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Drug Legislation Likely to Dry Up Biotech Funding

New drug pricing legislation proposed by House Speaker Nancy Pelosi could have a significant effect on large pharmaceutical companies and their shareholders, but would more likely put biotechnology investment in the deep freeze.

The Prescription Drug Pricing Reduction Act (PDPRA) of 2019 seeks to address many issues that affect Medicare and its beneficiaries, according to a Nov. 12 article in STAT News. It concentrates on cutting drug prices, improving the benefit component of Medicare's outpatient prescription drug benefit (Part D), and increasing competition.


Pelosi's main target is existing drugs that have no competition, like AbbVie's (NYSE:ABBV) Humira and Harvoni (which is marketed by Gilead Sciences (NASDAQ:GILD)). The legislation could bring drug prices more in line with what they cost outside the U.S. Humira, for instance, retails for more than $2,000 in the U.S., $1,500 more than what is paid for the medication elsewhere.

Courtesy of Los Angeles Times

While AbbVie, Gilead and other members of Big Pharma would undoubtedly be affected by the legislation, they have the size and resources to cushion the blow. This is not so for smaller biotechs. They're still laboring in the lab, trying to find breakthrough medications for major diseases like cancer, HIV and Alzheimer's. They can't exist without venture capital funding, and that source would likely dry up if investors don't see the possibility of outstanding returns on their money.

Andrew Lo, an economist at Massachusetts Institute of Technology, told STAT that the proposed legislation could have unintended outcomes. "These efforts, while they stem from very reasonable and laudable motivations, they will have an unintended consequence of creating a chill on funding."

Even a proponent of Pelosi's bill and "Medicare for All" acknowledges Lo is probably right. Dean Baker, an economist at the Center for Economic and Policy Research, agrees there will be fewer biotech startups.

The drying up of funding is of grave concern to heads of three biotechs: publicly listed Xencor (NASDAQ:XNCR) and privately held Nkarta Therapeutics and Tango Therapeutics. "If they (members of Congress) don't educate themselves on what this bill could do to this industry, they are doing their constituents a disservice," said Nkarta CEO Paul Hastings. "This bill could have devastating effects on our industry, period. End of discussion."

The Congressional Budget Office has estimated that the bill would take up to a trillion dollars out of the industry and result in 8-15 fewer drugs being developed in the next 10 years. The California Life Sciences Association thinks that estimate is far too low. Their study predicted nearly 90% fewer drugs would have been developed by the state's small biotechs in the past decade if the proposed legislation had been in effect.

Tango Therapeutics CEO Dr. Barbara Weber said small biotechs have been responsible for developing most of the drugs that have improved health care in the past 20 years, not multi-billion dollar companies like Merck (NYSE:MRK) and Eli Lilly (NYSE:LLY). They were able to do so because backers were confident they would eventually be profitable.

The biotechs are starting to make their voice heard on Capitol Hill, but most of the heavy lifting is being done by the Pharmaceutical Research and Manufacturers of America, which represents the big industry players.

"This type of policy would have a devastating effect on the industry and the patients that we serve," Stephen J. Ubl, PhRMA CEO, told the Los Angeles Times, emphasizing that it would cut research and development spending. Of course, this is the argument Big Pharma has been making for years. For many it rings hollow, and while we don't know exactly whether a bill will be passed before the end of the year, the tide seems to be turning against the industry and in favor of some control over rising drug costs.

Disclosure: The author holds positions in Gilead Sciences and Eli Lilly.

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This article first appeared on GuruFocus.