By Richard G. Frank and Caitlin Rowley / Bloomberg Opinion
The prescription drug provisions of the Inflation Reduction Act have generated a deluge of doomsday predictions from the pharmaceutical industry regarding drug innovation. Big Pharma has focused on the provision requiring the federal government to negotiate prices for selected eligible drugs covered under Medicare Part B and Part D with the highest total spending, beginning in 2026. Last week we got the list of the first 10 medications that will be up for negotiation.
The industry claims the process will make those drugs unprofitable and that, as a result, it will have little impetus to invest in drug development. The chief executive officer of the trade group PhRMA predicted “a nuclear winter for innovation” before the passage of the law.
However, such forecasts are unfounded. To understand the extent to which decreased returns may impact innovation, we analyzed how much it costs on average to bring a drug to market and how much these companies have earned from the selected drugs since their launch. Not only are revenues enough to justify the investment in these particular drugs, they are enough to fund several more generations of pharmaceutical development. Lower negotiated prices are unlikely to deter further investment in similar medications.
For our revenue estimates, we calculated global sales for each drug since its launch, using data from company Securities and Exchange Commission filings and annual reports. For the cost of bringing a new drug to market, we referred to literature on average drug research and development costs, including studies most frequently cited by the industry. The most recent review of studies estimating these costs found that the range spans from as low as $161 million (in 2019 dollars) to as high as $4.5 billion. In previous work, we found that average capitalized R&D ranges from $1.3 to $2.5 billion. A 2016 study frequently cited by the industry estimated $2.6 billion. Based on this existing research, we arrived at $3.4 billion in 2022 dollars, after adjusting for inflation.
By simply subtracting the average capitalized R&D costs from global sales dollars, we get a picture of the earnings above development costs for those 10 initial drugs.
Seven of the 10 selected drugs had cumulative earnings of over $25 billion, using the estimate of $3.4 billion for R&D favored by the industry. At the high end, Eliquis, an anticoagulant, has earned $87.5 billion above the cost of the average new drug since 2012. At the low end, the heart medication Entresto has earned $13.7 billion over the average cost of bringing drugs to market since 2015.
Moreover, since the price negotiation for each of the drugs will not kick in until 2026, the drugmakers will have three more years of returns at or around their 2022 levels. For example, the immunosuppressive Stelara, made by Johnson & Johnson, earned more than $9.7 billion in 2022 alone. J&J will likely make nearly $30 billion more on this drug between now and 2026, netting over $85 billion. Before the negotiated price sets in, all of these drugs will have made back their investment many times over.
Despite the pharma companies’ fears, negotiating Medicare prices will not lead to a “nuclear winter,” just perhaps a small chill in their profit margins.
Richard G. Frank is director of the Brookings Schaeffer Initiative on Health Policy and emeritus professor of health economics at Harvard Medical School.
Caitlin Rowley is the center coordinator of the Brookings Schaeffer Initiative on Health Policy.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
