Written by Ailsa Craig and Marek Poszepczynski, co-investment managers of the International Biotechnology Trust
In August 2022, a seismic shift reverberated through the biopharmaceutical landscape as the US Government, dabbling directly in drug price negotiations for the first time, ushered the Inflation Reduction Act (IRA) into law.
This landmark legislation aims to reduce the cost of selected prescription drugs and enhance their availability to more than 65 million Americans enrolled in the Medicare program. The law also allows Medicare to negotiate drug prices directly with pharmaceutical companies and caps out-of-pocket expenses at $2,000 per year for Medicare beneficiaries.
To better understand the IRA’s significance, it is worth noting that US prescription drug spending represented a mere 8.9% of the total healthcare budget in 2021. Notably, Medicare’s share in US prescription drug spending amounted to 21.2% – less than 2% of overall US healthcare spending.
Effective from 2026, the IRA introduces a phased approach to price negotiations, first targeting the 10 drugs with the highest expenditures under Medicare Part D, which furnishes prescription drugs for Medicare beneficiaries. This will expand to include 15 additional drugs each in 2027 and 2028, and 20 more drugs each year from 2029 and beyond.
The criteria for drug selection are stringent and will significantly impact pharmaceutical giants known for marketing mature, high-revenue drugs. The first 10 drugs to have their prices negotiated are all owned by biopharma heavyweights – three of them are biologics (drugs derived from biological, or living, sources) and seven are small molecule (drugs made from chemicals in a lab).
Strategic shifts
Our view is that the biotech sector may benefit from this regulatory shift. With larger pharmaceutical companies bearing the brunt of the IRA’s provisions, they may turn to acquiring biotech businesses with promising pipelines and groundbreaking innovations in order to make up for reduced revenues from more mature drugs.
The IRA’s pricing provisions may also reshape the biotech sector in several other ways. Small molecule treatments have a shorter negotiation window of nine years, compared to 13 years for biologics, potentially driving investment towards biologics. However, small molecules will always have a role in drug development. While Medicare after all is a relatively small portion of total pharmaceutical revenues, the shorter window before IRA price negotiations may affect therapeutic areas more exposed to the Medicare framework.
This means that the IRA could potentially negatively impact development of therapies targeting Medicare’s members, the elderly population, including treatments for cancer and cardiovascular, respiratory, and neurological diseases.
Tailored treatments
The legislation may also push companies to develop more tailored drugs instead of exploring additional uses for existing drugs. Companies have historically found success in finding new uses for current treatments – for example Alexion Pharmaceuticals’ Soliris drug, initially developed for a rare blood disease, went on to be approved for a neuromuscular condition and a rare kidney disease.
However, the exemption for orphan drugs treating single diseases might deter companies from exploring this multiple indication strategy i.e. using the same drug for different diseases. This approach could result in companies abstaining to develop and conduct trials in additional diseases with the same product when the marginal benefit of higher revenues might be offset by shorter time on the market without complying with the government. This potential unintended consequence may not necessarily benefit patients or payers in the long run..
The future trajectory of IRA pricing provisions remains dynamic and subject to shifts in political leadership. For example, a Republican win in the 2024 presidential election may lead to changes to the legislation, including an extension of negotiation windows or the removal of tax penalties for companies that refrain from negotiations, potentially alleviating pressure on drug manufacturers.
The IRA marks a new era of drug price negotiations, promising substantial impact on the biotech and pharmaceutical spheres. Ultimately, the effects will depend on a range of factors, including potential legislative amendments and the ever-evolving competitive terrain. As negotiations gear up to commence in 2026, the biotech and pharmaceutical industries stand poised for transformative change. The potential for an uptick in biotech acquisitions sets the stage for a dynamic and evolving investment landscape – which investors should closely monitor.
