For the past 20 years, the United States has been recognized as the primary market for biopharmaceutical manufacturers, generating nearly half of the net revenues from branded prescription biopharmaceuticals. This dominant position can be attributed to various factors, including favorable access to capital and a skilled workforce, regulatory frameworks that foster innovation, and advantageous pricing conditions. But will the latest healthcare reform throw a wrench in this well oiled machine?
The Inflation Reduction Act was passed by congress in August of 2022 with the intention of tackling rising drug prices to alleviate the financial burden on US consumers, who pay more for medications than any other country. The IRA includes several provisions to address high prescription drug prices for people with Medicare and to reduce the federal government’s overall drug spending.
Key Provisions of the Inflation Reduction Act:
Certain categories of drugs are excluded from the Drug Price Negotiation Program:
According to analyses from Wall Street and academic sources, it is anticipated that popular medications such as Eliquis, a blood thinner by Bristol Myers Squibb, Ibrance, Pfizer's breast cancer drug, and Imbruvica, a leukemia treatment from AbbVie, may be among the first 10 drugs chosen for price negotiations (to be implemented in 2026).
The government is expected to initiate the negotiation process this September by identifying the initial drugs to be targeted, likely based on the highest expense prescription drugs. It should be noted that the lists provided by different analysts vary due to their individual sales projections, and it remains uncertain whether the government will consider gross sales or net sales, adjusted for market discounts.
Negotiation or Control?
While the government is calling this price “negotiation,” many pharmaceutical companies feel this is a form of pricing control. Including Pfizer CEO, Albert Bourla, who called it "negotiation with a gun to your head…it is not negotiation at all. It is price setting." He also mentioned that he expects drugmakers to sue in an attempt to halt the process, but does not believe it will make a difference.
The concern is that the law gives the government the power to simply declare the prices they’re willing to pay, which will ultimately lead to lost revenue for pharmaceutical manufacturers, primarily in the Medicare channel. In addition:
The Congressional Budget Office estimates that the rebate and price negotiation provisions will result in a combined cumulative government savings of approximately $200 billion by 2031, at the direct expense of manufacturer revenue. But it remains to be seen just how much lower the negotiated prices will be.
How will these provisions affect biotech companies?
The pharmaceutical industry says the law will result in a loss of profits that will force drugmakers to pull back on developing groundbreaking new treatments. The unique business model of biopharmaceutical research and manufacturing is characterized by high cost, high risk, and long-term investments in R&D by drug manufacturers. So the reduction in revenue for manufacturers is expected to subsequently reduce biopharma R&D investments, potentially resulting in reduced levels of innovation.
Since certain drugs are being excluded from these price controls, it is likely that the entire biopharma development and commercialization cycle will be affected as industry leaders reassess their strategies moving forward. For instance, the legislation lends a preference towards biologics due to the discrepancy between negotiation periods for small molecules vs biologics, so we could see a reduction in small molecule R&D investments.
Many anticipate a reduction in early-stage drug discovery and development investments, and a shift away from small molecule investments, particularly for age-related diseases (those most subject to Medicare spending). In fact, many from the healthcare investing community publicly stated that it made them “extremely cautious and hesitant to fund any new small molecule projects for diseases of aging.” Therefore drugmakers will need to assess their clinical development and evidence strategy.
How Can Pharma Companies Prepare?
While pharma industry groups have often argued drug pricing restrictions will dampen innovation, advocates for lowering drug prices say it isn’t enough to make a dent in pharma success. It seems too early to tell, but there are steps that manufacturers can take to sustain growth amidst these legislative changes.
Manufacturers will need to revise portfolio strategy and reprioritize programs:
Evolve organization for price negotiations:
Emerging biopharma companies face a slightly different set of priorities. In addition to evaluating revenue impacts, rethinking portfolio strategies, and emphasizing comparative data in clinical programs, they will also need to reassess their partnership approach. These companies should consider investing earlier in pricing and market access strategies, as well as reevaluating their capital raising strategies due to potential investment challenges.
Concluding Thoughts From an Industry Insider
I spoke with a VP of CMC with over 20 years of experience within the biotech industry to hear his thoughts on the possible effects of the IRA. Here are some key takeaways I gained from our discussion:
He noted that, “It is in the nation's best interest to have a healthy and robust pharma eco-system that investors see predictable returns around so as to encourage keeping or bringing manufacturing back to the US. Predictable is the main word in that the IRA is somewhat unknown and has upset the equilibrium around predictability. Price negotiations would seem a very reasonable goal – but implementation should be careful and gradual.” With all the international supply chain issues the US has been experiencing in recent years, it would be ideal to move the majority of manufacturing to the US to avoid further supply chain setbacks.
He mentioned that “distribution and manufacturing margins appear to be very high, but those margins are needed to make up for R&D failures.” So he can see how that lost manufacturing revenue could dampen investment at conception stage, or even affect biotech acquisitions by big pharma.
He expressed concerns about how the government is implementing the negotiations in a “piecemeal” fashion (excluding some drugs over others), which is establishing a bit of a “winners vs losers” environment. In regards to the speculation around lack of investment in small molecule drugs due to the IRA showing more of a preference to biologics, he mentioned that “biologics and biosimilars are still also priced very high, so they could still be targeted in a sense.”
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