The Biotech Industry Organization (BIO) called it “the Innovation Reduction Act.” Biogen CEO Chris Viehbacher referred to it as a potential drag on drug R&D. Several major companies and trade associations have filed lawsuits seeking to halt implementation.
Much of the fine print of the sweeping Inflation Reduction Act, signed into law by President Biden last August and in effect since March, is still to be written – though going by the recent final guidance, the broad strokes of the law will not budge. The biopharma industry is sweating the long-term implications and warning that it could mean less lifesaving drugs make it to patients going forward.
The law was top-of-mind at this summer’s ASCO and BIO meetings, tentpole events in the biopharma conference calendar. In one panel discussion at the BIO event, Biogen Head of Corporate Development Adam Keeney said, “I don’t think we should debate a cap on out-of-pocket spending, or that insulin should be appropriately priced for the elderly population that needs it, but it does fundamentally change the way we are approaching investment internally versus externally. We are being forced to think about small molecule versus large molecule and how to get the biggest impact earliest.”
Among the possible knock-on effects:
- Patients will benefit in the near term but could lose out on new drugs in the long term. The law establishes a cap on out-of-pocket drug costs for Medicare patients through the Medicare Part D prescription drug benefit and limits the monthly cost of insulin to $35 for people on the program. Furthermore, it disincentivizes sharp price increases by requiring manufacturers to rebate Medicare when prices rise faster than inflation. It also authorizes the Centers for Medicare and Medicaid Services to negotiate prices for a select list of the drugs most costly to the Medicare Part D prescription drug benefit, the first ten of which are to be announced in September. However, it is likely that new drugs will be priced higher initially because of the law’s inflation rebate mechanism, with developers disincentivized from taking 5-10% annual price increases that many innovative therapeutics have commanded in the past.
- The small molecule pipeline could shrink because the legislation, as currently written, authorizes price negotiations for small molecule drugs within Medicare nine years after initial approval, while biologics get 13 years price control free, post-approval. As biopharmas shift gears towards more large molecule R&D in response (e.g., Pfizer’s $43 billion acquisition of Seagen), a number of therapy areas could be impacted, most notably neurology and cardiology, where small-molecule therapeutics dominate the pharmacopeia. Drug makers could shift their portfolios away from categories and indications with a long ramp-up time to profitability, such as cardiovascular conditions, or those disproportionately impacting elderly Medicare recipients. This shift could prove expensive to health systems, as generally self-administered small molecule drugs give way to more biologics, which often require injections or infusions in a clinical setting, adding costs and raising the risk of nonadherence.
- Market entry strategies will shift. Narrow windows for negotiation-free exclusivity could disincentivize drug development across therapeutic areas, but treatments for oncology and orphan conditions could be particularly hard hit. In addition, companies in these categories have traditionally pursued a “land and expand” strategy of commercialization by first gaining approval for an orphan indication in the U.S., then seeking to broaden the label. The IRA makes this tactic less attractive by shielding orphan indications, but not potential follow-on indications, from price negotiations and starting the clock at that initial approval, potentially forcing developers to reprioritize.
“You want that initial approval to be the most lucrative possible indication, because the clock is ticking,” said Mickey Popli, Director of Consulting Services at Clarivate. “That puts patients with rare diseases at a disadvantage, because manufacturers may delay or abort launches for those indications.”
Furthermore, oncology drugs typically win initial approvals for late-line treatment and gradually expand into more lucrative (and often more effective) use to treat earlier-stage patients, dealing developers a double hit.
- R&D efficiency is more critical than ever. With profitability constrained, pharmas will seek to make up lost ground by getting leaner and meaner and making better go-no-go decisions early in the R&D process.
“I think we’ll see a lot more companies cutting bait when it comes to clinical trials,” said Bill Melville, Lead Healthcare Research and Data Analyst at Clarivate. “Failing fast and not plowing resources into later-stage development is going to be the goal.”
The vise on revenues also makes differentiation essential.
“The companies that are developing me-too products will not benefit,” said Mike Ward, Global Head of Thought Leadership at Clarivate. “The future equivalent of the 7th triptan or the 8th PD-1 will not command high prices. Therefore, you need to understand what’s going to be hot and, should you take a candidate into clinical trials, how to make them more effective.”
In the long run, pharmas and biotechs will have to sit down with governments and make the case for paying for innovation. In the meantime, pharmas will need to make tough decisions while nurturing the pipelines of tomorrow.
“You may see a promising product in Phase 1, Phase 2, but if the opportunity is not there and you don’t spend that money, the product will die,” said TD Cowen Senior Biotechnology Analyst Ritu Baral at the BIO panel.
“Pharma has to play a role in maintaining a healthy ecosystem,” agreed Biogen’s Keeney. “The challenge with the IRA is that we as an industry have lost the argument around value. We have to change that dynamic to protect the contribution we provide to society.”
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