Since its passage in August 2022, the Inflation Reduction Act (IRA) has attracted criticism and even derision from biopharma leaders because it gives Medicare the ability to negotiate drug prices. The possibility of lowered revenues and less money to put into R&D led some attendees at the 2023 American Society of Clinical Oncology and BIO International Convention meetings to dub the bill the “Innovation Reduction Act.”
In a 2022 quarterly conference call, Merck CEO Robert Davis said the bill’s reduction of drug prices would be “highly chilling on future innovation.”
But two new studies suggest these fears may be overblown. Analyses of R&D spending and equity investment in biotech predict that the industry is capable of weathering a drop in revenue due to lower drug prices, with no corresponding loss in new approved drugs.
Big Pharma “can protect both their earnings and their pipeline with pretty straightforward reallocation of R&D to late-stage development [and] continued or increased licensing or acquisition of early-stage products,” Fred Ledley, M.D., told Fierce Biotech in an interview. Ledley, a physician-scientist and former biotech executive, is senior author of the studies and director of the Center for Integration of Science and Industry at Bentley University in Massachusetts.
In a working paper published June 28, Ledley and colleagues analyzed how market conditions—as captured by the S&P 500 and the Nasdaq Biotechnology Index—and drug prices influenced private and public equity investment in biotech from 2000 to 2022. They collected data on 8,229 equity offerings, representing a total investment of $406 billion, from BioCentury’s BCIQ database. They found that biotech investments rose and fell with market conditions but showed no connection to drug prices.
“We use two indices of drug prices: One is the producer price index for prescription drugs, the other is a consumer price index. And there's just no historical relationship between those indices and investment,” Ledley said.
Ledley and colleagues then followed up with a study, published in the journal Clinical Trials on July 24, that scrutinized R&D spending by 1,378 public biopharma companies between 2000 and 2018. For the largest 79 companies, with a market capitalization of over $7 billion, lower revenues did translate to lower spending on R&D. But, for the vast majority of biotechs with smaller market caps, there was no relationship between revenue and R&D.
“These companies appear to drive most of their R&D capital from equity investment,” Ledley said, rather than from revenue. These smaller biotechs are also the ones running the most clinical trials and driving early-stage innovation, he said.
According to the analysis, even a drastic 10% drop in global revenue would hardly impact the number of drug approvals, as long as big firms adjust by focusing less on early-stage assets.
Despite posturing from pharma CEOs opposing the IRA, Ledley thinks the leaders already know that their companies can deal with lost revenues from lowered drug prices.
“They spent a decade implementing what they call ‘agile management’ to reallocate spending to where it's going to be most effective,” Ledley said. “They found ways to be very profitable and very productive for 20 years with all sorts of changing circumstances, and we don't think this should be a threat.”
As an example, Ledley pointed to recent comments by Bristol Myers Squibb CEO Chris Boerner, made as the pharma giant negotiates the price of its blood thinner Eliquis with Medicare.
“Now that we’ve seen the final price, we’re increasingly confident in our ability to navigate the impact of IRA on Eliquis,” Boerner said July 26 in a quarterly conference call. Negotiated drug prices are expected to take effect in 2026.
What’s more, Ledley said reducing drug prices could ultimately be a boon to shareholders.
“Healthcare costs are a drag on the economy,” he said. “Lowering prices a little bit helps everyone else in their portfolio.”