The US Inflation Reduction Act (IRA) passed last year by the Biden administration and hotly contested by the innovative pharma industry, has started to look more like a reality since the first ten drugs subject to price negotiations under the IRA were announced in August. The negotiated prices will not take effect until 2026, yet the industry is already anticipating the pervasive impact of the new legislation on R&D and M&A while political analysts speculate about the consequences of the upcoming US elections.
[The list of drugs subject to negotiation is] the result of a rushed process focused on short-term political gain rather than what is best for patients
Stephen Ubl, CEO, PhRMA
Starting Point: First Ten Drugs
Passed last year by President Joe Biden, the IRA enables the US government to negotiate the prices of the drugs its Medicare healthcare program for over 65s spends the most on. The new legislation has begun to take shape with the Centers for Medicare and Medicaid Services’ (CMS) August announcement of the first ten prescription drugs that will be subject to negotiations under the IRA.
Drug companies earmarked for the negotiations had until October 1st to accept negotiations, facing heavy fines if they did not. When asked whether the company planned to negotiate, a spokesperson for Bristol Myers Squibb said: “We have no choice,” NBC news reported. Other companies on the list have followed suit, including AstraZeneca, Bristol Myers Squibb, Merck, Novo Nordisk, Boehringer Ingelheim and Johnson & Johnson.
When the list came out, Stephen Ubl, CEO of the industry’s most important trade group, Pharmaceutical Researchers and Manufacturers of America (PhRMA), said it was “the result of a rushed process focused on short-term political gain rather than what is best for patients.”
The IRA will span far beyond these first ten medications. In 2027, negotiated prices take effect for 15 more drugs and in 2028 for another 15 with an added 20 more in each subsequent year. Moreover, forty-three drugs will be penalised with fines for price increases that exceed inflation, including AbbVie’s Humira and Gilead’s Yescarta.
And apart from the direct financial burden of lowered prices and fines, the IRA is expected to have some other perhaps less obvious side effects for the innovative pharma industry.
The mechanisms companies have traditionally used in the US to extend exclusivity when their drugs lose patent protection have also come under fire under the new legislation. The IRA excludes from its Medicare price negotiations drugs that have generic and biosimilar competitors. While drugs facing imminent competition are awarded an extra two years before negotiations and are taken out if that competition arises, the IRA also includes measures to prevent brand sponsors from conspiring with generics firms to beat the system.
IRA’s timing coincides with several big exclusivity losses. “Manufacturers will need to calculate which is least damaging: generic competition or negotiations with the Centers for Medicare and Medicaid Services (CMS),” says the life sciences intelligence firm Evaluate in its report Pharma’s Age of Uncertainty.
Evaluate argues that the IRA will not alter the fundamentals of R&D economics. In effect, during the first quarter of 2023, Big Pharma did not show any signs of distress with respect to R&D spending with Pfizer, GSK, Sanofi, Bayer, Gilead, AstraZeneca, and Novartis all reporting increases.
However, US price negotiations will increase the need for more efficient drug development and differentiated therapies and may bring about adjustments to multi-indication strategies. “Pre-IRA, many such products tended to launch initially in narrower indications with shorter development times, and then expand into larger populations. Post-IRA, firms may try to launch first in the biggest market, to recoup costs as fast as possible after the nine or 13-year countdown begins. Some smaller indications may be abandoned, or targeted with a separate, similar molecule,” the Evaluate report asserts.
According to the American think tank Brookings, as of yet the IRA has had little impact on M&A investment activity with M&A deals in the first quarter of 2023 nearly doubling the first quarter of 2022. However, the industry has stressed that IRA will shift investment away from new small molecule drugs because under the negotiation scheme small molecules have nine years from FDA approval before they will be subject to price negotiations, as opposed to 13 years for biologics.
In Bloomberg’s view, because the IRA contains an exception privileging some small biotech drugs, which are ineligible for selection under the IRA in 2026-2028 and may be subject to a price limit in 2029 and 2030, excluded biotechs could see their M&A prospects hampered. “The companies that might benefit from an exemption would likely not benefit from it after acquisition and the acquiring company would have to adjust its valuation based on the projected net sales numbers post-acquisition, factoring in the impact of potential selection and price negotiation under the IRA.”
At least eight lawsuits have been filed against the IRA by Big Pharma companies such as Merck, BMS, AstraZeneca, Johnson & Johnson, and most recently Novartis and Novo Nordisk. “This case challenges an unprecedented and unconstitutional attempt to compel the nation’s drug manufacturers to sell their products at prices dramatically below their market value,” read the Novartis lawsuit.
The ability of these legal actions to impact the enactment of IRA remains to be seen, yet legal analysts at Bloomberg Law believe that instead of easing their legal efforts, companies may adjust them to reflect the realities of IRA as it comes into effect. “Now that the list is announced, we’ll definitely see movement in the lawsuits, because beforehand it was a little more of a theoretical harm,” said Carmel Shachar, a professor at Harvard Law School as reported by Bloomberg Law.
PhRMA has also sued, calling the plan for negotiated prices “a government mandate disguised as negotiation” and the US Chamber of Commerce, the nation’s largest business lobby group, also attempted to block the drug price negotiations set forth in the IRA with a lawsuit. Since then, a federal judge has denied the request for a preliminary injunction although he has not dismissed the case.
Upcoming US Presidential Election
The Inflation Reduction Act is good politics, and it’s good policy
David Mitchell, president, Patients for Affordable Drugs
The outcome of the approaching US presidential election could also stand to have repercussions. Since the introduction of the IRA, Joe Biden has repeatedly called it a legislative victory and plans to make lowering drug prices one of the cornerstones of his presidential election campaign.
“The president will have a very strong case to make,” said Senator Amy Klobuchar of Minnesota, a member of the president’s national campaign advisory board. “Not only will people want to keep the benefits they have seen, they are going to want to get the benefits that are coming their way.” According to the NY Times, certain polls have shown that 80 percent of Americans support giving the government the ability to negotiate lower prices for Medicare.
“The Inflation Reduction Act is good politics, and it’s good policy,” said David Mitchell, president of the advocacy group Patients for Affordable Drugs. “Any politician who says otherwise is going against the will of the American people.”
Republicans candidates for the Republican presidential nomination have as of yet said little about the cost of medication, yet the election of a Republican could, in certain political analysts’ view lead to the repeal of the IRA.
Republican presidential candidate and former biotech entrepreneur Vivek Ramaswamy has expressed some skepticism. “That narrow action is not super well thought out,” Ramaswamy said, HuffPost reported. “The use of the word negotiation is a misnomer, when in fact you’re just negotiating with a single party.”
In a campaign video Donald Trump promised to re-issue his since dismissed September 2020 executive order that would “tell Big Pharma that we will only pay the best price they offer to foreign nations, who have been taking advantage of us for so long.”