The Inflation Reduction Act (IRA), set to fully implement in 2026, has ignited intense debate within the pharmaceutical industry. Recently described as a "negotiation with a gun to your head" by Pfizer's CEO Albert Bourla, the IRA promises significant Medicare savings - an estimated $6 billion in 2026 alone. However, it also raises critical questions about its effects on innovation, R&D, and ultimately, drug availability for patients.
This report delves into the multifaceted impacts of the IRA, exploring:
The IRA primarily targets single-source drugs that have been on the market for an extended period:
To be eligible for negotiation, a drug must be among the 10 highest-spending products in Medicare Part D in 2023. It's unlikely that any drug with annual Medicare spending below $400 million would be included in negotiations. However, the industry anticipates a ripple effect on pricing across the board, even for products not directly involved in negotiations.
Industry leaders, such as Eli Lilly's CEO, predict a significant shift away from small molecule development in the coming decade, stating, "in 10 years we'll have far fewer small molecules being developed than we do today." But does the data support this viewpoint?
Global R&D expenditure forecasts vary:
While the increased investment in biologics can be partially attributed to rising cases of chronic diseases like cancer and autoimmune disorders, the IRA is likely to significantly impact future R&D investment decisions. The average small molecule's lifetime revenue is projected to drop by 5% to 6%, while biologics may see a 3% to 4% reduction. Given that the cost base will remain largely unchanged, the impact on net present value (NPV) could be twice as severe, potentially leading to a dramatic drop in investment for small molecules.
Industry reactions to the IRA have been mixed, with some arguing that pharma is overreacting to its potential impact on R&D. The Congressional Budget Office (CBO) estimates that the IRA's pricing reforms will reduce industry revenue by 7% over the next decade, resulting in just one fewer drug coming to market during this time. This represents about 1% of drugs over the next three decades, given that the FDA approves an average of 38 drugs annually.
Some speculate that the pushback could be motivated by increased pressure from shareholders to find the next generation of blockbusters, especially as several current blockbusters like Keytruda, Opdivo, Eliquis, and Humira approach patent cliffs.
Conversely, research from the University of Chicago (funded by Gilead) strongly refutes the CBO's forecasts. Their study predicts that the reduction in R&D will translate to:
Several pharmaceutical companies have already adjusted their strategies in response to the IRA:
It's worth noting that some industry skeptics argue these strategic decisions may have other motivations, with the IRA serving as a convenient justification. Holly Fernandez Lynch, a bioethicist and health policy professor at the University of Pennsylvania, commented, "I wouldn't be surprised if companies blame the IRA whether or not their issues were driven by the law."
The first quarter of 2023 saw a significant uptick in M&A activity compared to the previous year:
While this aligns with historical cyclical patterns and can be partially explained by inflationary pressures, some question whether the IRA has influenced the types of compounds and companies targeted by large pharma.
Data from BROOKINGS shows a less pronounced increase in M&A for biologics compared to small molecules since the passage of the IRA. Some industry observers anticipated an increased appetite for companies and compounds focusing on younger populations due to Medicare coverage for those over 65, but there's little evidence to support this trend so far. This could change as more clarity emerges on the drugs affected and the negotiated prices.
The IRA is likely to have the most significant impact on the clinical development of:
These areas often undergo stepwise development. Based on BCG's analysis of the initial drugs chosen for negotiations, the most impacted indications are:
These therapeutic areas occupy the highest portion of Medicare's spending. This is expected to influence future programs and drug development, with an increased focus on first-in-class programs within these indications and targeting large populations initially to maximize ROI.
The impact on rare diseases is also a concern. Despite orphan drugs being exempt from the IRA, the exemption is removed once additional indications are approved, subjecting the drug to possible pricing controls. This may disincentivize companies from developing rare disease programs or seeking approvals for additional indications, potentially harming patients.
To illustrate the potential impact of the IRA on development timelines for new approved products and additional indications, let's examine the development of rivaroxaban:
The IRA's seven-year cap on pricing protection could significantly impact the ROI for additional approvals. In rivaroxaban's case, the subsequent approval represented a more prevalent indication but would be held to the same 7-year "cliff." This more prevalent indication is also more likely to contribute to the drug's selection for the Price Negotiation Program.
This scenario illustrates why companies might be disincentivized to launch single indications if additional indications are not far from completion, especially if those subsequent indications offer a higher ROI. This could particularly affect smaller patient populations, who may have to wait longer to access the drug.
The IRA may also change how Medical Affairs teams are built and operated, with a greater focus on multiple indication launches.
While speculation about potential changes to the IRA under a different administration exists, completely dismantling such substantial legislation faces significant obstacles. Even if a new administration were to push for changes, it's unlikely that the IRA would be entirely overturned.
Future modifications are more likely to focus on balancing cost control with fostering innovation in drug development, rather than scrapping the entire framework implemented by the IRA. Any adjustments would require broad support in Congress, making dramatic changes unlikely in the near term.
While the full impact of the IRA on drug development remains to be seen, several trends are emerging:
These trends carry both risks and opportunities. Companies may face increased competition or struggle to secure approvals in key indications. Success in this new regulatory environment will require careful evaluation of products, pipelines, and competitive landscapes.
The IRA represents a significant shift in the pharmaceutical landscape, forcing companies to reevaluate their R&D strategies, pricing models, and development timelines. While it aims to reduce Medicare spending and drug prices, its long-term effects on innovation and patient access remain uncertain. As the industry adapts to these changes, continued monitoring and analysis will be crucial to understand the full scope of the IRA's impact on drug development and availability.
References
https://endpts.com/pharma-companies-soften-tone-on-full-ira-impact/
https://www.axios.com/2024/02/07/trump-medicare-price-negotiations-executive-power
https://www.tandfonline.com/doi/full/10.1080/13696998.2024.2323903#abstract
The Potentially Larger Than Predicted Impact of the IRA on Small Molecule R&D and Patient Health. Tomas J. Philipson, Yier Ling, Ruiquan Chang, Giuseppe Di Cera, Koichi Onogi, Aatman Vakil, Aarushi Kataria
Unintended Consequences of the Inflation Reduction Act: Clinical Development Toward Subsequent Indications. Julie Patterson, PharmD, PhD, James Motyka, PharmD
https://avalere.com/insights/will-the-ira-change-investment-in-orphan-drug-pipelines