Preparing for the Inflation Reduction Act - Part 1: What is the IRA and why should you care?
The US Inflation Reduction Act (IRA) will have a profound impact on the global biotech/pharma industry. In this first part of a three-part series Emma Tinsley, Chief Executive Officer of Weatherden explains what the IRA is, how it affects drug pricing, and why biotech and pharma companies – including those outside the US – need to take notice.
What is the IRA?
Passed in 2022, the Inflation Reduction Act (IRA) is a broad piece of legislation aimed at lowering inflation in the United States, in part by reducing healthcare costs.
This is the first major pricing reform to the largest drug market in the world. It fundamentally alters the power dynamic between the federal insurance programme, Medicare, and pharmaceutical companies. Medicare coverage typically applies to patients over the age of 65, with some exceptions. The most significant reforms will apply to specific components of Medicare, namely Part D (primarily prescriptions chronic conditions) and Part B (mostly outpatient care).
The key changes are:
Medicare price negotiation: For the first time, CMS (Centers for Medicare and Medicaid Services) can directly negotiate prices with drug companies for certain medications, starting with prescription medications. This gives the US Government more leverage and is expected to lead to lower drug prices.
Inflation cap: Drug price increases can't exceed the rate of inflation. Companies exceeding this limit must pay rebates.
Out-of-pocket relief: Medicare recipients will see lower out-of-pocket costs for prescription drugs.
Why should you care?
The US pharmaceutical market is massive. Roughly two-thirds of global revenue for top-selling therapies comes from the US, so any change to US drug pricing legislation will have a significant impact on product revenues, company valuations, and could ultimately stifle innovation.
The IRA specifically targets therapies that generate high revenues within a specific window, typically when sales peak around 10-14 years after FDA approval. Small molecules are eligible for price negotiation seven years after approval, biologics after 11. Mandatory discounts for some small molecules kick in nine years after approval, biologics after 13.
While specific discounts are still unknown, early estimates suggest a 5-6% lifetime revenue reduction for small molecules and 3-4% for biologics. While this might not sound like a lot, these figures represent averages across all affected drugs within the industry. For a small molecule that is selected for price negotiation, such reductions could significantly impact revenues. Price negotiations for a therapeutic would begin 3 years earlier, reducing its time on market prior to price reduction from 12 years (e.g. in the event of a generic product launching) to 9 years. This is a 25% decrease that is likely to fall within the drug's peak sales period.
This has significant implications for the biotech industry, as companies are valued heavily on the basis of their total projected sales, and a reduction such as this translates into a major valuation drop. Moreover, the US market sets the standard for global drug pricing. Lower US drug prices will likely lead to downward pressure on drug pricing worldwide.
The message is clear: The IRA is a wake-up call for the entire biotech/pharma/investor industry. Don't bury your head in the sand – it's time to adapt.
Getting ahead of the IRA
In recent years, the biopharma industry has moved from broad initial indications to a ‘tip of the spear’ approach, seeking smaller initial markets followed by approvals for broader use.
Under the IRA, this approach to drug development might need re-evaluation. The ‘clock’ starts when a drug is approved in its first indication. By potentially squeezing the window for subsequent broader (and therefore more valuable) approvals, the IRA reduces a drug's overall market potential. This creates a complex scenario, and the industry will have to grapple with balancing niche innovation with returns on investment, or run parallel programs for simultaneous launch, which can be risky.
Additionally, the IRA currently differentiates between small molecules and biologics in terms of negotiation and discount timelines, so companies may need to shift their strategies accordingly based on their development pipelines.
There’s clearly a lot to think about, and this is just part one. Stay tuned for upcoming instalments where we delve deeper into:
Part 2: The IRA’s impact on indication selection, regulatory strategy, and lifecycle management
Part 3: The IRA’s impact on first-in-class status, valuation and business development
About
Weatherden is a specialist consultancy group, made up of experts in all aspects of clinical development, dedicated to giving every great drug its best chance of clinical success. Emma Tinsley is a nationally recognised serial entrepreneur who has built multiple biotech companies. She is dedicated to bringing solutions to market that improve the probability of a drug’s success, and ultimately help bring life-changing medicines to patients.
