IRA Impacts on Drug Development, Pricing, and Profitability

The Inflation Reduction Act (IRA), signed into law in 2022, represents a seismic shift in the landscape of drug pricing and healthcare policy in the United States. At its core, the act aims to reduce prescription drug costs for Medicare beneficiaries while simultaneously addressing broader economic concerns. While hailed as a victory for the U.S. government and for Medicare beneficiaries who will be saving billions in drug costs, this legislation creates a plethora of challenges and uncertainties for biopharmaceutical companies, particularly concerning profitability and investment strategies.

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Key provisions of the IRA that affect drug pricing

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There are dozens of nuanced provisions in the IRA that will significantly impact the biopharmaceutical industry. However, three may be particularly concerning for sponsors.

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1. Medicare Drug Price Negotiation: The IRA empowers the Secretary of Health and Human Services to negotiate prices for select drugs with high budget impact on Medicare Parts B and D. This provision, which will take effect in 2026, effectively mandates participation from biopharmaceutical manufacturers by imposing steep penalties for non-compliance, including up to a 95% excise tax and additional fines.

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2. Prescription Drug Inflation Rebates: Pharmaceutical manufacturers will be required to pay rebates to the federal government if their Medicare annual prices increase above the inflation rate. This applies to both Medicare Part B and Part D drugs.

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3. Medicare Part D Plan Redesign: From 2025, manufacturers will be required to provide mandatory discounts of 10% of drug costs in the initial coverage period and 20% in the catastrophic coverage period. This replaces the previous 70% discount in the coverage gap, creating a new dynamic in which manufacturers will see lower discount values for lower-cost drugs and higher values for higher-cost drugs.

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Effects on biopharmaceutical revenues

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The Congressional Budget Office (CBO) estimates that the upcoming prescription drug rebates and Medicare drug price negotiation provisions will result in combined cumulative government savings of approximately $237 billion by 2031. This steep government saving directly translates to reduced revenues for pharmaceutical manufacturers.

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The influence of this legislation is likely to spread far beyond the financial benefits it provides to the government and Medicare recipients, and the subsequent financial losses it causes to pharma and biotech companies. For starters, commercial payers such as private health insurance companies, employer-sponsored health plans, and pharmacy benefit managers are likely to seek similar discounts to those negotiated by Medicare, which could cause further revenue losses for biopharma companies. On the other hand, the $2,000 cap on out-of-pocket costs in Medicare Part D could help balance out some of biopharma’s revenue losses by making medications more affordable for patients. This might lead to more people taking medications that they would have avoided due to high costs. That said, even this expected increase in usage won’t come close to covering the huge deficits expected.

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While it’s currently impossible to predict the exact financial toll that the IRA legislation will have on the pharmaceutical industry, it's clear that there will be a substantial reduction in biopharma revenue, contrasting sharply with the industry's strong historical and expected revenue growth.

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The question is: with billions in revenue at stake, will biopharma's response to the new Medicare pricing spark a renewed effort towards R&D efficiency and cost efficiency or trigger a retreat from high-risk, high-reward research? It’s possible we may see both.

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The push towards greater efficiency

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The biopharmaceutical industry's historically cautious approach to innovation stems from stringent regulatory requirements and the inherently high-stakes nature of drug development. This caution extends to adopting new technologies like AI and real-world data analytics, despite their potential to increase efficiency and reduce costs and trial timelines. With the financial challenges posed by the IRA legislation, leveraging technology to enhance R&D efficiency is becoming less optional and more critical than ever.

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The drive towards clinical trial efficiency may manifest in different ways, each of which bears its own risks and cost savings potential. One way to potentially save sponsors significant sums is turn to adaptive trial designs which allow for more flexible and responsive research protocols. Adaptive clinical trials are designed to be more flexible than traditional trials, allowing for modifications to be made based on interim results without compromising the validity or integrity of the study. This flexibility can significantly reduce drug development costs. For example, adaptive trial designs allow for early termination of ineffective treatments, preventing unnecessary spending on later trial phases. They also enable more efficient resource allocation by adjusting sample sizes or patient stratification based on early efficacy and safety findings. This reduces the need for multiple trials and accelerates decision-making, thereby lowering operational costs like patient recruitment, site management, and data collection. Moreover, adaptive trials can simultaneously evaluate multiple treatments or dose levels, optimizing the chances of finding a successful drug candidate without needing separate trials for each variant. There’s no question that adaptive trial designs are meant to cut down on the time and financial resources required to bring a new drug to market. However, adoption has been slow due to their innately complicated planning which not all sponsors can currently handle, and higher upfront costs, which sponsors have thus far been hesitant to lay out, even with the potential of more substantial savings later on.

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The integration of AI and ML technologies in clinical trials is also likely to accelerate as a response to the new Medicare pricing, and these technologies can be applied in multiple ways. AI algorithms can sift through vast amounts of data to identify suitable trial participants more quickly and accurately, potentially reducing recruitment timelines and the high costs of recruitment-related trial delays. Machine learning models can detect patterns and insights that might be missed by traditional statistical methods, leading to more robust and faster results. Predictive modeling can help in forecasting trial outcomes, allowing for better resource allocation and risk management that will reduce trial overhead. In the future, there will likely be even more ways in which AI and ML can improve clinical trial processes.

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EHR-to-EDC streaming is also poised to become a critical tool for sponsors seeking to optimize their clinical trial processes in the new pricing era. This solution directly addresses two of the most resource-intensive aspects of clinical trials: manual data transfer and Source Data Verification (SDV). By automating the flow of relevant patient data from EHRs directly into EDC systems, sponsors can significantly reduce the time and labor costs associated with data entry, minimizing errors and ensuring that trial timelines stay on track. With trial delays estimated to cost sponsors approximately $500,000 per day in lost drug or biologic sales, the need for timeliness has never been more critical. The reduction in SDV time is also particularly noteworthy, as EHR-to-EDC streaming allows clinical research associates to focus on higher-value tasks, enhancing the overall quality and efficiency of the trial. As pharmaceutical companies navigate the challenges posed by the new Medicare landscape, EHR-to-EDC technology will emerge as a critical solution that not only cuts operational costs but also positions sponsors to maintain competitive edge through faster, more efficient trial execution.

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The case for reassessing risk

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In addition to propelling the shift towards the adoption of new technologies, the new Medicare pricing structure is likely to prompt sponsors to rethink the drugs they develop.

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Sponsors will likely be tempted to rebalance their portfolios away from diseases that predominantly affect older patients where Medicare represents a large volume of users. This could affect research into high-morbidity conditions like cancer, heart disease, and Alzheimer's. Likewise, sponsors may opt out of developing riskier drugs because of the potential for higher expenses and the reduced potential for profit.

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Some sponsors may prioritize the development of truly innovative drugs that address unmet medical needs such as rare diseases which are less likely to be vulnerable to price negotiations, especially in their early years on the market. Similarly, sponsors may be hesitant to develop treatments for common conditions where multiple treatment options already exist, as these could be prime targets for future price negotiations.

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Finally, we may see sponsors shift away from the development of treatments based upon small molecules in favor of biologics, since the IRA stipulates that price negotiations for small molecule treatments can begin after a nine-year ‘exclusivity’ grace period, whereas the grace period for biologics is thirteen years, giving biologics developers four more years to earn more from their treatments.

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Taken together, these trends could have a dramatic impact on the future landscape of the pharmaceutical industry and the availability of treatment options for all illnesses.

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Potential unintended consequences of the IRA

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In addition to predictable consequences that are expected to result from the IRA price negotiations, there may also be unintended consequences that should be considered. Manufacturers might set higher initial list prices for newly launched drugs to mitigate potential revenue losses. This could have an impact on patients and insurance companies. Uninsured people may be most impacted, as already expensive treatments may suddenly be even more difficult to pay for.
The IRA provisions may also disincentivize generic drug manufacturers from entering the market if the pricing advantage relative to Medicare-negotiated branded drugs becomes less attractive.

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The Inflation Reduction Act represents a pivotal moment for the biopharmaceutical industry, introducing unprecedented pricing controls and negotiation mechanisms that will significantly impact profitability. While the act aims to reduce drug costs and increase access for patients, it also introduces considerable uncertainty for manufacturers.

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The industry now faces a delicate balancing act: maintaining profitability while continuing to invest in innovative therapies that address critical unmet medical needs. This may necessitate fundamental shifts in R&D focus, portfolio management, and business strategies. Companies that can successfully navigate this new landscape by optimizing their portfolios, enhancing their value demonstration capabilities, and adapting their organizational structures and clinical trial procedures, will be best positioned to thrive in this new era of drug pricing.

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