IRA Looms Large
Legislative uncertainty will impact all corners of the market
The US Inflation Reduction Act, passed in August 2022, is behind many of the uncertainties tainting pharma’s growth prospects. Its scope extends well beyond healthcare. But the pharma-relevant parts include curbs on above-inflation annual drug price rises, and price “negotiations”, constrained by mandatory minimum discounts, around the costliest Medicare drugs. The first ten of these, all outpatient (Part D) drugs, will be announced in September 2023. Bristol Myers Squibb’s anti-coagulant Eliquis, Merck’s anti-diabetic Januvia and AbbVie/JNJ’s Imbruvica for blood cancers are likely to feature. They cost Medicare $10 billion, $4 billion and $3 billion, respectively, in 2020. (See table – the Class of 2026; note list is based on 2020 Medicare spend data, Evaluate Pharma forecasts and eligibility criteria; may not correspond to published CMS list.)
Class of 2026
Drug
Company
Eliquis
BMS
Trulicity
Eli Lilly
Jardiance
Boehringer Ingelheim
Januvia
Merck
Ofev
Entresto
Novartis
Xtandi
Pfizer
Imbruvica
AbbVie
Ibrance
Pomalyst
Only products without generic competition (so-called ‘single-source’) and which have been on the market for a minimum of 9 years (for small molecules or NDAs) or 13 years (for biologics/BLAs) will be subject to price negotiation.
At the time of negotiations, Januvia will have been on the market for almost 20 years, and Eliquis 13. Yet even though the IRA kicks in after average market exclusivity periods expire (these stand at of 5-7 years for small molecules and 12 for biologicals in the US), in practice many firms have succeeded in extending those protections.
The result: shorter payback periods for the most valuable drugs. It’s not clear how far prices will fall post-negotiation, but drugs’ age determines the minimum discount: 60% for elderly Januvia and 25% for middle-aged Eliquis.
This, plus the four-year difference in exclusivity granted to large versus small molecules, is already impacting pharma asset valuation, portfolio planning and dealmaking. Lilly’s CEO Dave Ricks says three drug candidates have been deprioritised, and warns that Jardiance (empagliflozin), approved for diabetes in 2014, may not have been developed almost a decade later for heart failure under IRA. The law would have cut short the value gained from the additional indication, since its cost calculation groups all applications of the same active ingredient, and the negotiation clock starts ticking from the earliest launch.
The number of drugs subject to Medicare price negotiation will increase each year: by 15 in 2027 and 2028, and by 20 thereafter. From 2028, hospital or physician-office administered drugs (Part B) will also be affected.
Other blockbusters that may fall into IRA’s price-negotiation crosshairs by 2028, according to an analysis by the Journal of Managed Care Pharmacy (and Moody’s): Merck’s Keytruda (2028), BMS’ checkpoint inhibitor Opdivo (2028), Gilead’s HIV trilogy Biktarvy (2028) and Novo Nordisk’s diabetes drug Ozempic (2027). All currently feature on Evaluate’s top ten best-selling drugs for 2028.
Consensus analyst forecasts on which Evaluate data is based cannot capture IRA’s full impact, given the scale of remaining uncertainties. But they do largely reflect one aspect of the law that has already come into force: fines for above-inflation price increases. The White House announced in June that forty-three drugs will be penalised in the third quarter of 2023, adding to 27 named earlier in the year. Humira, Gilead’s CAR-T cell cancer drug Yescarta and Seagen’s targeted cancer drug Padcev all feature. Manufacturers will be invoiced the difference between an inflation-linked price and that charged. Congressional Budget Office estimates expect the inflation provision to save over $60 billion between 2022-2031, and forecasts almost $100 billion in savings from price negotiations over the same decade. Overall savings from negotiations could be even more significant than that, notes Heather Meade, Principal, Washington Council at EY, since negotiation provisions will continue to compound beyond 10 years as more products are included.
Down the line, Sanofi/Regeneron’s Dupixent (dupilumab) for atopic dermatitis and asthma, AbbVie’s Imbruvica and Skyrizi, Lilly’s tirzepatide are likely to fall into IRA’s price negotiation crosshairs unless competition has arrived.
The number of drugs subject to Medicare price negotiation will increase each year: by 15 in 2027 and 2028, and by 20 thereafter.
Lawsuits have begun. First-mover Merck is challenging the legality of aspects of the IRA on constitutional grounds, claiming that the price “negotiation” aspect effectively compels companies to accept Medicare’s lower prices by imposing punitive excise taxes on firms that decline. The US Chamber of Commerce, a business lobby group, filed a similar suit days later; then came Bristol Myers Squibb and industry lobby group the Pharmaceutical Research and Manufacturers of America (PhRMA). Lawyers point to further areas that are ripe for challenge, including around how the law is implemented.
Whether and when these lawsuits will impact IRA is another unknown. Simply delaying the law’s implementation would be seen as a victory for industry; each of the existing suits was filed in a court that runs through a different circuit court, maximising the chances of reaching a judge willing to stall the legislation.
The IRA is unlikely to disappear, though: curbing drug prices is about the only goal that all politicians and policymakers are agreed upon. Price negotiations on older drugs – though attracting the most attention – aren’t the only threat to pharma’s bottom line; the above-inflation price rise limits could do as much, if not more, damage. It’s a complex area: in the US, drugs don’t have a single price. Each product has an entire alphabet of tags, including AWP (average wholesale price, what pharmacies pay wholesalers), ASP (average sales price, a weighted average of prices paid by purchasers, net of adjustments), ‘list price’ and ‘net price’ (price after rebates and discounts). Net prices – those actually paid to drugmakers by middlemen pharmacy benefit managers (PBMs) – have been flat or mildly negative over the last few years, according to pricing expert Adam Fein’s Drug Channels.
Why aren’t these lower net prices being noticed? Blame the system. Bipartisan bills are in play in Washington targeting PBMs accused of extracting discounts from manufacturers and failing to pass them onto insurers and patients. These are unlikely to take the pressure off pharma, though, since resulting changes in PBM behaviour could also impact drug firms.
Price negotiations on older drugs aren’t the only threat to pharma’s bottom line; the above-inflation price rise limits could do as much, if not more, damage.
