A nuclear winter is coming for biopharma

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Originally published November 24 , 2023, in Boston Business Journal

The biotech and pharmaceutical sectors are foundational to the Massachusetts economy. Despite the centrality of the life sciences sector to the state’s economy, the Massachusetts political class has always been slightly ambivalent about supporting this largely for-profit sector of healthcare. Politicians here are much more likely to use talking points in their town hall meetings that criticize “greedy drug companies” rather than supporting a sector that provides enormous economic benefit.

For a time, the life sciences sector could survive this lukewarm political support as there were no public policies being considered that were an existential threat to the business model. Venture money continued to flow into startup biotech companies, large pharmaceutical companies continued to buy up promising biotech companies, academic medical centers continued to benefit from enormous spending on clinical trials, and the biggest problem in the Massachusetts economy was the traffic.

However, the life sciences sector in Massachusetts — which has been flying so high for so long — is about to experience a very hard landing. With the adoption of prescription drug price controls in the Inflation Reduction Act (IRA), drug research and development — the heart of the life sciences sector in Massachusetts — is about to experience a nuclear winter.

Don’t take my word for it, here is what Forbes wrote about the law: “IRA’s provisions will have profound implications for the industry’s future by reducing investments in life-saving drug R&D, slowing economic growth and diminishing overall health care quality for U.S. patients.”

The well-respected consulting firm Vital Transformation concludes: “We estimate a loss of between 66,800 — 135,900 direct and 342,000 — 676,000 indirect jobs in the U.S. biopharma ecosystem.” Hundreds of R&D projects and clinical trials will be cancelled.

Vital Transformation also estimates that the average revenue loss for drugs subjected to these price controls will be more than $4 billion per drug. The biopharma sector will be experiencing revenue losses of perhaps $80 billion per year. If you are a real estate developer that builds lab space or a hospital that runs clinical trials, you are going to need a new business plan.

Probably to avoid scaring off investors, many companies have soft-peddled the damage that will be done by the IRA price controls and have refused to criticize the sector’s lack of political support. This attitude is a combination of wishful thinking and naivete. Some biotech executives and venture capitalists in Massachusetts even offer support and political contributions to politicians who are overtly hostile to the biopharma business model.

Consider just one damaging detail in the IRA — it inflicts price controls on small-molecule drugs four years sooner than large-molecule drugs, or biologics, significantly reducing the potential profitability of small molecule drugs. Small-molecule drugs are typically the pills you get at the pharmacy rather than the injection or infusion that you get in a doctor’s office. And small-molecule drugs are particularly helpful for cancer and neurological disorders because they can more easily pass through the blood-brain barrier, the body’s natural shield against foreign substances entering the brain and nervous system.

So the IRA contains enormous disincentives for companies to invest in therapies for cancer, Alzheimer’s disease, and Parkinson’s. In recent congressional testimony, Dr. Steven Potts, a biotech entrepreneur and scientist, indicated that 85% of the 100 venture capital firms that he surveyed were pulling back from funding small-molecule research projects. Is this what the public has been demanding — fewer cures for cancer and Alzheimer’s?

It has been little reported that every single member of the Massachusetts congressional delegation voted in favor of these price controls that will inflict disproportionate damage on the Bay State.

The life sciences sector may have done fine for a couple of decades with only lukewarm support from the state’s political class, but these naïve companies are about to learn how much damage their politicians can inflict upon one of the crown jewels of the Massachusetts economy.

I will close with an ominous prediction. Within a decade, China will dethrone the United States as the leading center of life sciences research, just as the U.S. had dethroned Europe in the 1980s, when those nations adopted sweeping price controls. Guangdong will be the new Boston.

William S. Smith is a senior fellow and director of the Life Sciences Initiative at Pioneer Institute in Boston.