Draghi Wants His Drug Cake and to Eat It Too

The "Report on the Future of the Pharmaceutical Industry " by Mario Draghi, published in September 2024, examines some of the factors behind the European Union (EU)'s declining competitiveness in the biopharmaceutical sector. The report provides strategic recommendations aimed at reviving the industry. It identifies several significant challenges, including insufficient public funding of research; the shortage of innovation hubs uniting industry, academia, and investors; fragmented national pricing and reimbursement systems; sluggish digital integration; and lengthy regulatory processes. The report also highlights international competition from the United States, as well as intensifying rivalry from China. But it ignores the elephant in the room: the drastic underpricing of drugs in the EU which lowers revenues, especially for EU-based bio-pharma firms.

A July 2024 analysis by IQVIA highlights a notable shift in global trial activity, moving away from Europe and toward China and North America. Between 2019 and 2023, Western Europe's share of clinical trials dropped from 32 to 25 percent, while North America's share increased from 19 to 23 percent, and China's from 10 to 15 percent. In response, Draghi's report emphasizes the EU's efforts to harmonize multi-country clinical trials and streamline their setup and management across the region.

Further, the EU is seeking to boost AI-driven pharmaceutical innovation by improving access to and sharing of electronic health records (EHRs), building capacity for national health data access bodies, and scaling up genome sequencing capabilities. The EU is also expediting market access through cooperation on pricing, reimbursement, and procurement, as well as enhancing joint pricing negotiations across countries. The EU also plans to bolster innovation by fostering strategic international partnerships, enhancing its global trade position in pharmaceuticals, and accelerating regulatory processes. The report stresses the importance of greater public and private investment in research and development (R&D), and emphasizes the importance of collaboration between academia, industry, and public institutions.

One aspect that the report gave less attention to is the effect of drug price controls, which are independently determined by each European country but collectively exist across the EU, on severely restricting the revenue of biopharmaceutical companies. While the report does address how fragmented national pricing schemes can delay the availability of new drugs across EU countries, noting that "…Given the high degree of public payer cost-sharing for pharmaceuticals in the EU, there are trade-offs at play between stimulating innovation, fiscal sustainability and affordable access for patients," it stops short of exploring more deeply the impact of price regulation on future drug innovation. According to a recent RAND report, over half of all new drugs between 2018 and 2022 were launched first in the United States, with a median delay of about one year between reaching other major markets, such as France and Germany. Between 2014 and 2018, 47 percent of new therapies worldwide originated in the United States, while only 25 percent came from Europe. This marks a reversal from 25 years earlier, highlighting a steep decline in Europe's biopharmaceutical innovation landscape. This raises questions about the consequences of restrictive policies like price controls, which can undermine innovation by reducing the financial incentives for private R&D investment, and can have global implications-a point that Draghi's report does not fully explore.

Whyrisks posed by fragmented national pricing schemes to innovation, it largely overlooks the long-term, global implications of how pharmaceutical pricing is managed across different regions. A new working paper by Kate Ho and Ariel Pakes brings this issue to light. The authors argue that pharmaceuticals, much like climate change, have global consequences-once a new drug is developed, its benefits can extend worldwide. However, unlike international agreements to address climate change, there are no similar frameworks for pharmaceutical pricing or publicly funded research. Ho and Pakes argue for a more equitable distribution of the pharmaceutical R&D effort across high-income countries and explore the impact of a single international price for pharmaceuticals. Their research - along with a 2023 ITIF report that made the same argument - notes that the United States effectively subsidizes global drug development, in large part due to its higher prices. If a unified pricing model were adopted for high-income OECD countries, U.S. prices could be halved, while prices in other nations would rise significantly. For example, prices would increase to 148 percent of current levels in Germany, 197 percent in France, 263 percent in Italy, and 287 percent in Spain. The extent of these markups is illustrated in the figure below.

Indeed, as ITIF has written, pharmaceutical price controls reduce pharmaceutical revenues, which in turn reduces future R&D investment. This can restrict future generations' access to new therapies needed to tackle diseases such as cancer, Alzheimer's, heart disease, and diabetes. It is unfortunate that while many countries are willing to incur higher energy costs to combat climate change, they often rely on innovation from others to cure diseases.

While harmonizing drug prices could substantially reduce U.S. prices, it would cause significant price increases in other high-income countries, underscoring the complex dynamics of global drug pricing. Addressing the challenges outlined in the Draghi report is critical for EU competitiveness, but if the EU truly wants a competitive biopharmaceutical industry, it will have to stop free-riding off the United States and allow drug prices to be increased.

There is, of course, an inherent trade-off between fostering innovation and ensuring affordable healthcare, but the global implications of such policies demand attention. A move toward equalizing prices across high-income nations could allow U.S. drug prices to fall without the imposition of drug price controls or a negative impact on new drug innovation. However, international pricing introduces several challenges, particularly for the EU's public healthcare system. Public healthcare budgets could face increased pressure, leading to potential restrictions on access to costly medications, delayed approvals, or higher out-of-pocket costs for patients. Striking the right balance between current affordability and future pharmaceutical innovation is complex yet crucial for ensuring the sustainability of healthcare systems and ongoing advancements in pharmaceutical. This challenge could be addressed if the EU were to raise taxes by a modest amount.

An additional approach, noted in Draghi's report as an EU priority, is fostering a policy environment that accelerates AI-driven drug development. Promoting privacy-preserving data access, clear regulatory frameworks, and public funding could lower the cost of drug development, making therapies more affordable without stifling innovation. This approach addresses the fact that there are two main ways to reduce drug prices-either through policies such as imposing price controls and reducing intellectual property protections, or by lowering the cost of drug development itself. Emerging technologies such as AI, quantum computing, and gene editing hold the potential in achieving the latter, providing a path to more accessible medicines without compromising the global pace of innovation. In fact, according to a 2019 report by the U.S. Government Accountability Office and the National Academy of Medicine, one company estimated that AI-accelerated drug discovery would enable R&D cost savings of between $300 and $400 million per drug. ITIF will soon release a report that reviews the potential of AI throughout the drug development process, from accelerating drug discovery and optimizing clinical trials to improving manufacturing and supply chain efficiency.

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