Vox, 2018
Paying for Prescription Drugs Around the World: Why Is the U.S. an Outlier? Dana O. Sarnak, David Squires and Shawn Bishop; The Commonwealth Fund; 2017
Episode Credits
Guests: Chaitan Khosla, Director of Stanford ChEM-H
Craig Garthwaite, Associate Professor of Strategy, Kellogg School of Management at Northwestern University
Stacie Dusetzina, Associate Professor of Health Policy, Vanderbilt University
Original music composed by Ty Citerman; additional music by Blue Dot Sessions, Bacon and OnlyMeith
This episode was reported and produced by Ryan Levi and Victoria Stern. It was mixed by Ryan Levi.
Additional thanks to:
Rachel Sachs, Dan Paterson, Paul Hastings, Sarah Dykstra, Michelle Arkin, Michael Carrier, Nicholas Bagley, Richard Frank, Ariel Dora Stern, Brian Smokler, Bill Edwards, Kristen Samuelson, Paul Ruest, the Tradeoffs Advisory Board…
…and our stellar staff!