There has long been a de facto consensus among U.S. policymakers that America’s system for discovering and developing new drugs is the world’s best, and that there are two reasons for that success: First, the federal government provides robust funding for scientific research, mostly through the National Institutes of Health (NIH). Second, the U.S. system encourages vigorous innovation in the private sector by providing strong intellectual property protections and a drug reimbursement system that allow companies to earn enough to reinvest in risky research and development.
But this consensus is now under intense pressure from critics across the political spectrum, especially on the populist left, as left-leaning think tanks and presidential candidate Sen. Bernie Sanders (I-VT) question the legitimacy of both the public-private policy framework and the results it produces. The critics’ various indictments revolve around a number of misconceptions about how the U.S. system functions. Here are five of the most common myths:
1. The U.S. private sector does a poor job of discovering and developing new drugs.
The reality is that America’s biopharmaceutical sector is by far the world’s most innovative and productive. The industry today has more than 3,400 drugs under clinical development, including many that are firsts of their kind. Because this R&D pipeline is so robust, the U.S. Food and Drug Administration has been able to approve more than 500 new medicines in the last decade and a half, providing new and better treatments for a wide variety of diseases.
This output far exceeds that of any other country. In fact, from 2000 to 2010, U.S. companies were responsible for 57 percent of the world’s new drugs, while France, Germany, Japan, and the United Kingdom together accounted for just 29 percent. No surprise then, the U.S. biopharma industry stands as a source of economic strength and competitive advantage, producing nearly $100 billion in value added and more than $50 billion in exports annually while supporting some 3.4 million jobs.
2. The U.S. pharmaceutical industry invests in the wrong things.
The populist left argues we should not rely on industry to drive drug development because it focuses only on profits and either ignores certain diseases altogether or produces “me too” drugs to get in on the market for high-demand treatments. Dean Baker, an economist with the left-leaning Center for Economic and Policy Research, specifically charges that industry neglects research that is not likely to lead to patentable discoveries. He gives this example: “If a researcher at a major drug company discovers evidence that a natural substance or long existing drug like aspirin could provide an effective treatment for a specific condition, they have no incentive to do further research in the area.”
This ignores the fact that such “open source” medical discoveries are few and far between. Moreover, market incentives drive companies to focus on diseases that impose the greatest and most severe health problems for the most people. And we already have effective policies to align public priorities with private interests. Examples include smart tax credits and policies such as longer periods of intellectual property protection for the clinical trial data associated with “orphan drugs,” which have smaller markets because relatively fewer people have the medical conditions that require the drugs.
3. Industry wastes money.
The populist left argues there is plenty of money for the biopharma industry to develop drugs, even if its revenues were significantly lowered through price controls or reduced intellectual property protections. Critics rationalize this assertion with claims of excess profits and wasteful spending. For example, Baker argues that the industry’s marketing expenditures are comparable to its expenditures on research—so he reasons that if companies simply cut back on advertising, they could lower drug prices.
In reality, studies find that the biopharma industry spends less than 2 percent of its total sales on direct-to-consumer advertising—hardly a honeypot of potential savings—while it pours more than 18 percent of its sales into R&D, more than any other sector.
The left’s broader critique is that industry rakes in an excessive amount of profit and that if government limited drug company revenues (by imposing price controls or weakening intellectual property protection), it would not come at the expense of R&D or drug discovery. In reality, the claim that any individual drug generates too much revenue cannot be viewed in isolation, because many more drugs never make it through clinical trials, and thus generate no profits, only losses. Moreover, even among the drugs that make it to market, studies have found that as many as 80 percent never cover their capitalized R&D costs. In addition, return on equity in the pharmaceutical industry, adjusted for R&D spending, is only about one percentage point higher than it is for all U.S. industry.
4. Cutting industry R&D would have little impact on future biomedical innovation.
In their quest to reduce drug prices through price controls and weakened patent protection, drug populists know they have to seed the narrative that reducing revenues will not hamper drug discovery. But there is no getting around the fact that reducing revenues also would shrink R&D budgets, which in turn would slow drug discovery. Indeed, the Organization for Economic Cooperation and Development found that, “There exists a high degree of correlation between pharmaceutical sales revenues and R&D expenditures.”
Despite the amazing breakthroughs of the last half century, we are a long way from discovering all that needs to be discovered. Failure to achieve more breakthroughs will deprive millions of people of the cures they need—which will cost us more in the long run than we can possibly save in the short run. To take just one glaring example, the Alzheimer’s Association expects the financial impact of that one disease to reach $1 trillion per year by 2050—much of which will have to be borne by the federal government.
5. Government could lead drug discovery without industry.
To the extent that left-wing populists acknowledge that cutting into industry’s revenues with price controls or weaker intellectual property protections would lead to lower levels of private R&D, they contend government easily could make up the difference. To that end, they have floated a variety of proposals, from having employers pay medical research fees, to instituting compulsory licensing for drug patents, to simply turning the whole task of research and discovery over to the NIH.
There are any number of problems with these proposals, but the first is that there is no chance Congress would appropriate the necessary funding. Consider that the NIH budget is about $30 billion, while the U.S. biopharma industry invests more than $50 billion in R&D. Even if the drug populists were correct that half of this funding is unnecessary, taxes would still have to be raised by tens of billions of dollars to cover the gap. Fat chance that will happen in the current environment.
None of this means the U.S. system is perfect or cannot be improved. It certainly can—for example, by increasing federal funding for NIH (which is lower now than it was as a share of the economy in the mid-2000s); by exploring cooperative research models that focus on particular diseases; and by making the tax code more supportive of high-risk R&D with expanded tax credits and a new “innovation box” that lowers the corporate rate on profits derived from intellectual property. But policymakers should reject the false choice between public-sector leadership and private-sector leadership. America leads the world because its system maximizes the strengths of both.