The implications of the Inflation Reduction Act for the life sciences industry have gone from distant speculation to a stark reality in the wake of initial drug pricing negotiation offers made last week by the agency that runs Medicare.
Although the Centers for Medicare and Medicaid Services didn’t disclose the initial prices to kickstart the negotiations — what opponents prefer to call “price control” — investors are having trouble holding onto optimism, particularly when it comes to the future of small molecules.
The negotiations are designed to lower drug prices for older patients who are eligible for the program. And small molecules, which include blockbusters like Bristol Myers Squibb and Pfizer’s blood thinner Eliquis and AbbVie and Johnson & Johnson’s cancer treatment Imbruvica, receive a shorter nine-year period of exemption from negotiation compared to biologic medicines like AbbVie’s Humira or Merck & Co.’s Keytruda. Biologics are exempt for 13 years.
With that four-year gap in exemption, venture capitalists are worried the incentives to invest in small molecules will dwindle as there’s less time to recoup their costs — and the risks become more acute when Medicare pays drastically lower prices, said John Stanford, executive director of the life science venture capital advocacy group Incubate Coalition.
“I think the [IRA] cuts will, for political purposes, need to be severe,” Stanford said. “And they’ll signal a narrowing of the window in which we can recoup investments.”
To mitigate the added risk for small molecule drugs, lawmakers in Congress have introduced a bipartisan bill to extend the small molecule exemption so it’s equal to biologics. Incubate supports the bill, and Stanford said the equalization of the negotiation period would keep the investment thesis for small molecules on an even keel with the rest of the industry.
Pricing levers
Allowing Medicare to negotiate prices is economically akin to generics cutting in on a brand’s selling power, said Stanford. And while that is precisely how the law is intended to bring prices down for patients, investors see it as adding further risk to the already risky business of developing drugs.
“I think what we’re going to see when the prices do become public is a mechanism that changes the business case for these products in the same way that going generic impacts a traditional small molecule product,” Stanford said. “With that in mind, it will change the industry by creating incentives and disincentives.”
Because the law will only impact patients eligible for Medicare, the negotiation process is likely to cause drugmakers to skew toward small molecule medicines that aren’t primarily used by the older population. Small molecule drugs for diseases like cystic fibrosis, which affects younger patients, will be less impacted. On the other hand, drugs like the cardiovascular blockbuster Eliquis, which landed on Medicare’s first list of 10 drugs, would be hit hard.
“If we don’t deal with this now, every year that goes by there are fewer small molecules out serving patients in a 10- to 15-year time horizon."
John Stanford
Executive director, Incubate Coalition
Pharma companies have already begun to blame the upcoming negotiation on cuts to their small molecule pipeline. Genentech executives have argued, for instance, that the program could spur the company to slow development in areas with smaller patient populations to make better use of a drug’s limited time on the market. Pharma giant Novartis has signaled similar stalling tactics, and of course, several companies have taken to the courts to fight the legislation.
“The release of the prices is going to be the final nail in the coffin by giving certainty that the government is demanding dramatic and draconian cuts to prices,” Stanford said. “Because then the industry can commit to new business strategies that respond by taking steps to mitigate those impacts.”
Not so black and white
But an investment slowdown isn’t a complete shutdown of the industry, Stanford said. Rather, he believes the negotiation process would slow investment in science “around the edges.”
“There still will be investment, and some of those investments will be successful,” Stanford said. “But we’re going to see … less in rare diseases, less in small molecule, less in oncology, and those consequences are already playing out in real time.”
Adding to the uncertainty, investment trends are difficult to parse out, especially in a tough year for biopharma markets.
“Are funds struggling to raise because of the IRA or because the market is so bad? It’s a little bit of both,” Stanford said. “If you’re an endowment or a pension fund deciding between life sciences and other technology investments, there is a growing sense this is the beginning of the end.”
Private venture capital has put between $40 billion and $50 billion into the marketplace over the last couple of years, Stanford estimated, and “that doesn’t disappear overnight,” he said. But as incentives are removed and investors take fewer risks, negotiated price reductions chip away at progress.
The biologic equation
If pricing exemptions equalize small molecules and biologics patents to keep the balances even, what happens then to biologic investment? The reason for the disparity in the first place was that biologics have historically been more time-consuming and costly to develop.
But times have changed, Stanford said.
“The misconception and confusion dates back to a time when biologics were being developed in the early 2000s — as we were creating trade deals, we fought for something called 12-year regulatory data protection, because you can’t patent many of the elements of a biologic,” Stanford said. “Biologics have matured substantially, and from our perspective, if both [biologics and small molecules] are at 13, the disincentives are mitigated.”
What’s most important for investors is how far into the future they can count on seeing a drug grow in profitability, and the uncertainty of the negotiation process is what keeps them up at night.
“If we don’t deal with this now, every year that goes by there are fewer small molecules out serving patients in a 10- to 15-year time horizon,” Stanford said.
The industry is still fighting the IRA tooth and nail, and Stanford said certain changes like eliminating the small molecule penalty can help drugmakers, investors and Medicare negotiators see eye to eye.
“With the right fixes, we can continue to operate — that said, if you take $100 billion out of an industry, you are going to get less innovation,” Stanford said. “So it may not necessarily be that the sky is falling everywhere all the time for everyone, but for some people, the sky will be falling because of this new regime.”
