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“We finally, after all these years, beat Big Pharma when I signed the Inflation Reduction Act to get seniors and taxpayers a better deal.”

In a speech given in December 2023 at the National Institutes of Health (NIH) in Maryland, President Biden made it clear that the IRA and upcoming drug price negotiations were a win over Big Pharma, which he accused of “ripping off” Medicare and the American people with high drug prices.

Although price negotiations included in the IRA will only into effect in 2026, the Act remains the top regulatory priority for Big Pharma and association groups halfway into 2024. In 2023, the IRA was signed into law, thus allowing Medicare (which covers 66 million Americans mostly aged 65 and older) to negotiate prices of the most costly drugs. The aim (according to the Biden Administration): Saving the government and taxpayers US$160 billion over the next 10 years.

In response, pharma firms and industry groups filed last year over half a dozen lawsuits against drug negotiations taking place, calling them “unlawful”. Why then has this seemingly noble Act received so much pushback from the industry? Mostly because Big Pharma draws on the revenue and fatter margins generated from their lead drugs (like Pfizer’s Eliquis, J&J’s Xarelto, or Lilly’s Jardiance) to fund innovation and R&D into riskier assets. Indeed, the IRA continues to resonate as a legislative defeat for Big Pharma, and the price negotiations that will ultimately issue from it are seen as a strong headwind for the industry’s capacity to innovate.

Modality shifts ahead?
The IRA has already earned itself a couple of unsavoury nicknames amongst industry leaders, such as the “Innovation Reduction Act” or “Small Molecule Penalty”. The latter is of particular interest because it implies that drugmakers and investors alike might be moving from a particularly penalized modality to ensure margins and returns. Gil Roth, president of PBOA, an industry group representing CDMOs, expanded: “The IRA’s section on Medicare drug pricing negotiation marks a momentous shift in US policy. The impact of the IRA will be wide-ranging and has led to legal challenges. The R&D landscape might strongly shift toward biologics at the expense of small molecules.”

In March 2024, Pfizer revealed intentions to transition its focus from small molecule therapies within its oncology pipeline to biologics. This strategic shift aligns Pfizer with a trend observed among several pharmaceutical companies, which are increasingly closing their small molecule programs: Vir Biotechnology has halted the development of its small molecule pipeline focused on innate immunity, including a potential hepatitis B cure. Genentech is considering postponing the release of its small-molecule oncology drugs until it obtains approval for a broader patient demographic. Protagonist Therapeutics revealed intentions to discontinue a small molecule treatment for ulcerative colitis in its Q4 earnings report for 2023.

Ironically, incentives towards biologics provided in the IRA come at a time when the scientific potential for small molecules has never been higher: 34 of the 55 novel drugs approved by the FDA in 2023 were small molecules. The IRA however states that small molecule drugs become eligible for price negotiations four years earlier than biologics, potentially resulting in missed opportunities for significant sales revenue. Debbie Hart, president and CEO of BioNJ, explained the challenge: “One troubling aspect is the differential treatment between small and large molecules, with small molecule patent life reduced to 9 years compared to the 13-year timeframe for large molecules. The reduction from 13 to 9 years is discouraging investment in small molecule therapeutic development. Estimates from Vital Transformation suggest that numerous drugs currently available would not have reached the market under IRA policies, and as many as 139 therapies may not be developed over the next decade due to these regulations.”

If the current law remains unchanged, it will take years to comprehend fully the ramifications of the small molecule penalty. This is because small molecule drugs currently undergoing trials and nearing approval will continue to be introduced in the coming years, largely due to investment decisions made well before the legislation was enacted. It is likely to be a decade before we experience the full consequences of the absence of innovative, potentially life-saving treatments that never came to fruition. But a bipartisan group of lawmakers is also striving to reverse the small molecule penalty. The Ensuring Pathways to Innovative Cures (EPIC) Act proposes granting small molecule drugs the same 13-year exemption from Medicare price negotiations that biologics receive, thus aligning investment incentives for both classes at a manageable level. The EPIC Act would ensure that whether a drug is a small molecule or a biologic, the most promising candidates receive equal enthusiasm from investors.

Overall, the amount of scaled-back programs poses the harsh question of the long-term threat to innovation in the US – and ultimately to investment. While it is too early to assess if the IRA will affect the investment attractiveness of the US life sciences industry, prominent voices are raising the alarm.

The 2024 Presidential election: Smokescreen or real impact on pharma policy?
While November is still a long way off, the industry finds itself between Scylla and Charybdis: Both the Democrat and Republican parties have expressed a will to reform the industry. With drug pricing being a core tenet of Biden’s policy, a win in November would make any amendments to the IRA challenging. And while Trump spoke against the IRA earlier in 2023, his campaign is also rallying votes around drug pricing. Unfortunately for the industry, the reduction of drug prices seems to be the only policy that both candidates agree on, a unique feat in today’s divided political climate. For Christiana Bardon, MPM Capital’s co-managing partner, the election will only result in a status-quo for the industry: “Regarding the presidential election in 2024, Republicans are considered to be more supportive of our industry than Democrats so I think that the presidential election will be neutral to positive.”

The IRA changed the policy and regulatory landscapes forever. Regulatory compliance consultancies, industry groups, and pharma firms alike are assessing both the short-term and long-term effects of the IRA. This involves reassessing their product portfolios to identify disease areas or products less susceptible to government price controls and stress-testing their current pricing approaches to shield products from IRA-related rebates while maintaining optimal return on investment. Moreover, manufacturers are exploring opportunities in other markets where market entry barriers are less stringent to ensure sustainable growth while minimizing risks.

For now, the industry is coming out of a record year for drug approvals, with the FDA approving a five-year high of 55 innovative drugs in 2023. The coming years will determine to what extent will this innovative momentum be restrained. Going forward, manufacturers must urgently reassess their fundamental assumptions regarding budgets, underlying costs, profitability, and commercialization strategies, among other factors. For Big Pharma, what is certain is that the forecast portends to more stringent regulations, scrutiny from lawmakers, and pushback from Congress. However, for an industry used to reinventing itself, this changing regulatory environment could provide the opportunity to shift bets across different modalities.