Ever since the passing of the Inflation Reduction Act (IRA), the impact of this legislation on the discovery and development of new medicines has been debated. Now, a white paper from ATI Advisory has provided a snapshot of the early impact of the IRA on the biopharma industry. Entitled “Pharmaceutical Innovation and the Inflation Reduction Act: What can we learn from the first half of 2023,” this policy brief examines whether “the IRA has had immediate impacts on drug development.”
ATI Advisory was pretty thorough in compiling data for the first six months of 2023 using published information on 18 leading companies with respect to R&D budget changes, discontinuation of development candidates, and even M&A activity. Essentially, ATI Advisory shows that the behaviors of these biopharma companies are very similar in the first half of 2023 when compared to pre-IRA days. R&D budgets, pipeline attrition and M&A activity continue to progress. In fact, after analyzing the first six months of 2023, the reader might come away with the view that biopharma has been impacted very little by the IRA. The prospect of government price controls on drugs doesn’t appear to have changed the biopharma’s strategies. What happened to all of the handwringing on the part of biopharma CEOs in the run up to the passing of the IRA? Was it all just posturing?
Actually, it is really too soon to measure the impact of the IRA on this industry. First of all, once the IRA kicks in, revenues for these companies will drop significantly. The Committee for a Responsible Federal Budget claims that Medicare will save $300 billion between now and 2031 on prescription drugs. Given that biopharma invests 25% of sales directly into R&D, this translates to $75 billion less for R&D. It’s easy to see that with such an impact on revenues, R&D budget cuts will soon be implemented.
The second impact will be on a company’s development strategy. In the past, a company with a new drug to treat cancer would try to get it approved as soon as possible usually for a rare cancer that impacts a small patient population, while continuing clinical trials for cancers for larger patient groups. The rationale for this is to make a new breakthrough treatment rapidly available for patients in need. However, the IRA calls for price controls to be instituted after a drug has been on the market for either nine years (small molecule drug – pill) or 13 years (biological drug – injectable). Once a drug is approved for any indication, the clock for price controls starts. Given that the larger clinical program can lag the smaller one by anywhere from two to five years, it doesn’t make sense for the company to bring out the rare cancer indication as quickly as has been done. Rather, companies will wait to have the clinical trials completed for all the appropriate cancers and then apply for FDA approval all at once. This will be necessary in order for the company to make a significant financial return. But, as a result, certain patients will not benefit as quickly as they could have in the past. In addition, these strategic decisions will not be publicized by companies as they are proprietary. Thus, this impact will not be obvious.
Finally, it is likely that companies are now looking at their discovery research portfolios to see if they are too heavily weighted to small molecules versus biologicals. From a discovery standpoint, the amount of resources required to find drug candidates of either type are not that different. However, given that the price controls will be instituted for small molecules four years sooner than for large molecules, the latter has potential for greater commercial returns. Ironically, this will negatively impact the healthcare budget. Pills (small molecules) are obviously more readily administered than injectable drugs. One can easily go to a pharmacy and pick up a vial of pills. However, injectable drugs (biologicals) often need to be administered in a doctor’s office, a hospital or a health care center thus driving up costs. Yet, the incentives of the IRA are such that more injectable drugs will be in our future at the expense of pills. Again, this type of internal strategic change on the part of a biopharma company is likely to be invisible outside the company.
ATI Advisory’s analysis is simply an early snapshot and not indicative of the negative impact that the IRA is going to have on biopharma R&D. Sadly, this white paper will likely be cited by IRA proponents to show that the industry has not been damaged by the enactment of this law. That’s not the case. Not only will these companies feel a major impact, but patients and the healthcare system will stand to lose as fewer new medicines will be discovered in a timely manner.
(John L. LaMattina is the former president of Pfizer Global R&D and is the author of three books including: “Pharma & Profits: Balancing Innovation, Medicine, and Drug Prices”.)