Pipeline puzzle: US Inflation Reduction Act

Legislative changes have been important catalysts for shifts in drug development priorities and strategies over the past several decades. For example, the passage of the Orphan Drug Act of 1983 (ODA) spurred innovation in rare diseases that had largely been ignored by the pharmaceutical industry previously.

Prior to 1983, only ten drugs had been approved by the US Food and Drug Administration (FDA) to treat such rare diseases. Between 1983 and 2014, orphan drugs accounted for 25% of all approved new molecular entities (NMEs).

The Inflation Reduction Act of 2022 (referred to here as ‘the Act’) is a landmark piece of legislation for the biopharmaceutical industry and is poised to have a similar impact on drug development priorities and commercialisation strategies. This article looks at how manufacturers are likely to adjust their development, portfolio and launch strategies in response to the incentives and disincentives that the Act creates, with both intended and unintended consequences for patients.

The Act’s most publicised provision – with arguably the greatest impact on drug development priorities – grants the Secretary of Health and Human Services (HHS) the ability to ‘negotiate’ discounts on behalf of Medicare for a subset of drugs. The law mandates minimum discounts for negotiated drugs, with 25-60% off the non-federal Average Manufacturer Price (AMP) depending on time since approval. HHS has already published the list of the first ten Part D drugs to be negotiated with ‘maximum fair prices’ (MFPs) taking effect in 2026. In subsequent years, 15 to 20 additional drugs will be eligible for negotiation each year, with Part B drugs becoming eligible in 2028.

The Medicare price negotiation eligibility and selection criteria create some obvious and immediate distortions in the long-term ROI calculations for different drug classes and therapeutic areas. Small molecule drugs are not eligible to be selected for negotiation until seven years following initial FDA approval; in contrast, biologics are not eligible until 11 years post-FDA approval. This discrepancy gives biologics a longer pre-negotiation runway to realise a return on their substantial development costs, likely yielding a more favourable net present value (NPV) calculation at the time of investment vs small molecule drugs targeting the same indication.

‘The US Act is forcing manufacturers to rethink conventional wisdom about clinical development, launch sequencing and life cycle management decisions’

Additionally, since selection for negotiation is determined by rank-ordering eligible drugs based on Medicare spend, drugs with low Medicare exposure are by definition more insulated from price negotiation risk. This reality may help boost investment in therapies for diseases that manifest in childhood or young adulthood (including paediatric cancers and many genetic disorders) that historically have been subject to underinvestment due to their high Medicaid exposure.

Beyond these eligibility and selection criteria, the Act contains a litany of notable negotiation exclusions and exemptions that biopharmaceutical manufacturers have begun to consider in their pipeline planning activities. Drugs and biologics whose sole indication carries an orphan designation are ineligible for negotiation, which – when paired with the incentives created by the ODA – is likely to further accelerate the pace of orphan drug development. The Act also exempts blood plasma-derived products from Medicare price negotiation. Although the exact definition that the Centers for Medicare and Medicaid Services (CMS) and HHS will use to determine eligibility for this exemption remains ambiguous, a review of the FDA’s Approved Blood Products website would suggest that most haemophilia factor products and vaccines are likely to be exempt. Many cell and gene therapies, including chimeric antigen receptor T-cell (CAR T) therapies, are likely to be exempt as well, creating an additional boon for this growing area of drug development. The Act also affords temporary protection (until the 2029 applicability year) to ‘small biotech’ companies that derive a majority of their revenue from one drug, which in the near term may make certain co-commercialisation partnership models between these small biotechs and larger manufacturers more attractive than direct acquisitions.

As HHS announces drug selections for subsequent rounds of Medicare price negotiation, manufacturers will need to continuously reevaluate the commercial potential of launching new entrants into specific competitive therapeutic classes. The presence of one or more negotiated drugs will place downward net pricing pressure on entire drug classes as payers leverage maximum fair prices (MFPs) to extract rebates from manufacturers to maintain favourable access to their medicines. This is especially true for Part B drugs, where Medicare negotiation will result in spillover effects to the commercial market, as MFP rebates are factored into the Average Sales Price (ASP) calculation that often forms the basis for commercial payer reimbursement. As this process plays out, price erosion will reduce the attractiveness of launching next-generation drugs into these indications, ultimately depressing investment and patient access to new treatments.

Putnam’s Medicare Price Negotiation Database predicts that the therapeutic classes most impacted by Medicare price negotiation are likely to differ substantially in future rounds. While the first round of selections disproportionately affected cardiovascular and diabetes treatments (with seven of the ten selected drugs carrying primary indications in these areas), the 2027 and 2028 selections are likely to see greater impact in oncology, respiratory and metabolic indications.

Furthermore, the threshold for drug selection is likely to decline as HHS works its way down the list of mega-blockbusters. Putnam analysis predicts that the level of Medicare spend that places a drug at high risk of negotiation will decline from $2.5bn in 2026 to $1.3bn in 2027, $900m in 2028 and $500m to $600m in 2029. Manufacturers may seek to identify new ‘white space sweet spots’ in the drug development landscape: novel drug classes (where pricing potential is not adversely affected by the presence of a negotiated drug) with peak revenue potential large enough to be commercially attractive but small enough to minimise the risk of negotiation.

In addition to impacting which therapeutic areas and drug classes biopharma companies are likely to target, the Act is forcing manufacturers to rethink conventional wisdom about clinical development, launch sequencing and life cycle management decisions.

Drug manufacturers have typically followed a ‘land-and-expand’ model for indication sequencing, starting first with smaller, less costly trials of NMEs in a narrow or heavily pretreated population to de-risk the asset and subsequently pursuing indications for larger populations. In a post-Act world where a first approval starts the Medicare negotiation clock, that type of indication building over ten or more years is unlikely to be viable. Manufacturers may feel compelled to flip the script and pursue larger indications first and the smaller indications subsequently (or not at all), with wide-ranging implications on approval success rates, development programme costs and patient access to new treatments.

‘Uncertainty remains regarding the implementation of the programme and its ultimate effect on near-term revenue potential for some of the industry’s biggest blockbusters’

Manufacturers may also reconsider the sequencing of product launches in key global markets. Historically, initial regulatory filings in the US have been prioritised due to the market’s large size and relative pricing freedom. Post-Act, drug developers may consider launching first and indication-building in other highly developed markets, delaying US launch until regulatory filings for multiple indications can be submitted simultaneously, thus maximising the product’s commercial opportunity prior to Medicare price negotiation eligibility.

Life cycle management (LCM) strategies, which often include phased development of new drug formulations, are also being revisited. Under the Act, all formulations of a drug containing the same active moiety and commercialised by the same primary manufacturer are aggregated for the purposes of negotiation selection, with the approval date for the first formulation being used to determine the year of first eligibility. As a result, launching a subcutaneous formulation of an originally intravenous (IV) drug (without any other modifications) is unlikely to remain an effective LCM strategy. In response, manufacturers may consider new formulations that contain more active moieties (eg, IV Rituxan vs subcutaneous Rituxan Hycela) or a different combination of moieties vs the original formulation to preserve the value of product franchises.

With the first round of Medicare price negotiations set to begin in early 2024 and multiple pending lawsuits challenging the constitutionality of the Act, uncertainty remains regarding the implementation of the programme and its ultimate effect on near-term revenue potential for some of the industry’s biggest blockbusters. With impending threats to these vital revenue streams, drug developers have already begun to think critically about how to insulate their pipelines from the Act-imposed risks. A deep understanding of negotiation eligibility criteria, potential exemptions and the therapeutic areas most likely to be impacted over time can help manufacturers mitigate these risks.

References are available on request.