The Trump administration wants American biotech companies to play hardball with foreign health systems — and stop giving special discounts that aren’t offered here at home.
To that end, the White House is moving to finalize two Medicare pilot programs, “GLOBE” and “GUARD.” Both would require biotech firms to send rebates to the federal government, determined by the difference between the foreign prices of their drugs and the prices that Medicare pays.
In theory, the prospect of cutting big rebates to Medicare would force biotech firms to eliminate the pricing disparities by charging significantly more abroad. Americans would no longer have to disproportionately fund research and development that benefits the entire world.
But there’s an overlooked aspect of these GLOBE and GUARD proposals that could undermine that logic and hurt U.S. innovators and biotech companies — many of these companies can’t drive a harder bargain.
The reason is straightforward, but little-known outside the biotech industry.
Small and mid-size biotech companies are excellent innovators. They originate over half of FDA-approved drugs.
But these firms often have just a few dozen employees. Navigating the long and costly research and development process, and later the FDA approval process, is incredibly challenging. Figuring out how to manufacture their drug at scale and launch it in the United States is even more daunting.
And simultaneously launching that same drug in France, Germany, and dozens of other developed countries — which all have different legal and healthcare systems — is far beyond most small firms’ capabilities.
That’s why U.S. biotechs frequently strike “outlicensing” agreements with larger companies.
The small biotech generally retains the underlying intellectual property and the right to market the medicine in the United States. The larger company receives the right to sell the drug in foreign markets. In exchange, that larger company pays an upfront fee and perhaps ongoing royalty payments, which smaller companies can then use to fund their research efforts.
It’s a mutually beneficial arrangement that underpins much of biotech innovation today.
But when companies out-license their medicines, they generally hand off marketing and sales rights to the partner company. Biotech companies generally have little to no contractual authority over pricing decisions or visibility into relevant pricing information. Antitrust and competition laws may also make it challenging to share pricing information between the biotech company and its licensing partners.
And that’s a central flaw in proposals like GLOBE and GUARD. These frameworks impose costs that small biotechs have little ability to prevent or recover, placing an outsized burden on some of the industry’s most resource-constrained innovators.
If the government effectively penalizes outlicensing, companies would be forced to stop pursuing these agreements, and potential partners would become increasingly reluctant to enter into them. That would deprive companies of those upfront payments and royalties, as well as diminish investor confidence and reduce companies’ valuations — key sources of capital that support continued research into breakthrough cures and medicines. Some could be forced to scale back clinical trials, abandon promising treatments, or shut down altogether.
Patients would ultimately pay the price, as fewer lifesaving medicines reach the market both here and abroad — and those that do face significant delays or fall short of their full potential.
The policy would also undermine America’s global leadership in biotechnology. At a time when China is investing heavily in medical innovation, the United States should be making it easier for homegrown biotech companies to invent and commercialize therapies — not penalizing one of the financial arrangements that allows innovators to survive.
Foreign governments’ demands for heavy drug discounts unfairly burden American patients and taxpayers.
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But GLOBE and GUARD target the wrong culprit. American biotechs can’t negotiate more aggressively with foreign governments when they’re not a party to those negotiations in the first place.
So if the administration wants to end foreign freeriding, it’ll need to take on those freeloading governments directly.
Wayne Winegarden is senior fellow in business and economics at the Pacific Research Institute and director of PRI’s Center for Medical Economics and Innovation (medecon.org).