The Inflation Reduction Act (IRA) represents a significant transformation within the US healthcare landscape. While focused on reducing prescription drug costs for consumers, which rose by about 31% between 2016 and 2022, the Act presents a fundamental challenge to the established operating model of pharmaceutical companies. The IRA functions as a catalyst, prompting a necessary reallocation of value across the healthcare ecosystem. It necessitates a critical re-examination of decision-making, resource allocation, and the adoption of technological innovation by pharmaceutical companies.
Challenges To Existing Frameworks
The pharmaceutical industry has traditionally relied on revenue generated from drug sales to support research and development (R&D). The IRA, with provisions for Medicare price negotiation and inflation-linked price caps, directly disrupts this model. USC Schaeffer projects that these provisions could lead to over a 30% reduction in US pharma revenues through 2039.
Economic projections suggest a potential decline in pharmaceutical industry revenues within the US as a direct result of the IRA. The reduced revenue could have the consequential effect of hindering R&D investment. The pharmaceutical industry may see decreased innovation and development of new therapies, particularly for those diseases with smaller patient populations. The IRA contains provisions that some organizations claim undermine existing patent protections for pharmaceuticals. The uncertainty could make companies wary of investing in costly drug development in areas where patents might be complex or easily contested.
The IRA’s provisions also could threaten R&D in pharma companies, according to Pharmaceutical Research and Manufacturers of America (PhRMA), a top US pharma industry body. PhRMA conducted an industry-wide survey, in which more than three-fourths of respondents, comprising top global pharma companies, said there could be cancellations of early-stage pipeline projects. Most respondents also said companies with pipeline projects in cardiovascular, mental health, neurology, infectious disease, cancer or rare diseases expect “substantial impacts” on R&D decisions in these areas. The Schaeffer study says, “The IRA is expected to reduce revenue to pharmaceutical manufacturers from the combined effects of drug price negotiation, inflation rebates, and required manufacturer discounts.”
Naysayers claim the IRA disincentivizes the development of small molecules, which are used to make many drugs from aspirin to cancer therapies, which will not be available to patients in the long run. Recent decisions, such as the halting of research on a potential cancer treatment by Eli Lilly, citing a “nonsensical” distinction between small- and large-molecule drugs in the IRA, highlight the effects of the law on drug development.
Confronted with the reality of reduced revenue potential due to the IRA, pharmaceutical companies are likely to adjust their portfolios. They will be inclined to prioritize drugs that are either guaranteed profitability or can be brought to market quickly. Less commercially promising areas of research could be downsized or abandoned altogether.
While the industry confronts reduced revenues, the IRA presents an opportunity to reassess priorities and scrutinize the pharmaceutical value chain. The Act’s primary aim is to increase patient access to life-saving medications at affordable prices. Companies must now align this goal with ensuring sustainable operations. The affordability of prescription drugs brought about by the IRA could lead to patients sticking to their drug intake schedules, which could increase consumption volumes by up to 30%, according to Boston Consulting Group.
Specifically, pharmaceutical companies should evaluate their portfolios in terms of Medicare exposure and potential susceptibility to direct negotiation. In this case, artificial intelligence (AI) and machine learning (ML) can aid pharmaceutical companies in optimizing portfolio management in response to new regulations like the Inflation Reduction Act (IRA). By analyzing vast datasets, AI and ML can assess drug portfolios for Medicare exposure and susceptibility to price negotiations, informing future research and development (R&D) decisions and resource allocation. This technology can also help streamline clinical development, identify cost-effective manufacturing strategies, and uncover new indications for existing drugs, maximizing their value.
Technology offers immense potential to streamline processes and enhance efficiency. Real-world evidence (RWE), advanced analytics, and digital tools can provide valuable insights to guide decision-making. Additionally, exploring alternative R&D models, such as decentralized clinical trials or increased use of simulations, can offer avenues for cost reduction and accelerated development. Collaboration, both within and outside the traditional confines of the pharmaceutical sector, can spark innovative approaches to drug development and commercialization.
The Inflation Reduction Act marks a pivotal moment for the pharmaceutical industry. It signals a necessary realignment of the healthcare ecosystem, with an emphasis on improved affordability for patients. While this act poses challenges for pharmaceutical companies, it also presents a powerful opportunity for reinvention.
About the Author:
Tanmay Sengupta , Business Unit Head at Mu Sigma, who partners with Fortune 500 pharma companies to help them build a decision support ecosystem with advanced analytics, artificial intelligence and machine learning.
