Outsourcing Through An Industry-Government Battle

By Louis Garguilo, Chief Editor, Outsourced Pharma

I had no intention to write further about the Inflation Reduction Act (IRA) than I did in part one,

But analyst/consultant Jesse Mendelsohn of Model N (a revenue optimization company) informs me there’s more we need to cover for our readers.   

The Short-And-Long Of It

Second in the realm of controversial regarding the “negotiation” over prices on the IRS drug list for Medicare (see part one), is, as readers assuredly have noted, small-molecule drugs get shorter IP-timespans than biologics, i.e., 7 years post approval for the former, 11 years for the latter.

Some suggest this is not enough to alter discovery/development behavior at sponsors; others think even small changes in behavior can have ripple effects, and those would also impact certain CDMOs.

Now, a PhRMA survey concludes 63% of member companies expect to shift at least some of their r&d investment away from small molecules as a result of the new legislation.

However, a lot of this movement, Mendelsohn reminds us, has been ongoing for almost 20 years. And so has the movement to more complicated small-molecule programs and formulations (and fewer projects). 

CDMOs have recognized they must pivot, for example, to cell and gene, RNA, oligonucleotide, and other areas outside of traditional small molecules to serve evolving pipelines at emerging (and existing) customers.

“This trend has been continuous,” says Mendelsohn. Perhaps the IRS is, as proponents suggest, simply applying an accelerant.

“Whether it's for the sake of getting an indicator for a disease that hasn't been treated before, or potentially getting a unique ‘J-Code in Medicare so sales aren't pooled with another product,” this has been a part of our industry.

(J-Codes are part of the Healthcare Common Procedure Coding System (HCPCS) used by Medicare and others to identify injectable drugs that ordinarily cannot be self-administered, chemotherapy drugs, and some orally administered drugs.)

“Differentiation is only going to be turbocharged now,” says Mendelsohn.

However, he adds, “to the concern of whether Pharma will stop looking at small molecules and start looking at biologics, I don't think that's coming into play in any major way.”

“As long as Pharma sees a patient population and a profitability for that drug, they'll still chase it. But core to decision-making is within the therapeutic class for that drug, how are they going to differentiate either molecularly or with better efficacy from what's already on the market, or drugs they think will come on the market.”

For our focus and within all this, most acute for CDMOs to differentiate themselves in the eyes of customers concerned about IRA ramifications is:

• proffering new-science capabilities, new technologies and beneficial platforms
• exhibiting new-found flexibility in business models and scheduling
• maintaining the latest instrumentation and right-sized equipment
• hiring and holding onto a highly skilled workforce
• potentially implementing AI/ML solutions

How’d We Get Here?

Although somewhat outside our focus on outsourcing, but I ask Mendelsohn how did the pharma industry allow Congress and the current administration do pass this law? Big Pharma is an influential industry, with a powerful lobby, and a large contributor to political coffers.

“It is interesting,” he replies. From conversations with over 100 consultants he oversees who engage with executives at revenue-generating Pharma and Bio (and aspiring revenue-generators), he's gleaned that first, the IRA includes rebates that must be paid to the government for drugs whose prices increase faster than the rate of inflation.

“Manufacturers appear to have been waiting for and expecting this. If your drug-price increases beyond the rate of inflation, you owe that as a rebate back to the government,” and although with a degree of reticent, this was acquiesced..

“That system has existed in Medicaid for quite some time, and at the Veterans Administration. The federal-supplies schedule also has a price cap at last year's price plus the rate of inflation.”

“So that component of the IRA came with the feeling, ‘Okay, it was a matter of time before this went to Medicare.’”

But here’s where it hurts:

“The real and elevated concern over price negotiation is the subsequent regulatory guidance rather than the letter of the law itself.”

The Pain Point

Manufacturers negotiate pricing for their commercial drugs. They sit down with a health plan, pharmacy benefit manager (PBM), hospital, or group purchase organization, and discuss supply/volume that will be purchased, whether competitor drugs will also be purchased, etc.

That's how the industry does business, so initially Pharma was neutral when it came to the IRA, believes Mendelsohn.

“But what I hear from manufacturers is that's not the way the IRA is written for negotiating with Medicare.”

The way the law was passed, subsequent regulatory guidance from Center for Medicare and Medicaid Services (CMS) establishes how the ‘negotiation’ will actually happen.

“That's where the outcry is apparent,” he says.

And that's why Big Pharma is suing the U.S. government, including among others Merck, Bristol Myers Squibb, and Johnson & Johnson, as well as the trade organization PhRMA.

These (growing number of) lawsuits claim specifically that the price negotiations by Medicare run afoul of the First and Fifth Amendments of the US Constitution.

“Pharma thought this was going to be an actual negotiation,” concludes Mendelsohn. (Again, see part one.)

“The drug sponsors thought this was going to be a ‘Let's sit down and figure out volumes and these types of things,’ versus what we’re seeing now, which is – I'm oversimplifying – a transfer of an enormous number of data points, and the government churning that data and dictating your price.”

So the stark reality, as it appears to this editor, is that Pharma got politically hoodwinked, and we’ll have to see where the courts ultimately come down on this.

In the meantime, drug and therapy sponsors like OutsourcedPharma.com readers, and your CDMOs, will have to make decisions in the shadow of uncertainty.