US biosecurity starts at home, with insurance reform aimed at making innovation affordable

March 18, 2024

Congress has set its sights on China’s biotechnology industry and the US’s reliance on it. Legislators are worried about the Chinese Communist Party’s access to Americans’ genetic data and US taxpayer funds helping bolster CCP-affiliated companies among China’s still-nascent biotech innovators and its well-established contract research and manufacturing sector. They are proposing to sever ties between any federally funded work and Chinese ​“companies of concern,” which include BGI and WuXi AppTech. 

The Biotechnology Innovation Organization (BIO) has said it will ​“separate” from WuXi and throw its weight behind Congress’s efforts to pass the BIOSECURE Act. ​“Securing and advancing our preeminence in biomanufacturing will be one key component of a multi-prong approach to secure and advance this strategic imperative in biotechnology,” said BIO’s new president and CEO (and former intelligence officer in the US Navy) John Crowley. 

Some executives find this shocking and believe that our industry must rally behind WuXi and other vendors that many companies have come to rely on. And at first, BIO had appeared to agree. So it’s telling that BIO came around to supporting the BIOSECURE Act. 

There’s something much bigger at stake than R&D efficiency. This goes beyond mere nationalism, and there are realities we must contend with if we wish for biomedical innovation as we know it to be resilient to geopolitical shocks. It matters where scientific discoveries are made, where biomedical R&D is conducted, where the resulting medicines are manufactured, and how readily available they are to patients. The US and its patients benefit from the fact that a lot of that occurs at home and that advantage is worth defending. Preserving the future of US global biotech leadership is a big deal. 

But the BIOSECURE Act alone will not be sufficient for assuring continued US-led biomedical innovation, as it does not address the biggest challenge facing the sector: many Americans believe the government should dictate drug prices to make them affordable, without regard for the impact of such policy on innovation. 

Affordability is a function of insurance, requires that appropriately prescribed treatments be covered with low out-of-pocket costs that patients can afford, and is foundational to all pro-innovation, pro-biosecurity policy. Severing ties with WuXi won’t do US biomedical innovation much good if Americans continue to encourage our policymakers to dismantle America’s own industry with price controls that discourage R&D investment. 

Severing ties with WuXi won’t do US biomedical innovation much good if Americans continue to encourage our policymakers to dismantle America’s own industry with price controls that discourage R&D investment. 

Photo by Nuno Alberto on Unsplash

Protecting affordable innovation

Americans simply won’t care about biomedical innovation (whether it’s done by the US or China) unless they believe that they will be able to afford the medicines they need. When health insurance fails to serve as insurance, keeping prescribed treatments out of reach of patients who have dutifully paid premiums and taxes their whole lives, the justified anger of millions of Americans renders them, at best, indifferent and often hostile to the seemingly hollow promises of innovation, creating the political conditions that threaten biomedical progress and America’s biotechnology industry. Therefore, a pro-innovation policy will ultimately succumb to a broadly popular pro-affordability agenda unless pro-innovation is modified to be ​“pro-affordable innovation,” embracing insurance reform to lower what plans can charge patients out of pocket for appropriate care. 

Americans simply won’t care about biomedical innovation (whether it’s done by the US or China) unless they believe that they will be able to afford the medicines they need…

Therefore, a pro-innovation policy will ultimately succumb to a broadly popular pro-affordability agenda unless pro-innovation is modified to be ​“pro-affordable innovation,” embracing insurance reform to lower what plans can charge patients out of pocket for appropriate care. 

Right now, there are two broad trends. First, the US leads the world in biomedical innovation but seems to take that leadership for granted while other countries, especially China, are investing aggressively to catch up. And second, the US increasingly relies on foreign (particularly Chinese) firms as important R&D service providers and suppliers of APIs, generics, and non-chemical necessary medical supplies, which is what Congress has keyed on.

When given the opportunity to provide feedback to the Select Committee on the CCP as they pursue passage of the BIOSECURE Act and investigate the relationship between the bioeconomy and American national security, we spoke to how America can build supply chain resilience. But most importantly, we stressed that in our current policy environment, it’s not hard to imagine how quickly the US could lose its biomedical innovation leadership position if we lose sight of why we lead the world in the first place. 

Beating back policies that endanger US leadership requires promoting ​“affordable innovation” in the US. Looking outward to the implications of the increasing willingness of China and others to pour resources into their domestic industries is necessary but not sufficient. Protecting US biomedical advantages starts at home: with us building on our successes instead of tearing them down. 

But let’s take a step back and ask: How could the US even lose its biomedical capabilities and leadership to China? And even if it does, why does it matter who innovates and for whom? If China can make medicines, why can’t we just count on them for our medicines like we count on their factories for so many other products? Let’s take these one at a time.

The US is the world’s innovation leader – for now

US biomedical leadership stems from its scientific and technical capabilities and the market incentives it provides for innovators. The greatest threat to US biomedical leadership – from China or elsewhere – comes from anti-innovation policies on our own shores that deter the massive private R&D investments we enjoy today.

Price controls on novel medicine are innovation kryptonite 

Some policies, like the Inflation Reduction Act (IRA)’s ​“nine-year pill penalty,” already exist and are already skewing incentives. Congress and the Biden administration are considering even more extreme policy proposals like exercising so-called ​“march-in rights” to essentially nationalize intellectual property;the Smart Prices Act, which would price-control all medicines five years after launch; or similar policies that would extend price controls across all commercial market segments. By overriding the intent of the patent system, Hatch-Waxman, and Bayh-Dole to permit innovators a patent-defined period of market-based pricing, these policies would deter nearly all new investment in biomedical innovation (anything incentivized by BARDA contracts or, like Botox, directed at the cash-pay market would survive). They’d create an opening for other nations to usurp the US’s leadership position. Just because the US is the epicenter of biomedical innovation today does not guarantee it will remain so. 

Taking a step in the right direction, several members of Congress have recently put forward a ​“fix” for the IRA. Ideally, Congress will pass that fix and focus its future efforts on lowering and capping out-of-pocket costs for all patients (as the IRA does for those covered by Medicare, and as President Biden requested in his State of the Union address) to make innovation affordable, improve access, and boost adherence. Indeed, most anti-innovation policies stem from a misdiagnosis of the real problems with insurance design.

Who cares where drugs are made?

The US gets value from new medicines regardless of who invented them and where they are invented. As humans, we all share more or less the same biology. If China invented a drug, it would help patients all around the world just as well as a US-invented medicine would.

If anti-innovation policies were to price-control the US industry out of existence (because investors could no longer justify funding R&D to make medicines that the US refused to pay enough for), China would likely gladly step into the breach, spurring R&D from its homegrown companies. Today, Chinese companies invent drugs and are likely to license them to a US or European company to commercialize for the US market as quickly as possible. 

But in an alternate reality where China takes the lead in biotech innovation, Chinese companies (possibly funded via foreign investment, e.g., from the US/EU) would invent novel molecules and test them in Chinese patients. China would boost what its insurance plans pay for successfully developed medicines. They’d consider testing the ones that worked in American and European patients to the satisfaction of US/​European regulators. And if they wanted to use medicine as a political leverage point, China would be able to dictate the terms of access to these medicines and the prices we’d pay.

The reason that doesn’t happen today is that there is a vibrant US-led biomedical industry (inclusive of companies in Europe and Japan) that is likely to stumble on any discovery as fast or faster than any Chinese company can, and innovators are motivated to race to get to the attractive, profitable US market first. In other words, our US-based industry gives the US leverage that ensures that ambitious Chinese companies have to play more or less by our rules. If Chinese companies come to develop a unique capability, one might expect China to prevent its homegrown discoveries from being out-licensed until their political value can be maximized. 

Shifting R&D services comes at a cost

Meanwhile, the US is increasingly reliant on foreign service providers for early-stage research. The BIOSECURE Act keys on the possible relationships between Chinese service providers and China’s nationalist goals. 

Many US biotechs outsource routine R&D processes to Chinese contract research organizations (CROs) – a quick poll of RA Capital’s portfolio companies suggests that roughly half do at least some work with WuXi AppTech. Indeed, many of the largest Chinese CROs including WuXi generate the majority of their revenue outside China and have a substantial operating footprint in the US and Europe. US biotechs are also reliant on China for key inputs to the drug discovery and development process, such as nonhuman primates, active pharmaceutical ingredients, and basic lab supplies. 

US biotechs currently manage the risk of contracting with Chinese CROs by limiting the scope of activities they outsource. When companies invent a completely novel type of drug (such as a unique class of molecules), they tend not to outsource any discovery or manufacturing to China (or India) because it’s widely known that the technical know-how will end up disseminated to homegrown companies. However, once a technology is commonplace, such as in routine small molecule discovery, there is typically less risk in contracting with low-cost CROs in China. 

But US biotechs are vulnerable to CCP intervention in companies that provide such services and supplies, which is exactly what the BIOSECURE Act seeks to address. Policymakers and administrators should carefully monitor CCP relationships with Chinese CROs and providers of biomedical supplies. They should also emphasize the risk of further action should the CCP seek to weaponize such companies and encourage US biotechs to engage in the smart business practice of supplier diversification.

Onshoring or friend-shoring more of the biomedical value chain will make biomedical innovation in the US more secure, but will be inconvenient and destabilizing in the short term and more expensive in the long term. To abruptly move on from WuXi, US biotech companies would likely incur delays of at least a year or two and (more in some cases). Furthermore, the cost of purchasing WuXi’s services elsewhere would likely be 25% higher. Ultimately, we’d be delaying access to important new medicines and maybe even shuttering some projects unless we believed that the US would bear higher drug prices to justify the higher costs of R&D, bringing us back to the issue of insurance reforms to solve affordability by lowering out-of-pocket costs.

And so any enforced shift away from high-quality, inexpensive Chinese service providers ought to be precisely defined, offer generous transition timelines, and be paired with balancing incentives to build US capacity. For example, drug programs earning a ​“Made in America” stamp could earn a longer patent life or delay Medicare negotiation. And if US policies place friend-shoring on similar footing to onshoring, then it would be prudent to consider coupling that policy with other policies intended to discourage freeriding by our friends. Getting our friends to pay more for novel medicines would allow the US to shoulder less of the cost of incentivizing innovation. But all of that will only work in Americans’ call for affordable innovation is addressed with insurance reforms to cap what plans are allowed to charge patients out-of-pocket.

We need the US to be more R&D friendly

Why has China been able to gain an edge in providing R&D services? Cost and convenience aren’t the only reasons some research has shifted abroad. The US FDA should be more lenient in allowing companies to conduct early-stage clinical research in the US. Congress could incentivize this as well, e.g., by providing more money for FDA to boost first-in-human US studies. The FDA doesn’t always have to approve a study, but it’s not a great look when it doesn’t and a peer regulator in Australia, the UK, Europe, or Canada does. And as the FDA becomes harder to please, China has been working hard to make itself a preferred region for more and more R&D.

Compounding the existing national security risks, if China (or anywhere else) soaks up more early-stage research, that infrastructure in the US risks becoming inefficient, outdated, or insufficient. What’s more, a decline in early-stage clinical research set in the US means that we’re shifting the scientific and medical learnings that come from failure to other countries. Without those lessons, it’s harder to know how to succeed. 

Reshoring manufacturing 

Lastly, the US and other Western countries are almost entirely dependent on China and India for generic small molecule (pill) manufacturing, as well as for producing chemical ingredients (APIs) and basic non-chemical components for many medicines, leaving the US open to geopolitical risk. (By contrast, US biologics manufacturing is fairly independent and resilient, though many inputs into biologics production come from China.)

If the US wants to become truly resilient, we will restore our country’s ability to provide for its own basic biomedical needs, which means being able to make basic biomedical supplies and the generic drugs that represent over 90% of all prescriptions on US or friendly soil. That could make generics and APIs more expensive, but repatriating the US generic drug supply can also be done wisely and efficiently. 

For example, Americans don’t actually need 20 different companies to make generic Lipitor to enjoy inexpensive generic atorvastatin. We choose to rely on price competition to force down gross margins, but the end result is that companies don’t enjoy economies of scale. The US could contract with one or a small number of reliable domestic suppliers to make these medicines on a cost-plus basis with penalties for shortages, including loss of the associated contract. 

This may not sound profitable, but with the US generic drug market approaching $100B at roughly 50% margins, these contracts could represent tens of billions of dollars of gross profits annually. Those companies electing to become suppliers of essential off-patent medicines would benefit from economies of scale and find it well worth their while to tend to their duties responsibly and diligently, manufacturing any given drug at multiple sites and managing a stockpile of inventory to ensure no disruption.

In the long-term, American/friendly-made, cost-plus contracting would supplant the price-based competition among ex-US suppliers that is often the root cause of drug shortages when a race to the bottom on cost drives competitors out of the market. We don’t like the idea of having the standard of care slip backwards for any reason, certainly not due to shortages caused by supply chain disruption, and hopefully not after society has paid off its mortgage on the branded drug and now looks forward to enjoying it as an inexpensive generic. And yet, the process of a drug going generic is exactly what introduces instability into supply.

From seeing how reliably brand manufacturers make their drug before it goes generic, we see that shortages are not typically a problem when there is one motivated supplier. Nor do we see shortages when a drug is used so often that it can sustain over a dozen manufacturers (e.g., statin generics). Rather, the zone of market instability is for relatively low-volume drugs that can sustain only a few manufacturers, resulting in an oligopoly. In these cases, one supplier dropping out can result in a shortage; this isn’t something that the other suppliers can plan for and it takes time for them to ramp up production. 

Shifting to long-term cost-plus contracts with a handful of preferred US manufacturers under the watchful eye of the FDA (which has historically had challenges inspecting many of the facilities in India and China that currently make most of America’s generic drugs and APIs) would help reduce shortage risks and improve generic drug reliability and quality, all while creating tens of thousands of high-quality US-based jobs, which could be located in the same parts of the country most affected by globalization. 

Making generic Lipitor and its underlying APIs on US soil for the entire US market under a cost-plus contract might be more expensive than having many Indian companies using Chinese APIs to supply the US market. But it would be cheaper than having many US companies making generic Lipitor on US soil and competing for market share. Without anyone enjoying economies of scale, standard competition would merely reduce everyone’s gross margins but keep cost of goods sold (COGS) high, driving up the cost to the US. 

We don’t need to start with generic Lipitor. A better place to start would be generic sterile injectables, which are hard to manufacture well and can fall into shortage when a supplier drops out. Nor do we need to switch to a model of regulated monopolies making these drugs. We can start with using federal purchasing to have at least one contracted manufacturer making any given drug and paying them to maintain six months of inventory so that the US market could withstand the loss of a supplier. CivicaRx has proposed such a model. It’s worth pursuing. 

A contracting model would also solve a looming problem: some drugs are so complex that they will be impossible to reliably genericize (think gene therapies, or antibody-drug conjugates). Long-term contracts with innovator companies to continue producing these medicines at cost-plus pricing once their patents expire would fix a market failure that threatens to add unnecessary and significant costs to the US healthcare system.

Long-term contracts with innovator companies to continue producing these medicines at cost-plus pricing once their patents expire would fix a market failure that threatens to add unnecessary and significant costs to the US healthcare system.

Photo by Çağlar Oskay on Unsplash

This is partially what Medicare negotiation under the IRA already does with biologics – price-controlling those without biosimilar competition 13 years after launch (although the IRA does not actually empower HHS to enter into supply contracts and therefore does not guarantee that Americans can count on such medicines to continue to be made). How final prices will be set is not yet clear, but were the approach to be cost-plus to mimic the prices of generics, then we could see Medicare negotiation become the contracting mechanism our nation needs to ensure complex branded drugs can also ​“go generic”.

Long-term, cost-plus, American/friendly-made contracting for the production of all off-patent drugs by qualified companies could therefore serve as a mechanism for ensuring that America can count on the resilient supply of the biomedical armamentarium it helped to create by paying market prices for patented novel medicines, making the biotech social contract a resilient one.

What if?

In a world where the US ceded biomedical innovation leadership to China, it’s reasonable to expect that eventually the US public and policymakers would want to see our country reclaim it. This realization might dawn on us in the same way we realized that it might not be a good idea for the US to remain dependent on Taiwan for microchips. Unfortunately, like a forest that’s been burned to the ground, once the US-led biomedical innovation ecosystem has withered, it would take decades, not a few years, and hundreds of billions of dollars in taxpayer-subsidized research and other infrastructure for the US to rebuild what it lost, catch up, and potentially regain its current leadership position.

So what would the US do? Mimicking the CHIPS Act, the US might restore incentives for US companies to pursue innovation and profit from the US market. It would put off price controls on novel medicines until a patent-defined period of market-based pricing expired, simulating the process by which medicines are meant to go generic. It would solve affordability issues by mandating that insurance plans operate with low out-of-pocket caps. And, in the spirit of US resilience, new policies would require that all US payers, both government and commercial plans, cover only US-made medicines (or at least require that these medicines be made on ​“friendly” soil), creating a push to repatriate drug manufacturing.

We don’t yet need a full-blown CHIPS act for biomedical innovation because the biomedical industry is largely US-centered and US-led. We do need to restore and reaffirm a commitment to market incentives for innovation and restrain from further anti-innovation policies.

Policymakers can maintain US biomedical leadership by:

1. Fixing the ​“pill penalty” in the IRA, maintaining Bayh-Dole,
2. Advocating for international patent rights,
3. Motivating other countries to pay their fair share for innovation,
4. Reshoring generic drug manufacturing,
5. Improving the regulatory environment for US-based early-stage research,
6. And incentivizing US biotechs to reduce their reliance on China for R&D supplies and services. 

More broadly, policymakers should seek to improve insurance coverage and reduce out-of-pocket costs so that biomedical innovation is affordable for all patients, addressing the source of much of the momentum behind anti-innovation policy.

Our legislators appear to understand the risks of a driven, ascendant Chinese biotech industry and the national security implications of ignoring our own inability to test and manufacture the medicines we all depend on today. But if we fail to maintain the dynamic US market for biomedical innovation and make it affordable for all Americans, we risk ceding something even more important to China: our biomedical future.