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Notes -
How does the IRA affect Pharma rearch and development?
When we covered the Inflation Reduction Act a year ago some people expressed worries that the Medicare price setting provisions would discourage pharma research and development. Scott makes such a case in this old post. Yesterday the House Energy and Commerce Oversight and Investigation Subcommittee held a hearing to examine just that question titled “At What Cost: Oversight of How the IRA's Price Setting Scheme Means Fewer Cures for Patients" (The Republicans run the House so they get to narrative-set here). Normally EC in general and this subcommittee can be counted on to be fairly bipartisan but the focus was on a partisan bill, so there was a lot of calling the price setting “a mafia-style shakedown” vs rants about corporate greed and so forth. Anyway, I’ve tried to break it down into what I think were the relevant sections.
How does it work?
There are two broad categories of drugs, small molecules and biologics. The IRA offers patent protection periods of nine years for small molecules and thirteen years for biologics. After that Medicare basically gets to set the price; if companies refuse to negotiate / accept then they can be taxed on gross receipts starting at 65% and going up to 95%. There are is an “orphan drug” exclusions for drugs targeting under 200,000 people to ideally avoid reducing investment in rare diseases.The only drugs that will be targeted are the top ten most expensive drugs covered by Medicare, which generally means costing a minimum of $400 million annually.
This is projected to save Americans about $100 billion over the next ten years.
Right now only the first ten drugs are being targeted for negotiation, so we’re still very much in the beginning stages of understanding how this will work.
Will it Reduce Innovation?
This is really the main question and I didn’t feel like it was satisfactorily answered, but ultimately I wasn’t convinced that it will.
The basic idea is since after your patent period you’ll make way less profit, people will invest less. But, of course, you still get around a decade of being able to raise the price as high as the market can bear and all the profits that come with that. As was pointed out, the ten drugs being targeted right now have made between $15 and $57 billion each, so investors certainly got their nut. America is the only country to not negotiate prices and drug companies have median net earnings twice as high as non-drug companies, so needless to say they make quite a bit more profit than is normally needed to sustain an industry.
The Republican aligned witnesses say there have been 24 announcements of drug companies saying they are discontinuing research in certain categories. They were unclear what their sources were for a lot of claims (one guy said he did an internal poll in his company) but I managed to connect one claim to a consulting company called Vital Transformations that claims “Had the IRA been in place beginning in 2014, we estimate the reductions in revenue on the impacted drugs to be up to 40%. Because of this, between 24 and 49 therapies currently available today would most likely not have come to market and therefore not available for patients and their providers”.
The Democrat aligned witnesses point out that drug companies discontinue certain drugs all the time and it doesn’t mean it’s related to the IRA, even if it’s politically convenient for them to say so. They cite a Congressional Budget Office study (I’m more inclined to trust this than the Vital Transformations pdf tbh) that concluded drug innovation would only fall by 1% over thirty years. Brookings Institute seems to agree that the discrete announcements of drug discontinuations are not reflected in overall industry trends:
Will it reduce research in rare diseases?
The IRA has its “orphan exemption” for drugs that apply for rare diseases that affect small (<200,000) numbers of people. However, you can only apply to one rare disease to be eligible, if you have a drug for a common condition that later gets tweaked to target a rare disease, you don’t qualify, nor if you have a drug that treats multiple rare conditions. Some critics suggested this would reduce investment in multiple rare drug therapies. The category of drugs that target multiple rare diseases is small (about 7% of a random sample) and rarely gets anywhere near the threshold of sales that would qualify you to be a top ten drug targeted by the IRA - anything under $200 million is automatically exempt and your average hovers realistically around $400 million.
Which raises the question: why do we even have the orphan exemption at all when we’re by definition only talking about blockbuster drugs? In this study, the drugs that would qualify for the orphan exemption were similarly profitable as qualifying drugs for common diseases, which is kind of the only result you would expect.
Will it delay the release of drugs, specifically rare cancer drugs?
This was a specific claim because the CEO of Roche Genetech said he would delay the release of an ovarian drug because it would lose out more under the IRA. The counter-argument was basically the same as before about drugs being discontinued all the time, and decisions about whether to bring a drug to market or not are usually made years in advance for broader market reasons. The moment you get a patent your years of exclusivity are ticking away, so no one would choose to lose all private and public sales on an-already finished drug specifically because of expected reduced public profits thirteen years later. If anything the introduction of a limited time window for max profits would encourage companies to release drugs faster to take advantage of that window. In general the incentive also remains to do research in rare cancers because you need to pass a lower threshold of efficacy to get a drug approved.
Why would we expect R&D to be first on the chopping block?
One witness also pointed out that because pharma spends only 10-20% on R&D and 20-30% on marketing, plus have pretty gonzo stock buybacks, etc, it’s not clear that a reduction of profits would have to come from income. I’m not sure about marketing - presumably they’re already spending an amount they think brings in more sales and funds the business. However, the witness also cited that the five biggest pharma companies spent $13 billion more on shareholder compensation than they did on R&D, which is much less obviously connected to direct business success. As mentioned above, drug companies have median net earnings double non-drug companies, so there is still likely more than enough to still handsomely award investors. Also, in a time where they will be making less on existing drugs, if anything it makes more sense to invest in new drug lines.
Why the thirteen year vs nine year difference?
One witness was just hellbent on talking about how small molecules were discriminated against by the four year gap in patent protection, to the point where he would just insert it no matter what he was being asked. You can read the argument written out here. They replied by quoting “the industry” (the pharma industry, I guess?) saying that Biologics are more capital intensive, take longer to research, produce, and bring to market, and have overall higher risk, so it makes sense to give them more incentive. I’m not sure how the witness’ predictions square with the fact that small molecules mergers and acquisitions triple in the year following the IRA vs the year preceding it, or that current forecasts than investment in small molecules is expected to double by 2031.
Do Americans or Europeans have better access to drugs?
Democrats pointed out that according to the Kaiser Foundation 1 in 4 Americans say they struggle to afford drugs, and 3 in 10 Americans report not taking prescriptions because they couldn’t afford them. Pretty bleak!
Republicans responded by referencing a Wall Street Journal article arguing that medicine approval is faster in the US and citing a study that said:
It’s worth debating that if you have a greater share of drugs on the market, but a larger portion of your population can’t afford them, it’s not totally clear who has better access.
How much does the government drive innovation?
Democrats pointed out that according to one study, almost all drugs (99.4%) approved in the last decade had NIH funding at some point in the process. Generally this means NIH handles the early, riskiest research, “de-risking” the field for private investment afterwards. Another 24% of drugs had NIH funding during late stage trials. ” Given that taxpayers are playing a large role in the R&D itself, they claim it seems improper to also expect taxpayers to pay sky high rates for the finished product. Since Republicans are proposing cutting the NIH budget by $2 billion, democrats accused them of not actually caring that much about innovation and mostly being schills for pharmaceutical lobbyists.
I am by no means an expert on healthcare or drug pricing but it feels strange to me that Medicare couldn’t negotiate prices in the first place. Given that Medicare is something like 11-13% of total federal government spending my thought is that I would absolutely want them to negotiate prices down.
It's certainly unique; we're the only country not to allow the government to negotiate prices. This is part of why other countries can get lower prices though, because American consumers pick up more of the tab.
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