Life science venture capitalists have voiced concerns that U.S. lawmakers' proposals to cut patient costs by reforming Medicare's prescription drug coverage might discourage investment in the sector.

The proposals to amend a section of the government-run healthcare program called Part D would require manufacturers to foot more of the bill than they do now. The changes are designed to redistribute payment of so-called catastrophic coverage, when a patient's out-of-pocket costs reach a certain amount, currently set at $6,550.

Bills with various degrees of reform have been introduced in U.S. Congress to kick off the debate as lawmakers return from the summer recess. The first day the Senate and House are both in session at once is Sept. 20.

For venture capitalists investing in companies at the earliest stages of scientific discovery and drug development, the ramifications of pricing control could change the landscape in ways that vastly undermine future funding decisions, said John Stanford, executive director of Incubate, a life sciences venture capitalist lobbying firm.

"We do strongly support policies that can enable access, but it's the concept of an unbalanced reform that has folks concerned," Stanford told S&P Global Market Intelligence. "They see it as potentially a thumb on the scale of where we should be sending our dollars."

One of the bills, the Elijah E. Cummings Lower Drug Costs Now Act, or H.R. 3, was introduced in April as among the main contenders for pricing reform. Stanford said the bill's proposals would "gut industry to the tune of 20% of total revenue." To compare that impact to past industry-changing events, Stanford said, the implementation of Part D in 2006 hurt total revenue by about 3% to 5%, and the subsequent passing of the Affordable Care Act was negligible on pharmaceutical revenues.

The U.S. Congressional Budget Office found in February that H.R. 3 would reduce drug prices by 57% to 75% from current levels. The CBO estimated that the price negotiation provisions in the bill would lower Medicare spending by about $456 billion, while the Kaiser Family Foundation found that nearly 3 million Medicare Part D enrollees had out-of-pocket drug spending above the catastrophic threshold in a five-year period.

Actuaries from the Centers for Medicare and Medicaid Services estimated that the bill would decrease federal spending by $341 billion for the 2020-2029 period, $304 billion of which would be attributable to Part D.

"High and growing drug prices are affecting all Americans in some way," AARP Executive Vice President and Chief Advocacy and Engagement Officer Nancy LeaMond said in a May letter voicing support for the bill. "Their cost is passed along to everyone with health coverage through increased health care premiums, deductibles and other forms of cost-sharing."

Despite savings to patients and the Medicare system, Stanford said the proposed reform would put treatments for rare diseases at stake. These treatments reach only a small number of patients compared to drugs for more common conditions, meaning the up-front research and development costs required would set up a company for a loss without a larger price tag for each patient.

"If the average drug is costing $2 billion to $3 billion to bring to market, then [manufacturers] are looking to recoup that in a 10-year window at between $250 million and $500 million per year," Stanford said. "If we divide that over a patient population, and we're in the rare and ultra-rare space, that's where you see $200,000 and million-dollar drugs — these are going to immediately fall in that catastrophic category, costing companies more and disincentivizing investment in rare diseases."

Some venture capitalists invest in new technology — such as Flagship Pioneering, which funds mRNA companies like Moderna Inc. — while others invest in projects built on existing science. In all cases, the unpredictability threatened by the pricing reforms would be anathema to future investment, Stanford said.

"By putting this cloud over pricing and reimbursement, what you're really doing is undermining that piece of our investing puzzle," Stanford said. "Because if we don't have certainty about reimbursement, we've added more risk to the portfolio, and risk just makes capital more expensive."

Even for larger pharmaceutical companies such as Merck & Co. Inc. and Pfizer Inc., a 30% required rebate — as proposed in H.R. 3 — on expensive drugs would signal a lower return on investment overnight, Stanford said.

"The concept behind venture capital is that most of our investments will fail, and a few of the winners will have to be such big winners that they pay for the lot," Stanford said. "If 9 out of 10 investments are going to fail, then by definition to break even on the 10th, it has to have a 1,000% return. But you put that 1,000% out there by itself, and everyone feels it's gratuitous."

A proposed bill reintroduced Sept. 14 by Rep. Kurt Schrader, D-Ore., and Rep. Scott Peters, D-Calif., caught the attention of the life sciences venture capitalist community by addressing where health insurance companies would bear more responsibility than innovative drugmakers, Stanford said. These types of reform allow the earlier stages of life science investment to realize the capital potential without depending on the ultimate market conditions after government negotiation.

"That's exactly the kind of bill we had hoped to see out of this dialogue," Stanford said. "I don't love all the mechanisms that they're going to use to bring down price at the end of [a drug's] patent, but from our perspective, if Congress is taking actions at the end stage, then we don't see that interfering with our ability to invest and bring forward new drugs."

Keeping innovation humming

A new Alzheimer's therapy approved in June by the U.S. Food and Drug Administration provided the latest flashpoint in the debate over drug pricing. Biogen Inc. sought $56,000 per year for treatment, called Aduhelm, while scientists argued over the drug's effectiveness.

But the pharmaceutical industry is also basking in its successes in developing various effective vaccines for COVID-19 in record time. The full FDA approval in August of Pfizer and BioNTech SE's shot gave another lobbying group, the Pharmaceutical Research and Manufacturers of America — called PhRMA — fodder to speak out against pricing reform in the name of innovation.

"The FDA's approval of Pfizer-BioNTech's mRNA vaccine marks a significant step forward in our work to end COVID-19," PhRMA President and CEO Stephen Ubl said in an email. "But ironically ... members of Congress are meeting to advance policies that could inhibit our industry's ability to find future groundbreaking treatments and cures."