International Reference Pricing in Congressional Bill H.R.3 and Its Potential Impact on the U.S. Biotech Ecosystem

Duane Schulthess

Available online 19 September 2020

Abstract

The U.S. Congress has proposed reference pricing for Medicare Part D under Congressional Bill H.R.3 with the objective of benchmarking U.S. drug pricing against an average price basket of 11 countries for the 125 drugs with the greatest net spending in the United States. U.S. drug prices were found to be 3.7 times higher on average.

This study identifies 69 medicines that would be affected by international reference pricing under H.R.3, representing 70% of Medicare Part D spending. We calculate that implementing H.R.3 would lower overall industry revenue by $71.6 billion a year, a reduction of 58% in earnings before interest and taxes (EBIT) revenue.

The industry spends over $60 billion a year investing in partnerships, development agreements, and acquisitions with innovative biotech firms. The revenue reductions caused by H.R.3 would directly impact the free cash flow available for these agreements.
We investigated the historical investments of large pharma companies impacted by H.R.3 into 85 lead assets of biopharma companies in California – that state received the largest share of commercial investments between 2009 and 2019. We show that the total sum of the investments per lead product is a statistically significant predictor of annual product revenue (p<0.0001).

We also used a logistic probability model (p<0.0001) to test the impact of a 58% reduction in revenue on market entry under H.R.3., finding a greater than 80% reduction in the number of drugs that would be brought to market by California biopharma companies owing to changed investor behavior and reduced firm-level liquidity.