A recent blog entry suggested that the so-called “Inflation Reduction Act” “creates an incentive for Pharma firms to develop many middling drugs rather than a couple of blockbuster drugs.” In the passages quoted below from a different David Wainer commentary, he suggests that the Act also incentivizes pharma firms to reallocate development funds away from drugs for seniors and away from biologics. He assumes that the reallocation is “unintended” rather than based on the government believing that seniors matter less than others, or that biologics deserve more funding than the previous semi-free market allocated to biologics.
(p. B14) . . . the Inflation Reduction Act, . . . requires the federal government to negotiate prices for some drugs. Merck Chief Executive Officer Robert Davis was just one of many to warn it will be “highly chilling on future innovation.”
The 274-page legislation passed in 2022 doesn’t look likely to be a massive damper on innovation, but it will surely have an impact on how capital is allocated. When companies look at their R&D budgets, they will have to consider the law’s ramifications.
. . .
. . ., there is no arguing with the fact that the bill is reshaping many incentives drug companies face. For example, critics of the law point out that it eliminates the incentive to conduct additional research once a drug has been approved—a common strategy to extend patent protection for a drug—because prices are negotiated after nine years for small-molecule drugs and 13 years for biologics. As Kirsten Axelsen, a visiting scholar at the American Enterprise Institute explains, many oncology medications are first approved for severely ill patients and over time those drugs are tested for patients in earlier stages of the disease.
“Thanks to that, we’re now able to hold back the progression of cancer so that many of the major cancers have five-year survival rates of longer than 90%,” says Ms. Axelsen, who is also a policy adviser to law firm DLA Piper.
. . .
The law . . . could shift investment toward drugs that target the general population and away from seniors. That is because it only empowers Medicare to negotiate prices, leaving the commercial market wide open.
. . .
Perhaps the most serious concern is that the law picks winners and losers by favoring biologic drugs over small molecules, which face price reductions four years sooner than their larger molecule counterparts.
Small molecule drugs are chemically derived and simpler to make and can usually be taken orally by patients. These drugs—think medicine cabinet essentials like aspirin or statins—dominated the pharmaceutical industry during the 20th century. Biologics, therapies that are extracted from living organisms, are usually given through an injection and, because of their higher price tags, make up the bulk of today’s top-selling drugs. While biologics are at the cutting edge of medicine, discoveries of new small-molecule drugs continue to be made.
Eli Lilly’s CEO, David Ricks, noted in a recent earnings call that “it sends a signal to investors” that small molecules “aren’t wanted and are worth a lot less.” That could tip the scales toward more development in biologics, a likely unintended consequence of the law.
MIT’s Professor Lo says that is like effectively creating a tax on small molecules, or a subsidy for larger ones.
For the full commentary see:
(Note: ellipses added.)
(Note: the online version of the commentary has the date January 6, 2023 [sic], and has the title “Heard on the Street; New Biden Law Won’t Kill Drug Cures. It Will Reshape Them.” In the next to last paragraph quoted above, the second quoted sentence appears in the online, but not the print, version of the commentary.)