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OPINION

New Drug Pricing Legislation Would Kill Small Biotech Firms

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.
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AP Photo/Carolyn Kaster

Senator Amy Klobuchar (D-MN) and a cadre of other liberal lawmakers recently introduced the Strengthening Medicare and Reducing Taxpayer Prices Act, a bill they claim will help America's seniors by imposing strict price caps on prescription drugs.

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The so-called SMART Prices Act is anything but. The legislation would make it practically impossible for investors to finance drug development efforts, thus forcing many small biotech firms out of business. Ultimately, that outcome will deprive patients of lifesaving new treatments. 

The bill effectively doubles down on last year's Inflation Reduction Act, which empowered the government to set prices for dozens of prescription drugs covered by Medicare. It's an iron law of economics that price controls discourage new entrants into the marketplace and the development of new products. Life sciences is no exception. 

Even before the IRA, it took a risk-tolerant investor to bankroll cutting-edge biotech research. After accounting for the high rate of failure -- about 88% of experimental drugs that start clinical trials never earn FDA approval -- it can cost upwards of $2.6 billion to bring just one new medicine to market. Price caps hinder drug makers' ability to earn a return on the few new medicines that succeed. 

This is particularly true of small-molecule medicines, usually in pill form—the IRA subjects "small-molecule" drugs to price controls nine years after FDA approval. Larger molecule "biologic" medications, often administered via infusion, are eligible for price setting after 13 years. 

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Today, the average brand-name drug is on the market for 12.4 years before a generic copycat enters the market. Nine years isn't enough time to earn back billions of dollars in R&D costs. 

Since the IRA became law last August, leading biopharmaceutical firms have slashed R&D investment in small-molecule drugs. AstraZeneca and Bristol Myers-Squibb have said they may pause specific cancer projects because of the IRA. And 63% of drug companies plan to shift investment away from small molecule medicines, according to a recent trade group survey. 

These disastrous consequences haven't given leftist lawmakers any pause. The newly introduced SMART Act would expand and intensify the most anti-innovation aspects of the IRA. 

The legislation would double the number of medications subject to price controls. Just as bad, it would drastically reduce how long new drugs are exempt from price controls, subjecting both small-molecule and biologic medicines to price caps just five years after FDA approval. 

Wealthy, established life sciences firms will likely survive these draconian measures. They can compensate for lost revenue by slashing R&D and focusing on existing product lines rather than developing new medicines. 

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For small biotechs, the threat of more aggressive price controls on an accelerated timeline is existential. Life sciences startups, which often work on just one or two experimental drugs, could be put out of business if their products are selected for price setting. 

That would have disastrous economic and health consequences. Aside from inventing the lion's share of new medicines, small and medium biotechs employ 71% of the nearly 1.9 million workers in the U.S. bioscience industry. The SMART Act could put hundreds of small biotechs out of business and thousands of workers out of a job. 

The SMART Act's supporters point out that the IRA included a provision meant to lessen the law's negative impacts on small biotechs. This provision would still apply under the SMART Act's expanded price-setting framework. But we already know this exemption will not work for most small biotechs. 

This "exemption" policy states that if one drug accounts for more than 80% of a company's Medicare revenue, yet accounts for less than 1% of federal drug spending, it is exempt from price setting until 2029. In practice, any company that meets this definition would almost certainly be so small that it could not possibly build out a manufacturing and distribution network for its drug. 

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In fact, most research startups do not create this costly and complex network from scratch, so biotech startups often partner with larger firms with the experiences and resources to launch blockbuster medicines. But they will lose their exemption if they strike such partnerships under the IRA, especially under the proposed SMART Act. 

Small biotech firms nationwide have been racing to find treatments and cures for various illnesses, from HIV and cancer to Alzheimer's, diabetes, and myriad rare diseases. Lawmakers can help them survive and thrive by recognizing -- and rejecting -- the SMART Act for the dumb policy that it is. 

Karen Kerrigan is president and CEO of the Small Business & Entrepreneurship Council.

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