Finance
Council Post: How The Inflation Reduction Act Could Affect The Biopharma Industry
Published
1 year agoon
By
James White
Dr. Dmitry Reykhart, Chairman of the Ruthenium Global Pharma Fund Board of Directors.
The Inflation Reduction Act, which President Joe Biden signed into law in August 2022, resulted in groundbreaking changes in the U.S. pharmaceuticals market, as it includes measures to prevent increases in drug prices from surpassing inflation. The Congressional Budget Office projected that the IRA would save more than $287 billion over 10 years.
Two main components of the legislation aim to reform Medicare’s drug-pricing policy: price negotiations and higher inflationary cap price.
Starting in 2026, the IRA will authorize the Department of Health & Human Services to negotiate prices for certain expensive prescription drugs within the Medicare program, resulting in estimated savings of $98.5 billion over 10 years. The bill only applies to drugs covered by Medicare, not private insurance or cash sales.
The number of drugs to which price negotiations will apply is limited and will gradually increase from 10 in 2026 to 60 in 2029. The focus is on high-priced, single-source drugs without competitors approved by the FDA.
Additionally, the IRA limits price increases for existing Medicare prescription drugs to no higher than inflation and requires inflationary rebates if prices rise above inflation from 2023. This is expected to save the government $160 billion over the next 10 years, given that half of Medicare prices rose at a rate higher than inflation from 2019 to 2020.
The Potential Impact
I believe that companies that have their primary operations outside the U.S., focus on biologics (large-molecule drugs) and do not receive federal funding for research will see less of an impact from the IRA.
The IRA could better position those businesses whose portfolios focus more on biologics than chemicals (short-molecule drugs). The former will be less affected by the IRA as the legislation may be potentially applied to them after an extended period of 11 years rather than seven years for chemicals.
Companies with significant sales outside the U.S. and developed pharma units abroad will also likely be less affected by the IRA, as it applies to the U.S. Medicare program.
Controversial Issues
In my view, some aspects of the IRA raise questions about its effectiveness. One of the concerns is that Medicare will have to opt for less expensive treatment methods, which could end up being more expensive due to shorter courses or less effective medication. The legislation could also lead to stakeholders and investors avoiding companies that rely on federal funding, hurting the National Institutes of Health’s efforts to develop lifesaving products with private sector support.
Furthermore, drug makers may become less motivated to collaborate with the NIH and instead develop their own technologies to avoid government support. The legislation could also be exploited through loopholes, such as introducing limited competition to avoid price negotiations or setting higher prices for newly launched drugs. The CBO expects a decline in newly approved drugs of roughly 1% over the next 30 years.
This could lead to credit rating downgrades for companies in the market, according to Moody’s Investors Service, which predicted more merger and acquisition activity as a result.
Market Reaction
Companies are starting to express concerns about the impacts of the IRA on their future sales: Amgen, Merck & Co and Eli Lilly are anticipating negative implications on them, with Eli Lilly specifically noting a potential reduction in investment in small-molecule innovation. Gilead and AbbVie also expect pressure on financial results and pricing negotiations for certain drugs.
While market analysts estimate a 2% drop in industry value, I have a more pessimistic outlook. Based on my background as an associate professor in pharmacology and experience in senior positions in international pharmaceutical companies, government organizations and authorities, I project a 3% to 5% decline in certain cases and a smaller effect in 2023 with a possible 2% decrease in valuation.
In my opinion, the negative public perception of rising drug prices and the 2024 presidential election in the U.S. will become drivers for more active pressure on the pharmaceutical business from the U.S. authorities. Going forward, no matter who wins the next presidency, the topic of the high cost of medical care in the U.S. compared to other countries will be relevant and will require the government’s response.
The latter has already taken several measures aimed at the reduction of generic companies’ income. We can now assume that through the IRA and more effective ways to control new patents, they will put pressure on the original drug manufacturers. Those companies whose drugs have strong competitors in the market will be under a heavier burden, and it also applies to more financially intensive market segments such as oncology and diabetes.
Nevertheless, I believe that the U.S. will not agree to control prices in line with the European approach. The issue will coerce the pharma market and share prices of the companies, but a compromise with big pharma will likely be mainly achieved through self-limiting price growth and a demonstrative price reduction for certain positions.
The IRA is likely to have a greater impact on short-molecule and U.S.-focused pharma companies, as well as on those with more significant exposure to Medicare. They should start repositioning to adapt to the IRA by reassessing their revenue projections, revising their R&D investments and reconsidering their long-term pipelines.
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Source: Fox Business
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