Podcast: R&D Costs, Rx Prices, and the Formula for Success in Life Sciences Innovation, With Stephen Ezell

November 15, 2021

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The United States is the leader in life sciences innovation, but that has not always been the case. As global competition intensifies, it needs to continue spurring investment in R&D to stay on top. Rob and Jackie sat down with Stephen Ezell, vice president of global innovation policy at ITIF, to discuss the history of U.S. life sciences innovation and break down R&D costs versus the market prices of innovative biopharmaceuticals.




Quote for Tweets

“Innovating a new-to-the-world drug is not an easy enterprise. It takes at least 11 to 15 years of R&D—and the costs can exceed $2 billion, on average.”


Rob Atkinson: Welcome to Innovation Files. I’m Rob Atkinson, founder, and president of the Information Technology and Innovation foundation. We’re a DC based think tank that works on technology policy.

Jackie Whisman: And I’m Jackie Whisman. I handle outreach at ITIF, which I’m proud to say is the world’s top rank think tank for science and technology policy.

Rob Atkinson: And this podcast is about the kinds of issues we cover at ITIF from the broad economics of innovation to specific policy and regulatory questions about new technologies. And today we’re going to talk about life sciences, innovation and particularly, new drug development and where that’s going and how to do it better.

Jackie Whisman: Our guest is Stephen Ezell, who is vice president of Global Innovation at ITIF, and leads our center for life sciences innovation. He focuses on science and technology policy, international competitiveness, trade manufacturing, and services issues. Thanks for being here, Stephen.

Stephen Ezell: Well, thanks for having me, Rob and Jackie,

Jackie Whisman: It’s my favorite topic. And I want to start the conversation by giving listeners a brief refresher on the history of life sciences innovation in the United States. The US leads the world in life sciences innovation now, but that has not always been the case, which you’ve written about a lot.

Stephen Ezell: Well, absolutely true. Over the past two decades, US headquartered drug companies have been responsible for as much as 80% of R&D into life sciences innovation, and the US companies have introduced more new-to-the-world drugs than European or Japanese-headquartered companies combined. However, what people don’t understand is that this wasn’t really always the case. If you roll the tape back to the 1970s, the last half of that decade, European headquartered companies actually introduced twice as many new to the world drugs as American companies did, 149 to 66, and even well into the 1980, less than 10% of new drugs introduced to the world first were introduced in the United States. A vast majority of new drugs that were launched also were primarily in Europe. And so what changed? Well, there were a number of intentional, conscientious policy choices that were made in the eighties, nineties and the two thousands designed to make the United States, the world’s life sciences innovation leader.

This touches everything from massive increases for funding for the NIH, National Institute of Health, for basic scientific research. But there was a whole set of policy leverage as well, such as the Bayh-Dole Act introduced in 1982, which provided a pathway for innovation stemming from federally funded research that the intellectual property rights could go to universities and facilitate the transfer these technologies to be commercialized in the private sector. We introduced the R&D tax credit in 1981, the orphan R&D tax credit to facilitate investment into cures for rare diseases in the early 1980s. So there was a whole set of policy choices and the intent and the effect have been to turn the US into the world’s life science like innovation leader.

Rob Atkinson: So Stephen, it’s funny because even a decade ago, this issue was not all that politicized. There was some generalized consensus from both the right and left sides of the aisle that we’ve got a good system, maybe we tweak it a little bit here and there, but that generally it works pretty well, but now that’s become more polarized where you have some on the right who won’t even support or light... Some on the right, who are skeptical about supporting NIH funding, for example, which is critical. And then some on the left who argue that the current system is fundamentally broken, that the government should take over drug development from the private sector. And that the companies, only thing they’re interested in is making money and not developing new drugs. You say a little bit about that debate and why it’s a false debate and what’s wrong with it.

Stephen Ezell: Yeah, absolutely. Well, I think when that first thing is to understand is that innovating a new to the world drug is not an easy enterprise. It takes at least 11 to 15 years of activity at R&D and development costs that can exceed two billion on average for new drugs. And so the important point to make there is that it’s investment in research that is critical to the same industry. And we need both the public and the private sector doing it. The federal government now funds the National Institute of Health at about 42 billion dollars a year. And this is research into basic life sciences, for instance, into understanding the fundamental processes by which diseases develop and are transmitted, or identifying novel biomarkers in the body that can signal the presence of the disease. And so this basic life sciences research creates a platform for discovery and innovation, that then the private sector builds upon.

So really what the private sector is doing is investing in... So while the federal government primarily funds this basic scientific research, private sector companies perform much of the applied R&D including the completion of clinical trials that are required to transform basic scientific research into commercial products. Essentially the key point here is that industry’s contributions to the R&D of innovative drugs go far beyond development in marketing, but they’re essential to the applied science and discovery technologies and manufacturing protocols. The message is that without private investment in the applied sciences, there simply would be no return on public investment in basic science. And what research finds is that biotechnology companies invest about $100 in development for every $1, the government invests in research that leads to an innovation. And that highlights a critical point. It’s private companies, not the government or universities, that are assuming the risk of failure and trying to bring these, often, billion dollar projects over the finished line to phase three clinical trials.

And that’s why a key reason, the separating the cost of diaphragms to R&D from the final market price of medicines, would misalign incentives, raise bureaucratic cost and limited innovation. But academic research really finds this intense complementarity between the public and private research investments. For instance, a 2020 study, by the Milk Institute, found that $1 in NIH funding boosted the size of the bioscience industry by a $1.70 and that the long-term impact may be as high as 3.20 for every dollar spent. Others have found at $1 of NIH support for basic research leads to an increase of private medical research of roughly 32 cents. So the key point is that these investments in public and private life sciences, R&D are complementary, they’re critical to one another. And it’s the basic life sciences research funded by the government that is creating knowledge, biological processes, that develop a platform for private sector innovation to bring innovative new drugs to market. One of the-

Jackie Whisman: And that secret sauce is unique to the US and really what makes it so successful. I mean, the rest of the world does not have this complimentary system like we do. And like you’ve written, I’m kind of taking words out of your mouth really, but my research of your work is that without this complimentary system, we would really be nowhere. And that’s really what we have to work to preserve.

Stephen Ezell: Absolutely. The US government, as a share of GDP, certainly invest far more in R&D than our European peers do or Japanese peers as well. And this is exactly why we developed a world, the leading ecosystem, that leverages complementarity to produce more new-to-the-world drugs than any other society in the world.

Jackie Whisman: We’re not really scrambling to purchase drugs from China and their government run life sciences system.

Stephen Ezell: Well, one thing about the Chinese biotechnology ecosystem, certainly they’re endeavoring to catch up to the US and Europe as fast as they can, but thus far, it has been more focused on the older generation of small drugs, the chemistry synthesized drugs, as opposed to the next generation of biologic drugs, those drugs manufactured in living cells that represent the frontier of biomedical innovation. Also, China’s much more trying to compete in the generics, the biosimilar side as a copier, not an innovator, at this point. Now, certainly they want to reach the global frontier of biomedical innovation, but thus far, they are behind.

To your point, Jackie, when you look at the quality of global regulatory regimes, if you ask yourself, if it’s safe to ride a high speed train in China, when you see them piled off over cliff sometimes, I would also question, in some cases, the ability of the regulatory system in China, to validate that you’re really getting drugs that have gone through a rigorous safety and efficacy validation system. By the way, that’s one other point about the United States, transferring ourselves in the leader. In the early 1980s, it took our Food and Drug Administration, the FDA, as in the longest 36 months, three years, to make a safety and efficacy determination about a new drug at the height of the HIV/AIDS crisis.

That meant that as we were trying to innovate solutions, companies would dump their phase one or two clinical trial data at the FDA, in these warehouses and see that their previous filings hadn’t even been looked at because the FDA didn’t have the adequate resources to evaluate all the drug candidates. So that’s why we put in place something called the prescription drug user fee act, PDUFA, in the early 1980s. And this has played a critical role in ensuring that the FDA has the resources to effectively evaluate drug candidates. And also has done great in innovative things, like creating new breakthrough pathways so that we can speed the potential for innovative new drugs, like for cancers to get to market more rapidly.

Jackie Whisman: So let’s get to everyone’s favorite topic, prescription drug prices. It’s one thing that the left and the right seem to agree on these days. And both say that they’re unreasonably high. I know the answer to this, but I’d like to ask, what is your view on congressional efforts to lower drug prices? And we only have about 10 minutes left, but I know you could go on for a few days.

Stephen Ezell: Well, I think there are several elements to this debate. The first point to make, would be while it is commonly argued and maybe just commonly publicly accepted that drug prices are too high. The reality is that drug prices over the past two decades have not risen in total in any way out of line with either the overall increase in healthcare and medical system costs in the United States. And in fact, to even risen only slightly more than the consumer price index over the past few decades. Meanwhile, the share of prescription drug spending as a share of spending in the broader U.S. healthcare system has remained constant for the past two decades. So I think even that assertion must be taken with the grain of salt, but leaving that issue aside, there is a more fundamental, more critical issue. And that is that this is an innovation-based industry that depends upon the profits from one generation of innovation to finance investment in the next.

And that makes it like all other innovation-based industries. If you look at semiconductors, for instance, these companies depend upon the profits earn from one generation of semiconductor chips, like the 10-nanometer chip line, to provide the revenues to invest in the next generation five and three-nanometer lines. And so, what is in the life sciences, these companies that depend upon the profits from one generation of biomedical innovation, for instance, into diabetes or cholesterol, to provide the revenues to finance tackling the next generation challenges like pancreatic cancer or Alzheimer’s or COVID-19. And so that’s why, virtually, all academic scholarly evidence finds that there exists a high degree of correlation, almost one to one between pharmaceutical sales revenues and R&D expenditures. And why research shows a statistically significant relationship between a biopharma enterprises profits the previous year and its R&D expenditures in the current year.

And so, the point is, if we severely constrict the ability of these companies to earn revenues, we are going to have both, less innovation in the future and less availability to those drugs. This is why researchers like Goldberg and Vernon have found for instance, that if the United States have used an EU like drug pricing system from 1986 to 2004, this would’ve resulted in decline in firm’s R&D expenditures of up to 33%. And the development of fewer than 117 new medical compounds. A study from the CBO, the Congressional Budget Office, find similarly that a 10% decrease in drug prices will lead to a 6% decrease in pharmaceutical R&D spending. And conversely, other studies have found that if other countries, like in Europe, were to remove their government-imposed prize controls, that the number of new treatments available would increase by nine to 12% by the year 2030.

And that could add 6 to 18 months to the life expectancy of the average citizen, who is 15 years old today. Another critical point is that the drug price controls in place in other countries do in fact restrict the availability of medicines that already do exist. In fact, while 95% of new cancer drugs are available in the United States today, only 55% are available in comparable European countries. And there’s an average 17-month lag time between first availability of those cancer drugs in the United States and elsewhere in the world. The point is that in considering drug prices, we must both balance the interest of both present and future generations and recognize that if we don’t afford innovative drug companies, the ability to earn reasonable profits on the novel medicines, that they’re not going to have the financial resources and wherewith law to invest in the next generation of cures.

Jackie Whisman: And that’s not to say that there aren’t mechanisms available to the government to make consumer drugs more affordable for those who need assistance. I’ll be sure to link to our colleague Joe Kennedy’s report from 2019. He argues that Congress could lower drug prices by expanding access to affordable insurance, streamlining regulation, especially for the manufacturer of approved drugs and encourage other countries to pay their fair share of the cost of developing new drugs. But all of your research and your writing on this, I will also link to, but I didn’t want to make it seem like we were insensitive to the difficulties of some consumers.

Stephen Ezell: There’s separate questions well about controlling the patients out of pocket costs, which is why ITIF would support including a cap on cost from Medicare Part D beneficiaries, for instance. And another point as well, to your point Jackie is, as we talked about earlier, solving challenges that have never been before tackled by biomedical science. Problems that are on the frontiers of biomedical discovery is in fact difficult, risky, expensive business. This is why only 12% of drugs interface, one clinical trial, have ever actually become a product brought to market. It is expensive. The latest found that the cost of creating and innovating new drug has more than doubled over the past decade. And so one thing we need to think about is how we can increase R&D productivity and efficiency in the sector. In other words, how we can try to bring down the cost of drug discovery and drug development.

And as we’ve written in several reports at ITIF, new technologies like artificial intelligence, like CRISPR/Cas may give us the ability to more effectively identify and screen for compounds that could work on certain disease targets to conduct clinical trials more cost effectively and efficaciously. Policymakers need to double down innovation and think about how they can support investments in frontier biomedical discovery technologies that could help us bring down the cost of R&D discovery.

Rob Atkinson: Yeah. That’s one of the things I think that misses in a lot of these debates, whether it’s about the price of higher education or the price of healthcare, the price of drugs, most of the debate is about price not cost. And at the end of the day, if you’re focusing on price, then it’s essentially a redistribution as to dynamic. Somebody you pay faculty less, you can lower the cost of higher education. You pay to tell people the drug company, you have to pay less than you get less research. And again, not to disagree with Jackie’s point. That affordability is a really important question, but there’s two, two ways to get there. One way is cost reduction, in other words, through productivity, through more efficiency and I think that’s a critical point that you talked about some of the process innovations that how drugs are being made. That seem very promising. You want to just mention where that is, very briefly?

Stephen Ezell: Well, this is a place that we can continue to invest further in public private partnerships to support the next generation of biomedical process innovation. One good example, has been the manufacturing USA network. This is the national network of 15 institutes of applied manufacturing product and process technology. We’ve established one called NIIMBL in Delaware, the National Institute for Innovation in Biologic Medicines. We could expand with additional manufacturing, UAA centers focused on biomedical discovery. We could also look at expanding an NSF program, National Science Foundation program called Industry University Cooperative Research Centers, the IUCRC program, and develop more centers focused on biomedical innovation between industry and academia. So there’s a lot that policy can do to support further R&D and into kind of the next generation of manufacturing processes.

Rob Atkinson: And maybe, think about wrapping up, one of the things obviously we can’t ignore right now is the whole debate about COVID and the vaccines. One level it’s amazing to me where people are even having a debate about vaccine prices, because the cost of not having a good vaccine is enormous. I can’t remember what the numbers are, but the price for the vaccine relative to the benefits is what? 20 to 1, Something like that in terms of overall cost. But one of the things that-

Stephen Ezell: One study found that the value to society of each dose or full dose of two shots of the COVID-19 vaccine was $5,800 per patient.

Rob Atkinson: Right. Exactly. And so, one of the things that happens in that debate though, it drives me crazy is some of the people who say, “Oh, drug prices are too high.”, they’ll say. Pfizer or Moderna or whatever, they’re making a bunch of money on that. But what they ignore is with COVID. There were tens of companies around the world that spent a boatload of money, to try to develop a viable vaccine. And most of them failed. And if you have, essentially it’s like playing a lottery or investing in a movie or something, or venture capital. On venture capital nine out of 10 deals fail, that means that the one that succeeds has to make a lot of money, it has to make up for all the losses. So if the companies think, “Oh man, if I’m successful in getting a great COVID vaccine, and I’m going to make a rate of profit of 12%.” Nobody’s ever going to invest in that, because they know that that the rate of return is the risk times profit, not just the profit rate, because you’re losing.

And you mentioned, I know you’ve written about an event that’s coming out about the CBO study that looked at what the rate of return would need to be on a drug for them to make, just to break, really minor profit. Do you want to, I think that’s really interesting finding by CBO. You want to mention that?

Stephen Ezell: Yeah. The CBO study found that pharmaceutical companies need to make a return of 62.2% on their successful drugs. Just do average of 4.8% of return on all their assets. Other studies have found that probably three drugs in a given year earn enough financial return to repay companies of investments in the rest of their portfolio in the course of a given year. So when they have successes, they have to pay off to cover off on all on the cost of the other filled efforts.

Jackie Whisman: But then you have some people saying on Twitter, which I should not take as law, but I was very offended and told you about it. There are people, not a small number of people, who are saying, Pfizer and Moderna should open up their IP, share their patents with the other companies so that everybody can start producing these cures. I don’t know how that really works in a-

Stephen Ezell: Well, the reality is that they have done this. The Pfizer, Johnson & Johnson, Moderna, have entered into voluntary license arrangements with reputable contract manufacturers around the world. But instead of being forced to disclose their intellectual property and manufacturing process willingly to the world, they are working intentionally with reputable manufacturers who can adhere to the production and quality processes that are required to create these things. The response of the biopharmaceutical industry, to massively scale into the billions of vaccine production, has been enormous. We’re on course to produce 12 billion vaccines globally this year, actually much more. The problem becomes distribution of these vaccines into communities across the world. So many have used this situation to launch a broad frontal assault on intellectual property rights in the life sciences industry. Again, erroneously, infelicitously contending that there’s a conflict between intellectual property rights and access to medicines globally. The reality is without the IP rights in place and the bench up in place at these companies to respond immediately and innovate COVID 19 vaccines and therapeutics, that we would all be in a much worse situation. So IP is... Access to medicines does matter greatly, but existence of medicines matters more in the first instance, and robust intellectual property rights are a critical way to ensure that happens.

Rob Atkinson: Yeah. I feel like a lot of this debate really boils down to a first principle and it’s not that one side is right or the other is wrong. It’s really about that set of values. What’s more important? Access to current medicines that are at a low price or future medicines for our kids that are going to be that, think about that medicine cabinet that we all go to, if you will, in the drugstore, we want that to be vastly better in 20 years or 30 years with successful treatments for Alzheimer’s and diabetes and all sets of all their, really, terrible maladies. And I think that’s the fundamental debate. And I think there’s a way to square that circle. If we focus on enabling a robust business ecosystem, including the ability to make money on successful drugs with, what Jackie was talking about, just discreet direct government policies to ensure affordability for particularly individuals with less insurance or other affordability problems.

Stephen Ezell: And that’s the other genius of the US system is that by creating an environment where innovators can earn profits on innovative drugs, then after a 20-year period of intellectual property control then these drugs can be made at generic price. If you think back, on September 14th, 2017, the FDA approved MVASI, this was the first biosimilar drug for Russia’s then breakthrough Avastin. It was the first anti-cancer drug for lung, cervical and colorectal cancer. In other words, a drug for forms of cancers that scarcely existed in any form 20 years ago is now available as a generic drug. And if you think about it, the genius of our system, hopefully, is that if we come up with a cure for pancreatic cancer or Alzheimer’s, that 20 years hence, will have innovative drugs now available as generics that weren’t available to anyone anywhere in the world at any price in the year 2021. But we have to keep that dynamic going. If we are going to retain a life sciences innovation system that’s become the envy of the world.

Rob Atkinson: Absolutely. Well, Stephen, we could talk for much longer, because there’s a lot of different pieces to this, but we have to... He has reports to write.

Jackie Whisman: Stephen’s got reports to write.

Rob Atkinson: Things to do, places to see. With that, thank you so much for being with us.

Jackie Whisman: That’s it for this week. If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to [email protected]. You can find the show notes and sign up for our weekly email newsletter on our website itif.org and follow us on Twitter, Facebook and LinkedIn @ITIFdc.

Rob Atkinson: We have more episodes and great guests lined up. New episodes drop every other Monday. So we hope you’ll continue to tune in.

Jackie Whisman: Talk to you soon.

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Podcast: R&D Costs, Rx Prices, and the Formula for Success in Life Sciences Innovation, With Stephen Ezell