This is a recurring column about the cost of U.S. healthcare, including drug pricing policy, regulatory decisions, investment in research and development, and more.

Pharmaceutical leaders have cautiously welcomed the dulled medicine pricing reforms in President Joe Biden's $1.8 trillion spending bill, which analysts have predicted will have a minimal impact on certain drugmakers.

The proposal, set for a House vote as early as the weekend, would allow Medicare — the U.S. national health insurance program — to negotiate prices on as many as 10 drugs per year. The negotiations would begin in 2023 and take effect in 2025, expanding to as many as 20 drugs per year after that.

Pharmaceutical executives had argued that previous drug pricing proposals — which would have covered a broader range of drugs — would stymie future innovation. Many pharma leaders do support some sort of change to the status quo, especially as the pace of innovation is expected to put even more pressure on healthcare spending, said Panna Sharma, CEO of cancer-drug maker Lantern Pharma Inc.

"The next three years will create more knowledge about medicine and biology than we have in the past 35 years," Sharma told S&P Global Market Intelligence. "There is a real need to bring the economics of medicines more in line with overall healthcare costs, and I don't think that that's a bad thing."

The criteria for negotiation would leave many of the top pharma companies' medicines untouched, with only drugs that have been on the market for nine years, in the case of small molecule therapies, and 12 years, in the case of biologic drugs, being included.

The commonly used diabetes drug insulin, for instance, would be subject to pricing negotiations, as well as prescribed drugs that are self-administered and those that do not have a direct competitor.

However, many cancer drugs and therapies that are administered by a healthcare professional — covered in Part B of the Medicare program — would not be affected.

Only 8% of pharmaceutical sales on average would be subject to negotiation, with Pfizer Inc., Bristol-Myers Squibb Co. and Novartis AG among those most affected by the existing criteria, Cowen analyst Steve Scala said in a Nov. 15 note. Companies like Merck & Co. Inc. and Roche Holding AG would essentially have no exposure to the negotiation proposal, Scala added.

An additional proposed cap on out-of-pocket costs for patients "would appear to have a greater impact on pharma companies, [but] it still seems quite manageable," Scala said, pointing out that the cap could affect EPS by about 3% on average.

'Rational heads prevailed'

Pharmaceutical executives had argued that previous drug pricing proposals — which would have covered a broader range of drugs — would stymie future innovation. Regeneron Pharmaceuticals Inc. CEO Leonard Schleifer said that the updated reforms showed that "some rational heads have prevailed and the most draconian ideas have been written in that disappearing ink."

"It is quite remarkable just from my personal perspective that the industry that is most responsible for getting the country and the world out of the pandemic in as best shape as we can is the source of such great attack," Schleifer said on a Nov. 4 earnings call.

The U.S. drug pricing watchdog the Institute for Clinical and Economic Review, known as ICER, has balked at the argument that reducing drug costs will have a negative impact.

"If we are to move beyond the status quo and achieve fair pricing and access, we must have the courage to call out disingenuous arguments against needed reforms," ICER COO Sarah Emond said in a Nov. 5 newsletter. "Drugmakers need to acknowledge that picking launch prices that align with patient benefit will not lead to less innovation, but will in fact incentivize the development of therapies that improve patients' lives the most, since greater patient benefits will equal a larger price tag."

Another way to address drug pricing issues from the outset is by using technology to ensure drug research and development is less time-consuming, Lantern's Sharma said.

"If we want to make drugs more affordable, and we absolutely should, we have to change the way they're made," Sharma said. "You can't expect to do the same thing and end up with a different result."

Lantern's own use of artificial intelligence technology significantly cuts the time it takes to develop a drug, which means there is less expense to recoup in the market through price hikes, the CEO said.

"There's a band of pricing for oncology medicines, and ... we can afford to be in the lower end of that band because we are quicker," Sharma said. "It takes us one-fifth the time that it takes other companies to get through the development cycle. If I have to recover $75 million at the end of a drug program, as opposed to $750 million, that gives me a lot more pricing flexibility."

Investors unnerved

When it comes to investors, Sharma said he has already encountered a range of reactions to the drug pricing proposals, including those who are undervaluing companies for fear of future pricing concerns, and others who plan to take their business to countries with less stringent policies or even leave biotech altogether.

"Some investors are going to take a break from looking at biotechs because of pricing until they can get greater clarity," Sharma said. "Ultimately, it will slow down funding."

Since President Biden announced Nov. 2 that a drug pricing component would be part of the reconciliation bill, the Nasdaq Biotechnology Index has fallen from $5,461.74 to $5,078.33 at market close Nov. 16.

While the bill includes fewer restrictions than earlier iterations, investors might still see its passage as a stepping stone to more substantial government pricing control, Cowen's Scala said.

"Investors fear that this proposal, if passed, is a first step towards price regulation via allowing the government a path to add more drugs to this 'negotiation' process ... or further tweak the economics relative to beneficiary out-of-pocket spend, to the disadvantage of pharma," the analyst said.

"In other words, 'letting the fox in the hen house,'" Scala added. "But even politicians probably know that if the fox kills all the chickens, then there won't be any more eggs."