By John Prufeta, Founder & General Partner

The American economy is an incredible engine, producing an astonishing array of goods and services, consumed both here and throughout the world. The field of scientific discovery across a range of industries is a shining light of American competitiveness and a major driver of innovation that has fostered historically unprecedented economic growth and prosperity. The healthcare industry, as a major beneficiary of scientific discovery, occupies a large and growing slice of the U.S. GDP pie. The biotech vertical, ranging from scientists in the lab to the Pharma industry, is unquestionably one of the Crown Jewels of the American economy. It is an essential industry, one that uniquely touches nearly every American, and additionally several billions around the world. So, why would anyone want to harm it? Our business, namely the industry that drives innovation forward to discover safe and effective new medicines for humanity, is now experiencing what I believe is the first salvo of our government defining a ceiling to future expenditures in healthcare for the American public. Further, I believe that current and evolving policy may be unwittingly hardwired to result in the dismantling and ultimate destruction of America’s nearly 100-year supremacy in new medicine innovation. The U.S. has produced more Nobel Laureates, more new drug discoveries, and more new patents and intellectual property in medicine than any other country on Earth. And by a large margin. This fact has been consistently true for the past 80 years. It is now in some peril. Of course, the potential destruction will not occur in one fell swoop. No, the death will occur from a series of incremental, seemingly “fair,” “rational,” and “popular” policy moves. And what a time to introduce these policies, and their attendant uncertainties. The biotech and larger pharma world already look like a major crime scene these days with police tape across the doors of the venture capital, pharma, hospital, and scientific communities alike. And the culprit is so easy to find it would only require a two-minute Columbo episode.  

At a recent industry meeting in which I was a panelist, I heard the groans in the audience when fielding a question about the effects of the Inflation Reduction Act (IRA) legislation on our beloved industry. Within the narrow confines of the question, I answered with the only reply that can be given – it is not at all helpful to our particular industry. The groans emerged when I decided to get a bit more expansive in answering the question. I said that in my opinion, while we are indeed in the midst of the most consequential decade of medical innovation in history – at the same time, our government, as the biggest payer in the healthcare game, is telegraphing in a very big way that we cannot afford what likely will be a series of expensive new therapies discovered and approved in the next decade. Do you think small molecules are expensive? Wait until a rash of gene and cell therapy programs are fully realized and see the price tag there! Additionally, I stated that probably over 70% of the individuals in that room voted for the very same policymakers that have designed the new legislative initiatives. Not a popular statement, indeed. But nonetheless true. It seems elections really do have consequences. 

Let me go further. The FDA commissioner, recently addressing industries largest bio conference, told the audience that the prices of drugs in the United States are too high. Now, we can debate that point, or at least correct the statement to say that the cost of drugs is too high, meaning price is only a function of cost. Did you know that the Pharma industry is not in the top ten of the highest profit margin industries in the United States? It places at 15th, with a net margin of 18.35%. Compare this to the Regional Banking Industry’s net margin of 30.31%. (Source – Insider Monkey May 1, 2023). Nevertheless, I am glad the Commissioner said this publicly because the truth is, he’s absolutely correct. There are a number of reasons why this is true, including the sheer cost of prosecuting a drug through the testing, manufacturing, and regulatory gauntlet, as well as the more rude fact that the American worker pays higher prices for drugs than any other worker in the world – and chances are we invented the stuff in the first place! Not to be completely contradictory, my own thinking is that the Commissioner did not go far enough. Indeed, the trend looks pretty bad when one measures the marked increases in healthcare costs, including prescription drugs, when measured against the stagnant or declining, purchasing power of the American public. This was not always so.  

 

A quick reminder

To date, postwar economic growth, and general American prosperity have successfully absorbed the high cost of innovation and access within the healthcare sector, resulting in incredible advances in medicine, healthcare infrastructure, and access. Interestingly, the cost of health care seemed always to exceed the general inflation number, yet the economic engine absorbed these increases fairly successfully. The healthcare economy merely grabbed greater shares of the GDP, in a happy exchange for real advances in healthcare treatment.  

 

Back to the present

Basically, what the FDA commissioner is conveying is that the current and future American economy cannot continue to absorb ever greater healthcare costs within the constraints of expected GDP growth. Where I may disagree with the FDA commissioner is actually on a point that is completely outside his policy powers. Once again (1979 anyone?), as history turns, the American public is being told that our economic horizons and prosperity have limitations, and therefore, in the case of the healthcare sector, we must artificially adjust the price of the goods we produce rather than rely on future prosperities to fund new drug discovery and attendant treatment. Price controls, in effect, with small molecule therapies as the first victim. And despite the fact that price controls have never worked in history as a lasting solution – ever. From my perspective, we have what I would call a numerator/denominator issue. The FDA commissioner quite rightly points out the very big social issue of impending increases in healthcare costs due to incredible, but very expensive, medicines coming into being. Add to that an aging population that certainly will also cause an increase in the number of people requiring advanced, more expensive health care. That is his job, and he is crystal clear in his message. Once again, to remind you, the first salvo is telegraphing limitations on small molecule discovery. However, does anyone actually believe that the cost control ceiling will only focus on small molecules? Well, actually, no. Legislation has been recently submitted that adds biological to the target list and would result in adjusting when the price controls kick in from 9 and 13 years respectively, down to 5 years. Another prominent legislator proposes price caps for any drug that received support from either BARDA or CDC (NIH next?). What to do when a whole array of gene and cell therapy, synthetic biology, and regenerative medicine solutions are approved to treat literally hundreds of thousands of people, many of which will cost up to $2M? Think also of the likely shift in many treatments from ongoing, long-term treatment and attendant costs that are spread over a number of years changing to an immediate bill for treatment, at let’s say $1M per patient. Is it not reasonable to think that both government and industry, as the primary payers of health care bills presently, would have to place limits (rationing), or decline as unaffordable these types of new treatments? Maybe, but then maybe not. Is there a better idea? 

 

Examining the Internet Sector for the Impact of High-Growth, Lower-Tax Policies 

According to the IAB report in 2021, the Internet economy grew seven times faster than the total U.S. economy during the past four years and now accounts for an astonishing 12% of the U.S. GDP. More impressively, the internet economy’s contribution to the U.S. GDP grew 22% per year since 2016, in a national economy that grows between 2 to 3% per year. In 2020 alone, the ad-supported internet economy alone contributed $2.45 trillion to the nation’s $21.18 trillion GDP. More than 17 million jobs in the U.S. were created by the commercial internet, 7 million more (!) than only four years ago. It is clear that the U.S. economy is undergoing a radical transformation driven by the market-making power of computational power and the Internet network. Healthcare innovation can do the same and provide market-making power if supported and let talented scientists and operators innovate freely – and get properly rewarded for their work.  

 

A low-growth, high inflation economy, one that impinges on corporate profit and destroys worker take-home pay, will not be in a position to afford the medical miracles that are undoubtedly springing forth in this decade and the next. So, the IRA, designed essentially by the executive branch, is the first defining legislation telegraphing the limits of future budgets to absorb sustained high drug prices. Quietly, most of corporate America agrees. From their perspective, accelerating healthcare costs have affected their global competitive position and corporate profits. I submit that accelerating healthcare costs are only a small part of that scenario. It seems that the executive and legislative branches both, are quite content to advance artificial price controls in medicine, rather than championing a high-growth economy that can, indeed, easily absorb the inevitable higher cost of even accelerated, high-cost medical innovations. So, do we institute price controls, which have a very poor track record historically, or rely on innovation, which has a pretty darn good track record?  

 

 

The Numerator/Denominator Effect  

At the risk of being accused as an economic supply-sider, as horrifying to some as that may be, let me submit a better idea. I believe the best possible policy for all constituents is to support and sustain policies of high growth, resulting in economic initiatives that both increase corporate profit and individual worker spending power. I frankly do not care a whit if the design comes from Republicans, Democrats, or miracle of all miracles, is bipartisan, springing forth from both sides of the aisle. 

 

Is it good policy for America to remain the beacon of medical innovation for the world? We certainly cannot remain so with a regressive policy. The solution is to demand policies that foster a high-growth, lower regulation, lower-tax economy! 

 

Is it good policy to ensure a healthy medical innovation ecosystem capable of solving healthcare’s most vexing problems? The solution is to demand policies that foster a high-growth, lower regulation, lower-tax economy! 

 

Is it good policy to have sufficient spending power as a society to afford literally hundreds of thousands of $1M treatments in gene therapy, cell therapy, and synthetic biology? The solution is to demand policies that foster a high-growth, lower regulation, lower-tax economy! 

 

Is it good policy for America to continue to be the “champ” in medical innovation, with all the high-paying, high-tech jobs, and economic benefits that come with it? Then demand policies that foster a high growth, lower tax economy. 

 

As I sit here, reflecting upon the amazing journey of over 30 years in healthcare, I think about our children, our grandchildren, and ensuing generations enjoying access to life-saving, disease-curative therapies, without the pain and suffering of treatment options that do not quite cure. Instead, I dream of all of them living a long, healthy, prosperous life and contributing to making our world a better place. Made possible by the best medicines – Made in America. I can only hope that our industry’s decline in numbers will result from actually solving many of the most vexing healthcare problems, rather than watching an absolutely beautiful, amazing sector of the economy die by government-assisted murder.