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Price controls would harm state's biotech economy
The proposed legislation might reduce drug spending in the short term, but it will discourage medical innovation.
By John Stanford
February 22, 2023 at 11:45PM
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Minnesota's state legislators are considering a pair of bills that could inadvertently restrict patients' access to new medicines and drive high-paying biotech jobs out of the state.
The bills in question (HF 17/SF 168) aim to address a very real problem — the high costs that patients face at the pharmacy counter. Many Minnesotans, especially seniors and those with chronic illnesses, are among the roughly 57 million Americans who can't afford the prescriptions they need.
But the twin bills address this real crisis in a counterproductive way: by creating a prescription drug affordability board and giving it the power to implement "reference pricing" for certain medications.
Under the legislation, the affordability board could establish an "upper payment limit" for medicines it deems too expensive.
These price controls might reduce drug spending in the short term. But there's no such thing as a free lunch. Minnesota's price controls, in addition to new ones at the federal level, discourage medical innovation and ultimately leave patients with fewer lifesaving treatments and cures in the long-term. As the investors who fund the early-stage breakthroughs, we are already seeing the unintended — and unfortunate — impact of the policies proposed in these bills.
Drug development is incredibly expensive — adequate lab space and equipment, brilliant researchers and lengthy clinical trials aren't cheap.
New drug development is also incredibly risky. Many initially promising molecules never even make it past lab testing. And of the few that do, around 88% fail in clinical trials. That means companies large and small can spend hundreds of millions on R&D and never realize a dime in revenue, much less profit. Merck, for example, spent over $300 million on failed COVID-19 vaccine programs.
After accounting for all these failures, it costs well over $2 billion, on average, to take just one drug candidate from the lab, through clinical trials and the FDA approval process, and bring it to market.
So why are investors still willing to take the immense risk of investing in biotech companies? Because if just a handful of their portfolio companies can create a successful product, they can recoup their investments on all the failures and earn a return.
But the twin bills would throw a massive wrench into this delicate investment calculus, especially if similar proposals crop up in other states. Drug companies spent more than $100 billion on U.S. R&D in 2021. If governments cap the potential return on the rare drug candidate that does succeed, investors will withdraw their capital from the biotech industry and direct it to other sectors that offer better risk-adjusted returns.
It's odd that Minnesota is entertaining these state-level price control proposals, given that Minnesota's thriving biotech scene is the envy of many states. Minnesota is home to more than 600 pharmaceutical and biotech R&D companies which together employ around 11,700 people. It also ranks first in the nation in medical device patents per capita, and ninth in total biotech patents.
The proposal is even more of a head-scratcher when you consider that Minnesota's leaders, including Gov. Tim Walz, have worked hard to attract more pharmaceutical research and development investment to Minnesota.
It makes sense for the state to woo biotech companies. They provide good jobs and create cutting-edge products. A strong biotech sector in Minnesota, in the long run, provides a tax base to support schools, roads, health insurance and other essential government services for every resident.
But if price controls on prescription drugs become law, the private capital that creates those jobs — and the benefits they bring — will evaporate.
The lawmakers behind the bills presumably don't intend to crush the entrepreneurial biotech spirit in the state. But good intentions can't be an excuse for hurting Minnesota's attractiveness as a biotech R&D location.
John Stanford is executive director of Incubate, a Washington-based coalition of early stage life-science investors.
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John Stanford
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