The impact of the Inflation Reduction Act on the biopharmaceutical industry is going to be substantial in a number of ways. Already companies are analyzing the strategies for the types of programs that they work on in light of the coming price controls. For example, should less research be done in areas that lead to small molecule drugs (pills) given that such drugs will face price negotiations four years sooner than biologic drugs (given by infusion or intravenously)? While far more costly to deliver to patients, biologics offer the potential for higher financial returns due to longer price exclusivity.
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Similarly, biopharma companies are revising clinical development plans for drugs that have a number of potential uses. In the past, companies would launch a new important drug for a smaller indication, let’s say a rare cancer, while running a much bigger and more costly clinical trial for a large cancer population, say breast cancer. The rationale for doing this is that patients who need the life-saving rare cancer drug can have access to it more quickly than waiting for the larger cancer trials to complete—which could be years later. However, given that the “price negotiation clock” begins to tick when the new drug is first approved for any cancer indication, it would behoove companies to wait until all the studies are complete before launching such an important new medicine in order to maximize the return on its investment. Thus, patients with the rare cancer will be penalized.
These are just two of the impacts that the IRA will have on the biopharmaceutical industry. However, the most important impact, in my view, will be on the industry’s ability to deliver new drugs. Unfortunately, an essay in the New York Times essentially pooh-poohs this critical issue. In “The 4 Arguments You Will Hear Against Drug Price Negotiation,” Larry Levitt, author of this essay and the executive vice president of KFF, makes the following claims.
“The idea that curbs on drug pricing will stifle innovation has long been the pharmaceutical industry’s go-to argument. At some level, the drugmakers may be right: Lower prices mean lower profits, and that will be less attractive to investors. Drug development is a risky business, and the appeal for investors is the big potential payoff fueled by higher prices.
“But it’s reasonable to ask how many fewer drugs might get developed and which drugs might those be,” he adds.
“The Congressional Budget Office, the economic referee in legislative debates, estimated that the drug pricing provisions of the IRA would result in 13 fewer drugs coming to market in the United States over the next three decades. That’s a very small share of the 1,300 new drugs expected over that period. Some of those forgone drugs might be potential lifesaving treatments, but some might be drugs that offer only marginal health benefits. It’s impossible to know for sure.”
Unfortunately, Levitt’s arguments do not account for certain realities within the biopharma industry — a topic which I have a lot of experience with as the former head of Pfizer R&D.
Let’s start with some basics. First of all, the biopharmaceutical industry invests 25% of top line sales directly into R&D—a percentage higher than any other industry. Thus, a decrease of $10 billion in sales will result in $2.5 billion less available for R&D. TV ads that we are now being bombarded with tout that the IRA will result in billions of dollars to be saved by Medicare on drug costs. The Committee for a Responsible Federal Budget has estimated that Medicare will save $300 billion between now and 2031 on prescription drugs. That would translate to a reduction of $75 billion in R&D spend across biopharma.
The industry will have to make substantial R&D cuts to make up for such revenue losses. Jobs will be eliminated, research programs will be cut and companies will abandon certain areas of research. Ironically, companies could begin to decrease efforts in drug discovery programs that would have benefited those over 65 in favor of programs that are more geared to a younger, non-Medicare eligible population. But the most critical aspect of this is that fewer drugs will be discovered and developed over the next decade. Assuming that it takes, on average, $2.5 billion to develop a new drug, $75 billion less for R&D would result in 30 fewer new drugs between now and 2031. To say that there will be 13 fewer drugs in the next decade is at best naïve.
Price controls, unfortunately, are here to stay. Polls show that Americans wanted this. But, make no mistake—the IRA will have a major impact on biopharma R&D and, as a result, fewer important medicines will be available.
(John L. LaMattina is the former president of Pfizer Global R&D and the author of Pharma & Profits – Balancing Innovation, Medicines, and Drug Prices.)