IRA’s Impact on Industry Revenues, R&D Will Be Modest: Study
01 Feb 2024
Pictured: Stacks of dollar bills/iStock, mirza kadic
The Inflation Reduction Act’s Drug Price Negotiation Program does not pose a substantial threat to the industry’s top-selling assets, nor will it disincentivize funding for research and development, according to new research published Wednesday in the journal Nature Biotechnology.
The paper—penned by researchers from the Harvard Kennedy School of Government, Harvard Business School, Weill Cornell Medical College and Questrom School of Business at Boston University—makes the case that Medicare drug price negotiations will only have a “modest” effect on industry revenues, and that it “will not likely result in large-scale defunding of research and development.”
To arrive at their conclusions, the researchers took a retrospective approach looking at 74 drugs across 31 companies and what their negotiated prices in 2022 would have been if the program had taken effect in 2012. Their analysis showed that negotiations overall would have affected $43.2 billion of 2022 revenues, representing 6% of the $742 billion cumulative global revenues of the 31 companies.
Relative to the entire industry, sales affected by the negotiations comprised just 4% of the total global revenue. “The range of 2022 revenue reductions we calculated is of the same order of magnitude as annual sales at risk of being lost due to new patent expirations,” the researchers wrote.
When it comes to the IRA’s potential impact on R&D investment, the authors argued that a dip in revenue does not necessarily and proportionally translate to lower support for research. “[M]arginal changes in revenue for individual companies are not necessarily proportional to marginal changes in R&D,” they noted, pointing out that biopharma’s windfall during COVID-19 was not entirely pumped back into R&D.
Instead, the Medicare Drug Price Negotiation Program might warp companies’ pipelines, incentivizing the development of therapies that are unlikely to be eligible for negotiations.
“Changes in the net present value of drug-development projects will be concentrated in medicines where Medicare is a notable purchaser and where the ratio between expected revenue and development costs was only marginally positive before the IRA,” according to the researchers, who advised that “policymakers considering narrowing or expanding the scope of Medicare negotiation should carefully consider the tradeoffs across medicines with diverse characteristics.”
Still, the authors find little to worry about as many companies regularly skip or stop development projects due to “bandwidth concerns or other frictions.” In these cases, the IRA will not necessarily increase the number of shelved projects but instead could open resources for a candidate that would otherwise not have entered development.
“The net effect of the IRA is the sum of the lost innovation and the gained innovation,” the authors concluded.
Wednesday’s study comes as the Centers for Medicare and Medicaid Services is expected to submit by Feb. 1 its opening proposals for maximum fair prices for each of the 10 drugs selected for the first rounds of negotiations. Analysts expect CMS to seek steep discounts on these drugs, which their manufacturers are likely to push back on.
Negotiations will run through the spring and summer of 2024, with the final prices to be published by Sept. 1. The new pricing will take effect in 2026.
Tristan Manalac is an independent science writer based in Metro Manila, Philippines. Reach out to him on LinkedIn or email him at tristan@tristanmanalac.com or tristan.manalac@biospace.com.
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