Unintended consequences are inevitable.
Medicare Takes Aim at Prescription Drug Prices
The Biden administration made a bold move this week by announcing that Medicare will directly negotiate the prices of 10 prescription drugs. These drugs, including Jardiance for diabetes, Entresto for heart failure, Imbruvica for blood cancer, and Stelara for psoriasis, have been identified as major contributors to Medicare Part D prescription costs.
“There is no reason,” President Biden stated, “why Americans should be forced to pay more than any developed nation for life-saving prescriptions just to pad Big Pharma’s pockets.”
However, there is more to this story than meets the eye.
The High Cost of Drug Development
It’s important to recognize that drug development is an incredibly expensive process. In 2019 alone, the pharmaceutical industry spent a staggering $83 billion on research and development. A study conducted in 2020 revealed that the average cost of developing a new therapeutic drug or biologic agent was $1.3 billion. This cost takes into account the expenses incurred from failed trials, making it a risky and costly endeavor.
While Americans bear the brunt of these expenses, other countries benefit from the fruits of American drug development without contributing their fair share. The United States accounts for a significant portion of prescription drug spending and GDP among innovator countries. Additionally, the pharmaceutical and medicine manufacturing industry provides hundreds of thousands of jobs.
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So, what will these new regulations actually achieve? According to National Review’s Jeff Zymeri, if implemented, they could lead to a decline in drug development. The Congressional Budget Office predicts a potential 15% loss in manufacturer revenue, resulting in fewer new drugs being brought to market. This would particularly impact drugs targeting rare conditions, which have a smaller market.
As an investor in biotech stocks, I can confidently say that these regulations would discourage investment in the sector. Why would investors risk their money on a drug if its success would only lead to diminished profits?
There is an alternative solution: holding other countries accountable for their fair share of drug costs. By ensuring that Americans pay similar prices to those around the world, we can maintain incentives for innovation. However, this would require politicians to confront the realities of the global market, which is unlikely to happen.
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