Adjusting R&D
The IRA doesn’t alter the fundamentals of R&D
Despite its wide-reaching effects, IRA doesn’t fundamentally change the economics of pharma R&D. Pipelines were already being streamlined in the face of greater competition and pricing pressure. The spectre of US drug price negotiations adds to the push toward more efficient, faster development of differentiated therapies.
Similarly, though the law trims the net present value (NPV) of some small molecule pipeline assets just as newer categories like oligonucleotides and radio-ligand therapies gain traction, it won’t stop their development or eliminate their worth. Recently-acquired Iveric’s lead molecule, avacincaptad pegol, is an oligonucleotide aptamer in registrational trials for geographic atrophy and in Phase 2 for Stargardt disease. Lilly in June announced it would pay $2.4 billion cash for DICE Therapeutics and its Phase 2 small molecule (oral anti-IL 17) for psoriasis and other auto-immune conditions.
Adjustments may be made to multi-indication drug development strategies. Pre-IRA, many such products tended to launch initially in narrower indications with shorter development times, and then expand into larger populations. Post-IRA, firms may try to launch first in the biggest market, to recoup costs as fast as possible after the nine or 13-year countdown begins. Some smaller indications may be abandoned, or targeted with a separate, similar molecule.
The law is unlikely to derail broader therapy area trends. Widespread, chronic conditions like cardio-metabolic, central nervous system (CNS) and inflammatory diseases have become more popular R&D terrain as niches across oncology and rare diseases overheat. Drugs for CNS, immunomodulatory and endocrine disorders are expected to grow strongly over the next five years, even though still-dominant oncology will account for over a fifth of sales in 2028 (Figure 9: Top 10 Therapy Areas in 2028).
Novo Nordisk’s Wegovy (semaglutide) catapulted obesity into the limelight, both as public health emergency and highly lucrative franchise. Novo and Eli Lilly, whose diabetes drug Mounjaro is expected to be approved in obesity this year, have knocked BMS and GSK off the list of top ten companies by worldwide prescription pharmaceutical sales in 2028. Novo is currently the third biggest pharma company globally by market cap, according to Refinitiv data. Both Novo’s diabetes drug Ozempic (also semaglutide) and Mounjaro are expected to top $17 billion by 2028; Wegovy will add another $9 billion in obesity. (See figure 6: Top Ten 2028 Products - note: Mounjaro’s sales include obesity from 2024.)
Lilly’s Phase III Alzheimer’s antibody donanemab is also among the top ten most valuable pipeline programs by net present value. (See figure 8: Top Ten most valuable pipeline assets); Novo and Lilly are expected to show CAGR of over 11% between 2022 and 2028, more than double that of most of their peers. (See figure 5: Top Ten 2028 Companies).
The picture may change next decade if IRA materialises: obesity and Alzheimer’s are prevalent in Medicare populations, and CMS is reviewing its current policy of non-coverage for obesity drugs. If CMS treats all dosage forms of the same active ingredient as a single drug for negotiation purposes, as suggested in March 2023 guidance, Wegovy could fall into the net with Ozempic long before 2034 (13 years post-launch). Yet CMS is expected to issue more detailed guidance on the topic. Meanwhile, restrictions on Medicare coverage for Alzheimer’s treatments could be eased for Biogen/Eisai’s Leqembi if it receives full FDA approval (a June advisory committee vote was unanimously positive).
Pharma R&D spend growth is expected to slow over the next five years to just half the CAGR seen between 2014-2022. That trend pre-dates IRA, and may reflect risk-aversion, pipeline dynamics or, more optimistically, it may anticipate greater R&D efficiency. For anyone outside pharma, Artificial intelligence (AI), not IRA, is the acronym du jour. AI is being touted as an aide to drug discovery and development, by simulating molecular interactions, churning out drug leads, or recruiting trial patients. Its most significant near-term potential may lie in drug delivery and patient access: if AI could power faster drug access and care delivery, lower costs and add transparency in the pharma-patient distribution chain, pharma would see faster returns and closer links with end-users. AI-powered products could grow to $60-110 billion in the pharmaceutical industry, and more than double that across healthcare more broadly, according to a recent McKinsey report. Even just a piece of that could put IRA in the shade.
Widespread, chronic conditions like cardio-metabolic, central nervous system (CNS) and inflammatory diseases have become more popular R&D terrain as niches across oncology and rare diseases overheat.
