A significant section of the Inflation Reduction Act (H.R. 5376) recently signed into law was targeted at lowering public spending on prescription drugs (Subtitle B: Prescription Drug Pricing Reform). The new laws include Medicare negotiation and includes a provision that disproportionately affects small molecules which have triggered reactions throughout the industry from the extreme of “this is the end of small molecule drug discovery as we know it” to “this may not cause permanent damage.” But what’s actually in the legislation, and what does it mean in practice for drug discovery professionals?
Here, commercial reviewer Anthony Vaganos, helps explain what’s in the act and how it impacts drug hunters.
What is the Inflation Reduction Act and What’s Relevant to Drug Hunters?
On August 16th, President Biden signed the $700 billion Inflation Reduction Act of 2022 into law, which includes reforms covering a wide variety of areas including climate change, healthcare, and taxation. The healthcare specific portion of the act is estimated to lower the government deficit by $237 billion to over $265 billion over the next decade based on CBO and senate estimates. Included in the bill are healthcare reforms targeted at lowering prescription drug spending which largely impact government sponsored healthcare plans such as Medicare (covers all Americans, ≥65 years old) and Medicaid/CHIP (covers 11 – 37% of eligible patients depending on the state) but also includes changes to commercial insurance procured through Affordable Care Act marketplace.
Key provisions in the bill relevant to drug hunters are:
- A new Medicare drug price negotiation system starting in 2026
- Elimination of out-of-pocket patient costs for vaccines covered by Medicare/Medicaid
- Lower out-of-pocket maximums for Medicare beneficiaries
Lower Out-of-Pocket Costs Allow More Patients to Benefit from Past Drug Discovery Achievements
Some of these policies will help improve access to the novel drugs (including vaccines) that drug discovery professionals are proud to contribute to, which scientists will celebrate. Due to elimination of out of pocket patient costs for vaccines covered by Medicare/Medicaid access to adult vaccines will improve. For perspective, 4.1 million Medicare beneficiaries received a vaccine in 2022 and half of states did not cover all vaccines recommended by the Advisory Committee on Immunization Practices.
More older adults will also benefit from drug hunters’ previous pursuits to cure cancer, multiple sclerosis, and other serious diseases due to lower out of pocket maximums for Medicare beneficiaries. More than 1 million Medicare beneficiaries faced out of pocket costs >$2,000 in a year, primarily impacting patients with cancer, multiple sclerosis and hepatitis C. The act reduces the patient out of pocket cost maximum for Medicare Part D drugs to $2,000 which will improve affordability of high cost drugs and enable more patients to access these treatments developed by drug discovery scientists.
How the Medicare Drug Price Negotiation System Affects Investments in Drug Discovery R&D
The Medicare drug price negotiation system is more controversial to the industry, given the fact that if implemented, it will reduce revenues from novel drugs and likely reduce future investment in drug discovery and development.
A Congressional Budget Office estimates from an earlier version of the act suggest that over the next 30 years, 15 new molecular entites will not make it to market due to the changes in the Inflation Act. Others disagree with the CBO estimate and believe the legislation will have a much greater impact on small molecule NMEs.
A landmark part of the act is the requirement of Medicare to negotiate the prices for the 15 drugs with highest Medicare spend without generic and/or biosimilar substitutions across Part B (hospital drugs) and D (at-home drugs), with negotiated price implementation starting in 2026. The number of drugs eligible for negotiation increases annually until 2031, when 100 drugs will be subject to price negotiation.
Negotiation involves Medicare offering drug manufacturers a lower price (<75% of previous price) based on several criteria, including whether the manufacturer has recouped its R&D cost and whether the drug “represents a therapeutic advance,” among other factors. Manufacturers may counteroffer based on the same factors. While there is little detail on how a counteroffer would be handled, this would likely result in a pricing model similar to Germany or other EU markets where there isn’t much of a real counteroffer process, and instead is more of a “accept the offer or pull your drug from the market” situation.
There are three key parts of the negotiation system that impact how prices will be negotiated:
- only a certain number of drugs with the highest spend can be subject to negotiation per year
- the drug must not have a generic/biosimilar equivalent
- the drug must have been on the market for at least 9 years for a small molecule and 13 years for a biologic.
The expected declines in drug revenue relative to today’s system is therefore a function of:
- the drug’s likelihood to be among the top 100 contributors to Medicare drug spending by 2031
- the relative contribution of Medicare to the drug’s revenue vs. from private health insurance
- the expected time it would take for a generic/biosimilar equivalent to come to market (inversely correlated to expected time spend in trials due to shorter patent life at approval)
Once an NME is de-risked through a positive Ph. III registrational trial, significant new investment is triggered to expand the medicine into new indications. The combination of these new indications is typically what enables a medicine to achieve blockbuster status (see the number of indications Humira has). However, trials for these new indications take time and revenues aggregate many years after the first approval. These additional indications can be critical to making a molecule profitable overall and therefore worth of development to begin with. If business cases for these later indications isn’t positive, it could have a cascading effect on investment in therapy where initial investment is limited or doesn’t happen unless the opportunity is a single, blockbuster size indication.
An area particularly likely to suffer is oncology medicines for which patients are typically elderly (and on Medicare), development times are long, and revenues are particularly skewed to later years. Oncology development typically involves long, challenging trials in late-stage, advanced or metastatic cancer with small patient populations and expected revenues before trials can finally be conducted for earlier stage cancers where the drugs may be curative and have a greater impact in a larger group of patients. Other areas with long trials and large elderly patient populations, such as Alzheimer’s disease, cardiovascular disease, aging, among others are likely to see reduced investment for this reason.
How the Medicare Drug Price Negotiation System Disproportionately Impacts Small Molecule Drug Discovery
The much shorter time window for small molecule blockbusters vs. biologics blockbusters also disproportionately impacts the expected return from small molecule programs for such indications. The average time on market for a novel drug before a generic equivalent enters was 13 years based on drugs that had generic launches in 2011-2012. On average, this means that biologic drugs under the negotiation system may not actually see a price negotiation as a biosimilar equivalent may already be available; however, on average, small molecule drugs will have to negotiate price 4 years earlier than a generic would have entered.
For these reasons, small molecule drugs in areas such as oncology, Alzheimer’s, aging, and cardiovascular diseases, which are intended to generate revenues from elderly patients after long trials in broadening indications, may be the most prone to reduced investment.
The Long-Term Consequences Are Still Uncertain
As the legislation was just enacted, we are still in the stage of estimates and hypotheses for the implications of this bill. From a macro-level, legislation reduces health insurance premiums and out of pocket costs for broad swaths of Americans who rely on public healthcare programs like Medicare. The majority of the act impacts Medicare policies which covers people 65 and older and those with disabilities (16% of Medicare beneficiaries), so most of the impact for drug hunters will be those focusing on drugs impacting older adults. Since the first Medicare negotiation won’t happen until 2026, it is likely that the legislation is revised before then, as the legislation would have to survive through 4 years of political changes including a presidential election, and Republicans have been quoted as wanting to remove or change it already.
What does the Inflation Reduction Act Mean for Drug Hunters?
Overall, the drug pricing reforms and healthcare components of the Inflation Reduction Act of 2022 will greatly improve patient access to medicines across a variety of insurance types form Medicare and Medicaid to commercial insurance procured through ACA marketplace. This will help to ensure that more Americans can benefit from the endeavors of drug hunters. In particular, it will make it easier for older adults to access vaccines and improve access to medicines for high-cost, serious diseases.
The main area of concern for the industry, however, will be how the Medicare drug pricing negotiation system will impact investment in research for new medications. Assuming the act is not amended significantly in the future (which is still possible given negotiated prices don’t take effect until 2026), the return on investment for small molecule research has decreased overnight. The degree to which it will decrease and the degree to which it will make ROI for certain disease areas negative (and uninvestable) remain to be understood. Based on CBO estimates, it is almost certain to result in fewer new drugs approved over time, fewer new indications studied for drugs, with fewer new indications for small molecule drugs in particular.
In the short term, billions of dollars of revenue from existing commercial blockbusters will likely disappear beyond 2026 (which will directly impact R&D spend in hardest hit indications). Investment in follow-on (or lifecycle) indications is likely to cool in areas such as oncology (which made up nearly 50% of 2021’s IPOs) and some programs heading into Ph. II and Ph. III trials are likely to be scrapped due to greater commercial risk. While there is still much uncertainty to state with confidence how this will affect early-stage investment and preclinical R&D, if the legislation is not amended, one would assume reduced overall investment in small molecules for cancer and aging-related diseases as a base case.