[Ip-health] The CEA estimate of HR 3's impact on innovation

James Love james.love at keionline.org
Wed Dec 4 12:49:51 PST 2019


https://www.whitehouse.gov/articles/house-drug-pricing-bill-keep-100-lifesaving-drugs-american-patients/


The White House Council of Economic Adviser's analysis of the impact of HR3
on innovation is ridiculously simple.  CEA assumes company R&D outlays,
which include costs of acquiring IP assets, produce exactly one drug for
every $2 billion booked as R&D.

The CEA analysis also says that it costs $10 to $13 billion in drug saves
to induce that $2 billion in R&D investments.  (15 to 20 percent of sales).

It’'s actually more expensive than that, once you back out the costs of
acquiring IP assets, which are jacked up by the prospect of high prices and
booked as R&D, it's even more costly to induce the R&D investments.

The disparity between booked R&D costs and actual costs of experiments is
particularly true for CAR T and gene therapies, where trials are cheap, and
IP is expensive.

Also worth noting, the CEA assigns 100 percent of the R&D investments to
development of new drugs, and 0 percent for everything after drugs are
first approved. Which is empirically, untrue.


What the CBO and CEA estimates should stimulate is a more interesting
discussion of how best to finance R&D, since spending between $10 to $63
billion per new drug (the range of estimates by CEA and CBO), is very very
expensive, given the much smaller costs of the actual research, including
human subject trials, that are required.

Zolgensma and Kymiraqh trials probably cost less than $10 million prior to
FDA approval, for example. And even when drugs have really expensive
trials, involving hundreds of millions, after adjustments for risks, it’s
very hard to justify $10 to $63 billion in sales to pay for those trials
and other real R&D costs.

Much of what makes drug development expensive these days is the escalating
costs of acquiring the necessary IP, which itself is a function of the
expected prices.

Jamie


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This was the core analysis by the White House on HR 3.

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"CBO’s assessment suggests that H.R. 3 could reduce pharmaceutical company
revenues by $500 billion to $1 trillion over the next decade, which would
have noticeable negative effects on drug innovation. Since pharmaceutical
companies typically spend 15 percent to 20 percent of their revenue on
research and development, this revenue decrease would probably result in a
$75 billion to $200 billion reduction in research and development
expenditures over the next decade. For comparison, CEA conservatively
assumes the cost of developing a new drug to be $2 billion, which explains
how CEA reached the estimate that H.R. 3 could result in as many as 100
fewer drugs entering the market over the next decade."

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-- 
James Love.  Knowledge Ecology International
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