The Regulatory Landscape
Measuring Inflation Reduction Act (IRA) implications
The regulatory environment is a key element in keeping the US the undisputed life sciences innovation leader globally. Over the years, legislation and regulations from Washington, DC, contributed to initiating and sustaining that leading position. Yet, industry leaders worry that recent policies will inhibit big pharma and biotech’s ability to innovate. Indeed, as put by BioNJ president and CEO Debbie Hart: “A central pillar of the nation’s hospitable environment for the life sciences ecosystem has been its strong, predictable and reliable intellectual property framework. Biomedical innovation is risky, as approximately nine out of 10 therapeutic candidates from biotechs never come to fruition.”
The Biden administration's passing of the Inflation Reduction Act (IRA) in August 2022 felt like a shockwave for the US life sciences industry. In a groundbreaking fashion, the IRA includes measures that prevent increases in drug prices from surpassing inflation, reform the Medicare drug-pricing policy through price negotiations and includes a higher inflationary cap price. Big pharma publicly expressed concerns about the impact of the IRA on its sales and revenues, particularly anticipating less investment geared towards innovation. Overall, this means that US-focused companies will need to revise R&D investment, reassess revenue projection, and question their long-term pipelines. Donna LaVoie, president and CEO of LaVoieHealthScience, a strategy consulting firm, summarized: “The Inflation Reduction Act is a big deal. Drug approvals and pricing is top of mind and heading news lines. We are currently in an environment where the investors will want to understand the regulatory environment and reimbursement before investing.”
Understanding the state of the life sciences industry in 2023 would be impossible without having a close look at the elephant in the room (or in the Act): the Prescription Drug Provisions section of the IRA. This section caught the industry short. Conversations with US decision-makers throughout the value chain all point towards pharma not expecting Medicare pricing negotiation in the near term. Briefly, the provisions will require the federal government to negotiate some drugs covered under Medicare from 2026, require drug companies to pay rebates if prices rise faster than inflation for drugs used by Medicare beneficiaries, and delay the implementation of the Trump Administration’s drug rebate rule in 2027. The Congressional Budget Office estimates that the provisions in the law will reduce the federal deficit by US$237 billion until 2031.
Deloitte data shows big pharma collectively spent US$139 billion in R&D investment in 2022, a 2% decrease from 2021, but still above the US$100 billion mark the industry hit for the first time in the second year of the pandemic. The latter is a reminder of the importance of R&D – manufacturers developed a vaccine in nine months thanks to decades of work done in the mRNA field. Tyrone Brewer, president of US oncology at Janssen, a pharmaceutical company of J&J, recalled: “This would not have been possible without huge and continuous investment, and this is why policies that could harm R&D and innovation budgets are so key to address. The pandemic was a reminder: it is not a question of if, it is a question of when.”
Ultimately, the industry will look for the federal government to share the financial risks of taking drugs to market, either through incentives, subsidies, or tax breaks. This ever-changing regulatory environment coupled with increased enforcement provides a niche opportunity for legal and consulting firms to help clients navigate the IRA. After being acquired by RLDatix in 2022, Porzio Life Sciences, a compliance leader, took another dimension. The firm is now more established in the government pricing area and has kept adapting its offering as laws seldom change incrementally. When discussing the federal government’s ability to negotiate drug prices through the IRA, John Patrick Oroho, president and general manager of Porzio Life Sciences, explained: “This is where innovator companies, that spend a lot of money in R&D to get new drugs to market, have an issue; innovation money comes from profits from existing products. If the government is going to negotiate prices, the government is going to have to invest back in the market to split the risks.”
“Any government actions to reduce prices will hurt funding going into the sector, as investors weigh returns and valuations if the price of innovative new drugs comes under heightened pressure.”
Brian Scanlan, Operating Partner - Life Sciences, Edgewater Capital Partners
Drug manufacturing, pricing and approval: maintaining a competitive edge
The Biden administration launched a biomanufacturing and biotech strategy in September 2022 to secure a domestic supply chain of key drugs and make the US industry competitive against its Asian counterparts. The White House identified several areas of concern for the US pharma-manufacturing industry caused by decades of offshoring production. Data from the FDA shows that 75% of APIs supplying the US market come from overseas. To create jobs and counter Chinese competition, the key pharma players have been looking to the Biden administration to offer tax breaks to prompt more manufacturing in the US, and federal funding to cover the cost of loans. Initial efforts are encouraging: “We are starting to see a rise in policy initiatives to incentivize domestic manufacturing and reinforce the US’ competitive edge. Policymakers and leaders in the pharmaceutical industry understand the importance of investing domestically”, explained Janssen’s Tyrone Brewer.
Remaining at the forefront of innovation implies competition on the international front in terms of new molecular entities' approval. 2022 was a relatively slower-paced year for the approval of drugs by the FDA. The agency gave its nod to 37 new entities in 2022, the lowest total since 2016, and a steep decrease compared with the 50 drugs approved in 2021. Regulators perhaps decided to remain on the conservative side after the controversy caused by the FDA’s accelerated approval pathway and the walk back from giving Biogen’s Alzheimer’s disease treatment Aduhelm the green light in 2021. As 2023 unfolds with 13 approvals by the FDA up until March, industry leaders will assess if last year’s dearth of approval was simply a cyclical glitch (like in 2016, when only 22 entities were approved between years when 45 and 46 were awarded), or if this decrease turns into a trend.
What is promising for future entities’ approval is the FDA’s push to clear its backlog of facility inspections. In November 2022, the Office of Regulatory Affairs stated that it had resumed routine domestic operations, and the high priority given to domestic inspections will likely contribute to decreasing timelines towards approval. Robert Poe, CEO of Olon Ricerca – whose Concord, OH facility was successfully inspected in 2019 – acknowledged the downstream challenge for manufacturers post-Covid-19: “The biggest challenge is that the FDA is understaffed and cannot do inspections as regularly as they could in the past, and this will take several years to address.”
Drug pricing and approval are two interconnected issues that will undoubtedly remain at the forefront of discussions during board meetings in 2023. BioNJ estimated that provisions in the IRA regarding price-setting are projected to result in 135 fewer new cancer drug approvals and 551 fewer HIV/AIDS clinical trials by 2039. On the approval side, some biotechs have acknowledged the FDA’s push to approve more drugs, particularly in the rare and orphan diseases space. Prashant Kohli, CEO of Acasti, a late-stage specialty pharma company advancing two phase 3 programs, said: “The FDA wants to see companies making investments in rare diseases to address unmet needs.”
The passing of the IRA suggests pricing and public-private negotiations will likely remain the industry’s biggest risks in 2023 and beyond. Overall, more risk-sharing among stakeholders, clarity on R&D spend, and public-private collaboration are needed ahead, as the industry – which has often been solely deemed as profit-driven – pushes toward a shared goal: innovative drugs mean new treatments and new hope for patients in need.
Article header image courtesy of CordenPharma