Venture firms warn R&D funding for new drugs will 'drop off a cliff' if Dem bill approved

Drug prices
Venture capital firms warn they will cut off investments into new drug startups if Democratic-proposed legislation to give Medicare broad negotiation authority is added to a major $3.5 trillion infrastructure package. (Getty/Charles Wollertz)

A collection of venture capital funds that invest in pharma and biotech startups issued a dire warning that funding for new drugs will dry up if Democrats move forward with giving Medicare the power to negotiate drug prices for certain drugs and extend those prices to commercial plans.

“Investments won’t just be reduced, it will drop off a cliff,” said John Stanford, executive director of venture capital coalition Incubate, during the briefing Wednesday in Washington, D.C.

The briefing is the latest escalating rhetoric from the pharmaceutical industry as Democrats aim to include broad Medicare drug price negotiation powers in a $3.5 trillion infrastructure package expected to be voted on this fall. Venture firms said that giving Medicare broad authority to negotiate lower prices for new products will scare investors away from looking at biotech and pharmaceutical research and development.

“If the government can pick any arbitrary price by threatening it with a ruinous 95% tax then I can’t justify any R&D investment to my investors,” said Peter Kolchinsky, a co-founder and managing partner of RA Capital, referring to the potential penalty for a drugmaker for not participating in Medicare negotiations. “I am not allowed to invest anyone’s money unless I can make a positive case there will be a return.”

Kolchinsky also was concerned that Congress won’t fully consider the costs of R&D when it negotiates the drug prices. He said venture funds invest in a portfolio of drug startups, and the portfolio relies on a few successes to generate a return.

“If a portfolio won’t generate a positive return they won’t invest,” he said, referring to little investment made in recent years on antibiotics.

Axel Hoos, M.D., CEO of startup Scorpion Therapeutics, said it would be “fundamentally impossible for investors to secure returns and leave the sector.”

The startup “won’t have the capital to continue our research and address unmet needs in the cancer landscape,” he added.

RELATED: Biden directs Congress to give Medicare broad authority to negotiate for lower drug prices

RA Capital’s general counsel Sarah Reed said that she is discussing with other attorneys how to create a “legal escape hatch that allows firms like ours to pull back money already funded if HR 3 is passed or anything close to its current form.”

The briefing is the latest escalation by the pharma and biotech industries as Democrats close in on considering a $3.5 trillion infrastructure package and aim to include Medicare price negotiation.

All 30 members of the Pharmaceutical Research and Manufacturers of America, a key drug industry group, wrote in a letter to Congress slamming Medicare drug price negotiation authority.

“We agree with leaders in Washington that Americans need help with their healthcare costs, but these dangerous policy experiments are not the answer,” the letter said.

It remains unclear how far Democrats will be able to go on drug price reforms in the $3.5 trillion package.

The House Energy and Commerce Committee considered in a legislative markup this week legislation that enables Medicare to negotiate for lower prices for certain high-cost products on Part B and then would require drug makers to apply that price to commercial plans or face an excise tax.

But the legislation failed to advance out of the committee after three Democratic centrist lawmakers voted against it.

“Medicare should be able to negotiate drug prices, absolutely, but we should not be using an international pricing index or an excise tax that is so harsh that it hardly qualifies as negotiation,” said Rep. Kurt Schrader, D-Oregon, one of the three “no” votes.

Schrader and Rep. Scott Peters, D-California, instead endorsed a competing package that would allow Medicare to negotiate for lower drug prices for products that no longer have exclusivity and no market competition.

That package earned plaudits from venture capital firms at the briefing.

“The legislation is really aimed to reduce what Americans pay for older drugs,” said Kolchinsky.

Stanford of Incubate said that the group believes that Peters’ bill “does take this conversation in the right direction and shows they have been listening to the people here on this stage.”

Peters was originally scheduled to speak at the briefing but had to bow out because it conflicted with the legislative markup, which had stretched for three days. 

However, recent data show that high launch prices for new drugs have been a key driver of Medicare Part B spending increases. A recent study from Duke University found launch prices for new drugs have doubled since 2005.  

Currently, Medicare Part B pays the average sales price for a drug that is administered in a doctor's office in addition to a 4% add-on to the provider for storage and administration costs. 

An April analysis from the Kaiser Family Foundation showed that spending in Medicare Part D and B is highly concentrated around a relatively small subset of drugs, most of which don't have generic or biosimilar competition. 

After the markup, Democrats continued to endorse giving Medicare price negotiation power even after the defeat.

Rep. Frank Pallone, D-New Jersey, chairman of Energy and Commerce, said in a statement that the "most effective way to rein in skyrocketing drug costs is to finally give Medicare the ability to negotiate lower prices, and I'm confident it will be part of the final Build Back Better Act."