Numbers Don't Lie: Trump's Drug Pricing Rule Would Squash Innovation
Days before Thanksgiving, President Trump announced the final details on a long-promised plan to link Medicare payments for certain advanced medicines to the lower prices paid abroad.
The effort — called the "most favored nations" model — attempts to address the disparity between the prices paid by Medicare and the prices paid by governments in places like Canada, the United Kingdom, and France. But the approach is profoundly confused.
Our peers in the developed world pay lower prices because their healthcare systems employ government-imposed price controls. The United States has a unique healthcare system within which, in exchange for higher healthcare costs, Americans enjoy far greater choice of and access to the latest and most innovative treatments and cures. They also benefit economically. Thanks to appropriate funding for biopharma industry scientists, the United States is the epicenter of medical innovation and home to the world's most dynamic and thriving life sciences sector.
The prices for medicines set by foreign governments wouldn't come close to supporting the level of innovation the world enjoys today. By pegging U.S. drug prices to these below-market prices, Trump's effort promises to deprive the world's scientists of much-needed research funding.
And it does so on the, widely held but sorely mistaken, assumption that drug companies enjoy lavish profit margins.
According to my own analysis of the world's roughly 1,500 biopharmaceutical firms, the profit margin for the collective global drug industry is around 11 percent. That's hardly excessive. In fact, it's perfectly average — as it's roughly in line with the margin for an average publicly traded company.
My analysis also finds that a whopping 36 percent of the collective drug-industry revenues go toward research and development. No other industry comes close to matching this level of investment. The next two most research-intensive sectors are software, which devotes 15 percent of revenues to R&D, and semiconductors, which spends 13 percent. Both of those industries also enjoy far larger margins than the drug sector — 24 percent and 26 percent, respectively.
If the Trump administration succeeds in systematically undervaluing the achievements of research scientists, the future of biomedical innovation looks bleak. My own analysis finds that pegging U.S. prices to the prices paid in comparable countries would decimate profits for the global drug industry, turning the average operating profit of 11 to an average operating loss of 25 percent.
Such losses are of course unsustainable, and they couldn't be addressed by simply "cutting fat." Profound reductions in R&D would be unavoidable, affecting both the internal R&D budgets of large biopharmaceutical companies as well as the capital available to start-up biotech companies, the engines of much of our most innovative new technologies.
In such a world, finding investment dollars to develop the next great cancer breakthrough or a game-changing curative gene therapy medicine wouldn't be merely difficult — it'd be impossible.
The global drug industry is leading the world out of the Covid-19 pandemic by doing what it does best — investing heavily in R&D and inventing vaccines and therapies that the world desperately needs. Trump's drug-pricing gambit might seem well-intentioned to some, but in practice, it would starve the world's scientists of valuable resources.
Ravi Mehrotra has had leadership roles in life sciences investing for more than two decades. Most recently, he served as senior managing director on the biotech team at Evercore ISI. He has worked on more than 200 initial public offerings.