Impacts Of The Inflation Reduction Act (IRA)

By Louis Garguilo, Chief Editor, Outsourced Pharma

Jesse Mendelsohn, Senior Vice President at revenue optimization company Model N, is an analyst/consultant in “pharmaceutical regulatory compliance and government pricing.” He manages a life sciences group of over 100 consultants.

Practically speaking, he’s a revenue management-software guru to our industry.

Obviously, he says, there are always important milestones and events transpiring at biopharma organizations, but based on his organization’s conversations, currently the biggest disruptor – particularly to the branded pharmaceutical industry – is the Inflation Reduction Act (IRA), 2023 legislation passed by Congress and signed into law by President Biden.

Of the 700 pages, “almost 200 are related to pharma,” says Mendelsohn. “It's mainly a law focused on drug pricing for pharmaceuticals.”

The IRA refers to this as a ‘price negotiation’ with Pharma, but in practice there isn’t much negotiation.

“Pharma has to turn over an enormous amount of data, and then Medicare says here's your price for this drug,” is how Mendelsohn describes it.

The aftershocks of this legislation, including to contract development and manufacturing, are only now starting to be understood.

Along with a good deal of “regulatory-guidance ambiguity,” says Mendelsohn, “overall there's a basic understanding of what the law and guidance say in words, but more than a year later, what this means for future pipelines and product launches is unclear.”

Pharma Blacklist

The IRA affects both Big Pharma and biotechs, as well as their relationships with external partners.

“For Big Pharma, even if you aren’t on the first lists for “price negotiation” vis-à-vis Medicare, prepare to make future lists,” warns Mendelsohn. “That’s keeping executives up at night: ‘How do we maintain margins on a drug when the price is basically capped by the federal government?’”

“You can be certain that based on the analysis of how this initial list was written, specifically how it predicts upcoming annual lists, gross-to-net calculations for potential future drugs is well underway.

“What in pharma we calculate as gross net – basically, what we sell a drug for versus what we pay out to get and keep it on market – is being analyzed aggressively to see if margins can be maintained.”

Manufacturing is always an area ripe for efforts to maintain margins. If manufacturing is outsourced to CDMOs, the squeeze on these external manufacturers can be intense – and some think counterproductive in the long run.

One thought at sponsors is to create new formulations of an approved drug, or introduce alterations/combinations so the drug might be categorized as a new formulation versus what is now subject to government price-setting.

“For Pharma, an immediate search is ongoing to find a way of pivoting development and manufacturing to differentiate from any product that is or might fall under negotiation,” says Mendelsohn.

Unfortunately, CDMOs specializing in fill-finish are already a bottleneck for all drug developers, especially biotechs with less outsourcing leverage.

These and other effects of the IRA has Mendelsohn suspecting that biotechs must at least consider moving away from certain intended research programs, and potentially altering product development plans.

“If you were intending to focus in a similar therapeutic class as one of the drugs that's now on the IRA list, or you're pretty confident based on some analysis one that will be on an upcoming list, financial analysis needs to come into even more play than ever before,” he says.

“Your financial motivation to someday launch a drug potentially competing with one capped by this ‘maximum fair price regime’ as decided by the government, is reduced.”

Ironically, the intensity on government pricing at earlier stages of an emerging biotech may impart strategies that do not serve the best interests of some patients – or actually help with drug costs.

I’ll pause momentarily: Are we exaggerating here?

Some would (and have suggested) such talk is overblown. However, at this point, I can’t see how we can brush such concerns aside as somehow invalid.

Certainly, there will be increased discussions with internal resources at drug sponsors, with their expert consultants, and trusted CDMO partners.

The pivotal questions are, “How inexpensively can we predict we can make this product? Is there a process, scale-up, and commercial potential that allows us to compete profitably in this pricing and market environment?”

“Small biotech folks trying to come up with a first molecule are probably scrambling to see if now they should enter a certain market,” says Mendelsohn. 

By the way, he adds, “I could go on about generics and biosimilar manufacturers concerned for drugs on or foreseen to be included on upcoming lists.”

In an already margin-thin business, “They might not want to create a biosimilar or generic version, given that the price is just marginally off the list price of the original product, and they get so much of their revenue in those first months, quarters, or years before the price gets subjected to pressures from me-too competition.”

Therefore, in my words, not Mendelsohn’s, the IRA appears to be a rather ham-handed attempt to lower drug pricing. Well intentioned perhaps, but its success metric might actually come at the expense of fewer products, and/or product-distorting decisions by the companies we rely on to create new medicines.

Too Specialized

Back to the CDMOs, Mendelsohn worries about a narrowing of R&D and service providers to “specializations.”

Certainly with large exceptions (i.e., recent large-market GLP-1 diabetes/obesity drugs), our industry has substantially narrowed development to smaller patient target markets, something also government directed by various “fast track” incentives for rare and orphan diseases.

“The IRA will make for an interesting dynamic for CDMOs,” says Mendelsohn.

For example, service providers will need specialized skillsets, technologies, and business models perhaps, to provide customers with the reduced production runs needed to serve small-market opportunities.

“When it comes to contract development and manufacturing, the ability to support this level of specificity in product, added complexity, at reduced scale, is going to be a question mark, and for those who can do it, a differentiator,” suggests Mendelsohn.

But will any of the above actually reduce drug prices overall?

A noteworthy politician once said, and I paraphrase, the most frightening words are “We’re from the government, and we’re here to help.”