The Inflation Reduction Act: Responses From Experts on Implications for Biopharmaceutical Innovation

September 21, 2023—Two panel discussions on the Inflation Reduction Act at the World Medical Innovation Forum in June attracted standing room only crowds who heard lively discussions on key provisions of the IRA that may influence biopharmaceutical innovation. Steven Pearson, MD, President, Institute for Clinical and Economic Review, and Pat Fortune, PhD, MBA, Vice President, Strategic Innovation Leaders at Mass General Brigham, were panelists on the sessions and offer views on the Act’s impact on patients and innovators.

Pearson was interviewed by video after his Forum session and before the release of the list of CMS’s 10 targeted drugs, subject to price negotiations between Medicare and their manufacturers, designed to curtail pharmaceutical costs. Fortune provides feedback, his own opinions, through a Q&A in response to the list’s release on Tuesday.

YouTube video: https://www.youtube.com/watch?v=y9OugM4fmI8

Pat, were there any surprises on the list of drugs CMS is targeting? 
No, they were largely predictable, given that at least five of them are on the list of 10 drugs on which Medicare spends the most. In fact, at the Forum panel discussion, we had mentioned a few of them that were likely to be on the list, including Eliquis. If there were any surprises, it was that there was only one drug targeted for cancer, Imbruvica. Because cancer is by and large, a disease of the elderly, there is a fair amount of spending by Medicare on it. However, some of this spending would be covered under Part A and therefore not relevant here. Finally, Humira which has been in the top ten of CMS spending for the past several years was not included but that may be due to the recent approval of a substitutable biosimilar.

I see that Enbrel is one of the identified drugs, and it’s one based on our Mass General Brigham Innovation breakthroughs. Are there others? 
I don’t believe that MGB had intellectual property that covered any of the drugs other than Enbrel on the list.

What’s the status on these drugs now that they have been identified? 
First, a series of lawsuits have been filed by pharma companies or on their behalf that argue that this legislation is, in one way or another, unconstitutional. If any of these are successful, that would place the law itself and next steps in limbo. Dr. Pearson covered this in the comments you alluded to earlier.

Second, I think there are other process questions that make the outcome of the next steps difficult to predict. For example, the law specifies the next step as a negotiation between the government and the companies whose drugs are on the list. It will be interesting to see how that discussion proceeds as a negotiation in that, a “maximum fair price” will be established prior to these discussions. That would seem to dilute the scope of what is negotiable since there is presumably a lot less room to move from this price than, for example, from the current one. It is difficult to see how this will work as a negotiation in the usual sense. The intent appears to be to reduce CMS spending on these drugs as opposed to centering the discussion on determining a price that is “fair” to and affordable by both parties. At least to me, this implies that the basis on which this “negotiation” will proceed are unclear, and we will just have to wait to see how this plays out.

So how is pharma proceeding? 
The points outlined earlier summarize where pharma is under the first cycle of Medicare price negotiation. As noted, there is a fair amount of uncertainty, not just about the formal process but also how each of the parties will proceed outside of this current exercise. On the one hand, this may be seen as anecdotal price negotiation that seeks to reduce Medicare drug spending. However, other provisions in the legislation have material implications beyond just this specific result. For example, the legislation restricts pharma price increases on single source drugs under Medicare Parts B and D to the rate of inflation. However, the broader implications of this feature have not yet been worked through. To quantify this, data in the literature suggests that for the period of 2022 – 2039 drug manufacturer revenue due to the legislation will decrease by $1 trillion because of the price negotiation component and an additional $1.8 trillion as a result of the inflation component. How this will affect pharma R&D investment as well as pricing strategies is unclear, and some responses could represent dramatic changes from the status quo.

What effect will this have on drug availability? 
One expected effect is that this will affect the number of new drugs that will be developed.

How will venture capitalists deal with this? 
I expect that VCs will read the tea leaves based on how some of the effects noted above will play out and then try to figure out what pharma will invest in and ultimately be likely to buy. Given that this adds risk relative to historical venture investments in pharma, this could signal a   decreased rate of investment in new drug discovery and development and perhaps capital rotation into other sectors. An example here might be investments to make discovery and development more efficient or lower risk perhaps through increased investment in AI and increased use of real-world evidence.

What drugs won’t be developed? 
I don’t expect much in the way of changes here. Investments in anti-infectives will continue to be difficult and may get even harder than it is today. Anti-infectives are taken for a limited time and therefore not as profitable as drugs for chronic disorders. Generally, drugs for chronic disorders will be prioritized over those for acute usage. That dichotomy is not new, but the magnitude of the difference may change.

There may also be some changes in preference by pharma for large molecule drugs over small molecules because of the way they are treated by the legislation in terms of the time from launch before they are subject to CMS price negotiation. But I think this will take a backseat to the properties and performance of the drug itself.

One other point I’d make is that the Congressional Budget Office estimated that the effects of the current version of the legislation will be to reduce the number of new drug approvals over the period from 2022 – 2039 by about 5 drugs. Estimates from academic studies over this same period using models of elasticity of R&D spending relative to revenue reduction will result in roughly 135 fewer drugs. The real number is likely between these two bounds, but the difference may be substantial and likely consequential. I expect that this is an area that will get a lot more attention by academia, the government and pharma as the implementation of the legislation plays out over the next few years.

Will private insurers model pricing that CMS comes up with? If so, then the IRA will affect a much greater population than just Medicare, right? 
There’s a little bit of complexity in that, but you’re not off base. They will look at what CMS pays and use this in price negotiations with pharma. This is a bit harder to predict because there is more opacity in the negotiations between private insurers and Pharmacy Benefit Managers and discount programs that pharma itself offers.

So, what advice would you give our innovators in this time of so much uncertainty? Should they continue to innovate? 
Yes, by all means continue to focus on innovation. As the biology underlying health and disease continues to rapidly advance, the opportunity to create new therapies has never been greater.  Pharma will continue to be a very large and important business globally. The time-tested approach of focusing on addressing unmet clinical needs hasn’t changed and the ability to affect prevalence, severity and cost is increasing as science advances. In an organization as large as MGB some groups will stay close to how this and other pieces of legislation will impact the commercial and capital markets, and these are groups with whom innovators can work and collaborate. VC’s and pharma will make their decisions on what is good economically for them. This will be in context of a dynamic regulatory environment but at the end of the day projects that offer a high and positive Net Present Value will get funded.

What will happen to pharma’s R&D prospects? 
I think pharma is very experienced and adept in the way they allocate and spend their R&D dollars. Therefore, if things continue even as we’ve discussed, and discounting productivity increases in their drug discovery and development there will be fewer drugs developed. Is the reduction going to be a handful or a bushel? As noted above, it is hard to tell, but the investment that will be made is still in hundreds of billions of dollars, and I remain optimistic that the law or at least the most deleterious aspects, will be changed or the effects mitigated some other way. The key is to keep talking about what is indeed a complex problem. I wouldn’t assume what we have now is where we end up.

How does that impact patient care? 
There might be fewer me-too drugs (medication similar to a pre-existing drug, with minor modification), as we see with statins for example. There are roughly seven statins available right now, approved for lowering cholesterol. Me-too drugs will not go away (for good reason) but there may well be fewer of them.

What happens to pharma? 
This all depends on what happens from here on out. In some scenarios, a case can be made that pharma gets smaller, in others the change may not be significant, and in others pharma continues to grow. I personally believe that we are in a period where U.S. healthcare as a system needs to improve in quality, equality and cost. This will involve some adjustments and transition, but I also believe pharma will adapt and continue to be a major part of the global economy. From a scientific point of view, I believe the best days are in front of us, but we will need to work through some adjustments to get there.

Tell me what you thought about the World Medical Innovation Forum panels on IRA. 
I have a bit of bias here. I thought pretty much everything that has played out since that meeting had been touched on by the panels. If you look at those panels—nothing the panel described is inconsistent with things that have happened since. But there is uncertainty in how the next steps play out. How is the negotiation going to work? How might the currently projected state change even just as result of working through the case at hand. Like most situations I have seen in the years I have worked in this business, my best advice is “stay tuned.”

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