How To Win The Biotech Innovation Race Against China?

The United States’s dominance in biotech innovation is crucial to our national interests and global security. In recent years, China has quickly become a powerhouse, bolstered by its biotech-friendly regulatory reforms and poised to soon surpass the U.S. Unfortunately, some of our government policies are undermining American advantages against China.

Developing a new therapy takes more than a decade, costs billions of dollars, and faces high failure rates, making it a long, expensive, risky endeavor that government funding cannot accomplish. Private investment in biotech is a sweet deal for the public. When it fails, as the vast majority of attempts do, investors, not taxpayers, lose their money. When it succeeds, investors receive their returns, while current and future patients become the biggest winners. New therapies get cheaper over time as newer treatment options demonstrate better efficacy and patent protections expire. After all, every existing drug was once a new drug.

According to the Information Technology and Innovation Foundation, China’s share of global biopharma companies increased from 5% to 16% between 2017 and 2024, while our share decreased from 47% to 39%. China’s share of global biotech venture capital surged from 4% to 19% from 2010 to 2020, while our share declined from 69% to 62%. China-headquartered companies’ share of global clinical trial starts jumped from 3% to 28% from 2013 to 2023, while our share dwindled from 37% to 29%. China’s most-cited biotech publications nearly quintupled from 139 to 671, while ours shrank by one-third from 218 to 145.

These alarming trends reflect a harsh reality: both capital and brain are highly mobile. Investors allocate their money, and talented individuals dedicate their careers to biotech, driven by the expected future returns, akin to small fish swimming at the bottom of a food chain, with large drug manufacturers (through acquisition) and public investors (through IPOs) seeking high-potential targets. Unfriendly currents can quickly disrupt this delicate ecosystem, causing an exodus of capital and talent to alternative investment areas, leaving patients deprived of new therapies.

One example of this disruption is government price controls. Bureaucratically determined by a few individuals, price controls distort the expected returns from therapies’ true market value, which reflects the collective wisdom of all market participants. They also impose risks on investors through regulatory uncertainty. Low returns plus high risks are a recipe for reduced biotech investment and fewer new therapies, as demonstrated by the decline of biotech in Europe and the estimated impact of price control provisions in the Inflation Reduction Act.

Inflationary penalty regulations, which aim to contain price growth below inflation, contribute to drug shortages by removing incentives for manufacturers to expand production to meet rising demand. In fact, the reduction in new drugs due to price regulations can be viewed as a form of policy-induced shortage, with small-molecule drugs being more affected than biologics because of differing levels of regulatory rigidity.

Moreover, Medicaid Drug Rebate Program and the 340B Drug Pricing Program require drug manufacturers to offer price concessions. Safe harbor regulations also enable pharmacy benefit managers to extract rebates from manufacturers without violating the federal anti-kickback statute. These policies, by detaching net prices from list prices, harm patients whose cost-sharing is based on inflated list prices. They also create regulatory complexities, distort the market, and discourage downstream biotech activities.

Meanwhile, anti-competitive policies, in the name of patient protection, discourage drug manufacturers from lowering prices. For example, protected-class regulations mandate coverage of all drugs within designated therapeutic classes, leading to higher prices. Similarly, capping out-of-pocket costs disincentivizes manufacturers from reducing prices or offering cheaper options, raising premiums for everyone.

How did we end up in such a regulatory mess? Policymakers’ reward functions typically have a shorter time horizon than a drug’s development cycle. What works politically in the short run can harm voters long after the policymakers are gone. This mismatch undermines political accountability and makes drug pricing policies vulnerable to political pandering.

All players in the drug development and supply chain are driven by financial incentives. Without regulatory distortions, they would pour in resources, respond efficiently to market signals, and focus on outcompeting their rivals through new therapies or lower prices. American dynamism, not government price controls, has been and always will be the key to benefiting all patients.

The U.S.’s innovation-friendly regulatory framework has driven decades of capital influx and brain gain. However, short-sighted policies are threatening our dominance in global biotech innovation. The last thing Americans want is to lose our superior access to new therapies and the biotech innovation race to the world’s most powerful and ambitious authoritarian regime. We must win!