By Chris Hamill-Stewart
The passage of the Inflation Reduction Act (IRA) in 2022 signaled the beginning of a long-expected legislative effort to address drug pricing and Medicare expenditure.
Unfortunately, the effect of the IRA on the biopharmaceutical industry could be disastrous and cripple the industry for years to come, creating a ripple effect that reduces innovation and leaves patients without the medicines they so desperately need. Companies have warned of perennially lower valuations and reduced ability to raise much-needed capital. Small-molecule drugs, long the shining star of the pharmaceutical industry, are going to be hit particularly hard by the IRA. Small biotechs fear reduced investment, partnership interest and innovation around their small-molecule programs due to the reduced profit potential of these assets. Many companies have already invested large sums into R&D for promising treatments. Now, with potential changes brought about by the IRA, the financial viability of those projects is called into question.
In many ways, even the largest industry players are powerless to stop changes to drug pricing that many in the public see as long overdue. The IRA has three provisions that impact the biopharmaceutical industry, but the most influential is the direct negotiation provision, which grants Medicare the authority to negotiate drug prices directly with biopharma and biotech companies. In August 2023, the U.S. Government announced the first 10 drugs up for negotiation. New prices are set to go into effect in January 2026.
A recent report from Vital Transformation highlights the long-term impact of the IRA on the biopharma industry and the results are alarming. According to the report, the IRA could reduce revenues by up to 40%. Duane Schulthess, CEO at Vital Transformation, says, “There appears to be a belief amongst those who have never worked for or invested in the biopharma sector that the IRA’s impact is limited, as it “only” targets the top spend drugs each year. However, the IRA’s impact grows over time–cumulatively affecting 100 drugs over the next 10 years. The revenue reductions on these drugs are so large that 37 drugs currently available today would likely have not come to market if the IRA policies had been in place over the past decade.
Looking forward, we estimate that, because of the IRA, as many as 139 therapies may not be developed and thus will not get to patients over the next 10 years.” This means that life-saving innovations for cancer, autoimmune diseases and many others may never come to market. Stifled innovation is not the only impact, however, as Vital Transformation estimates a loss of between 66,800 and 135,900 direct jobs in the U.S. biopharma ecosystem.
As the industry was already grappling with potential IRA fallout, another blow came in December 2023 when the Biden administration announced a framework to march in on taxpayer-funded patents if drugs developed this way are not marketed at a “reasonable price.” Government funding is often used for biomedical research—eventually leading to the development of pharmaceuticals. The use of march- in rights to take patents away would have disastrous effects on the public-private partnerships that fuel the biopharma industry. The industry will shy away from partnering with academia or other institutions conducting research using government funding, stifling innovation and making it even more difficult for academic research to translate to the clinic.
The Inflation Reduction Act and the march-in rights policy pose substantial challenges for the biopharmaceutical industry—threatening innovation, revenue and jobs. These changes could significantly reshape the landscape of drug development and patient access to new therapies, marking a critical turning point for the industry’s future.