The Inflation Reduction Act’s Potential Impact on Research, Launch Strategy

Capitol building

In August, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law, and it could alter far more than the price of Medicare's most-prescribed drugs. Industry observers say it could affect the direction of research and some fear it may lead to further government forays into price control.

First, some quick background: The IRA focuses initially on negotiating the prices for Medicare Part D’s 10 most-prescribed medicines and takes effect in 2026. The following two years will see 30 drugs added to that list and another 20 – this time for Medicare Part B and Part D drugs – in 2029. At this point, the drugs chosen will be expensive and have no generic or biosimilar equivalents. They also will be older medications – small molecule drugs approved at least 9 years ago or biologics approved 13 years ago by the FDA.

The discrepancy between negotiation periods for small molecules and biologics “will have some unintended consequences…unless this is thought through carefully,” Jeremy Levin, chairman and CEO of Ovid Therapeutics, told BioSpace. Levin is also the immediate past chair of BIO and a member of its executive committee.

Decreased Investment for Small Molecules?

For example, “One unintended consequence will be untoward investment in biologics, as opposed to small molecules,” he said. That may lead to a deficit of development in certain areas, such as psychiatric treatments and some cancer treatments. “Biologics are very good at cancer, but can’t penetrate the blood-brain barrier. Anything that penetrates that barrier requires a small molecule,” Levin continued.

He speculated that some companies will think twice about funding new trials to demonstrate the efficacy of small molecule drugs, fearing they will be unable to get a return on that investment.

“Launch prices are not controlled,” Levin pointed out. “Consequently, to recoup some of the investments, launch prices may be slightly higher than they were before.”

Consider how the industry chooses the launch locations for new, innovative therapeutics. Currently, the decision balances medical needs for the drug against the cost of the drug, among other factors. Consequently, a drug that is broadly applicable to the world is most likely to launch first in the United States or Europe where prices – and thus return on investment – is highest, before the company negotiates discounts with other markets.

The concern over ROI can be justified. Data from Deloitte, analyzed just before the pandemic, indicates that only 48 percent of non-specialty drugs met or exceeded premarket forecasts. In contrast, 74 percent of orphan drugs and 72 percent of specialty drugs met or surpassed first-year expectations.

Historic data from McKinsey & Company, drawing from the early part of this century, shows that 66 percent of drug launches failed to meet their sales forecasts. Of those, 78 percent still lagged in year two, and 70 percent in year three. Even the 13 percent that exceeded sales projections subsequently lost market share so by year three, only 53 percent still exceeded forecasts. To avoid such failures, McKinsey analysts recommended capturing the drug’s potential as quickly as possible, which includes selecting the launch location carefully.

Lance Minor_courtesy BDOAfter a cursory read of the IRA, Lance Minor, principal and life sciences national co-leader at BDO, initially suspected the IRA could affect the locations of certain drug launches. Now, “After a deeper read of the Inflation Recovery Act, I would not expect biopharma to change its typical path to launch in the U.S. market first,” he told BioSpace.

No Foreseeable Impact on Launch Plans

“There appears to be a focus on getting biosimilars or generics to market first, prior to negotiations on new drugs,” Minor points out. “With 50-to-60 new drugs being approved each year, how the candidates are chosen and the negotiated price reduction are both unknown.

“Further, it appears the Act prioritizes biosimilars and generics over price negotiations. And finally,” Minor said, “price controls start after 13 years for biologics or nine for small molecules. Even then, the level of price limits would need to surpass the typical pricing structure across the EU before there’s a shift in the overall drug launch planning. Therefore, I wouldn’t expect the IRA to drive any foreseeable impact to launch plans or R&D spending rates. There’s much to learn, but it appears to be steady as she goes.”

Prior to the IRA’s passage, Wayne Winegarden, Ph.D., director of the Center for Medical Economics and Innovation at the Pacific Research Institute, speculated that price controls would affect biosimilars, albeit indirectly.

“By arbitrarily capping costs of some brand-name biologics, this bill would make it nearly impossible for biosimilar manufacturers to recoup the large investments required to make a biosimilar and cause a chilling effect in biosimilar development, driving up costs for patient and employer-sponsored health plans,” he wrote in Forbes.

BIO, for its part, has long said price controls would curb innovation.

Milena Sullivan_Avalere“While the Inflation Reduction Act opens the door to government negotiation, it is likely that the U.S. will remain a viable market due to the confining nature of the federal government’s role in the near- to mid-term,” Milena Sullivan, managing director of Avalere, and Mike Ciarametaro, principal, Avalere, told BioSpace in a joint statement. “In the longer term, its impact will depend on several factors such as the political will to expand government price setting authority, as well as the expanding role and influence of evidence and value-based coverage that are likely on the horizon.”

Levin, however, is optimistic that won’t happen. “The real movers on price are less the pharmaceutical companies than pharmacy benefit managers and the insurance companies. That’s one of the big holes this particular legislation did not address,” he said. 

Despite any shortcomings, the bill was necessary for the country and for the biopharma industry, Levin stated. “If the bill had not been passed now, every coming administration – of either party – would endeavor to paint the industry as a target for the populace.

“The thing I noticed that was striking, when I walked the halls of Congress (talking with legislators about this bill before it was passed), was that while there was enormous antipathy between the two parties regarding the process of developing this healthcare bill, they were behind the content of the bill,” he said. “Therefore, it’s really important that the industry embraces this.”

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