How the IRA Will Affect Drug Development

drug pricing

Pictured: Pharmacist scanning barcode of boxed drug / iStock, MJ_Prototype

The Inflation Reduction Act (IRA), signed into law by President Biden on August 2022, also contains provisions regarding drug pricing. Two policies in particular are designed to influence drug prices, and these might in turn affect drug development strategies.

First, the IRA provides that starting in 2026, the federal government will have the authority to negotiate a maximum fair price (MFP) for some drugs among the highest-spending, Medicare-covered drugs. Second, drug manufacturers will be required to pay rebates to Medicare if drug prices rise faster than inflation.

Late last week, in an online panel discussion organized by BioCentury, experts from biopharma and venture capitalist companies shared their views on how these IRA policies may shape drug development, including promoting biologics over small molecules and changing strategies for orphan drugs. Although the panelists noted that the IRA might be repealed, they agreed that drug developers must plan for the future as if it is here to stay.

“I think investors today want to hear from us, with a fair amount of specificity, [on] how we see [the law] affecting our business plan and our allocation of capital,” Richard Pops, chairman and CEO of biopharma Alkermes, said on the call. “If your answer is not much, I think pretty soon that’s not going to be viewed as a very sophisticated answer.”

Biologics Come Out on Top

One likely effect the IRA portends for drug development is that biologics will be favored over small-molecule drugs because they have an extra four years of protection against price negotiations. While small molecule drugs will come up for negation nine years after FDA approval, biologics are protected from negotiations for 13 years.

“To the extent you’re able then to shift the development program toward a biologic embodiment of the biology you’re trying to exploit,” Pops said, “that’s probably worth on the order of twice as much as doing it in a small molecule.”

Uncertainty Surrounding Orphan Drugs

The IRA does include a provision exempting single-indication orphan drugs, plasma-based drugs and low–Medicare spend drugs from price negotiations. For Katie Cumnock, research lead at California-based healthcare investment firm Patient Square Capital, this will reinforce and accelerate existing trends in drug development.

“We’re already thinking about orphan and rare diseases," Cumnock said during the panel discussion." We’re already pursuing some of the more innovative technologies and techniques like cell and gene therapy, which may be subject to some of the exclusions of this act and may, in fact, become more valuable as time goes on." 

However, Meenakshi Datta, a partner at Chicago-based law firm Sidley Austin, argued that the IRA might also adversely affect orphan drug development. These drugs are often later approved for additional therapeutic areas, and if that happens, the IRA will no longer exempt them from price negotiations.

Datta noted that some companies have already abandoned additional orphan indication programs as a result of the IRA. “The nuance of that analysis, I think, is on a company-by-company, drug-by-drug basis.”

A key consideration in this regard, Datta said, is when the clock starts counting down toward price negotiations. In her reading of the statute and the guidance, that starting point would be the initial date of approval for the first approved indication, not approval for the additional indication, “which is completely perverse and absurd,” she said, adding that it could have a “potentially chilling impact on drug development.”

For these reasons, Pops said, the IRA could considerably change how drugs are rolled out across indications.

“There will never be another Keytruda,” he said. “You cannot think about bringing a drug to the market and then building indications over a decade as you expand the potential utility in different cohorts of patients.”

Indirect Effects

Negotiations might also affect second-to-market companies, Datta said, which would be unable to compete with lower-priced drugs that have undergone negotiations.

“It just collapses the market for the drug."

Patient Square Capital’s Cumnock added that because drugs are only subject to price negotiations if there are no biosimilars, entry of biosimilars into the market will now be encouraged by companies producing brand-name products.

Although IRA provisions will likely affect prioritization in drug development, Pops said he is confident that science will continue to be the innovation engine for the industry.

Despite the new rules, he said, scientists will still be motivated to develop important medicines they discover.

“We will just try to figure out what the business model is that supports doing that.”

Sophie Fessl is a freelance science writer based in Vienna, Austria. Reach her at @brainosoph.

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