Inflation Reduction Act: threats and opportunities for UK life sciences, a summary

As its implementation draws closer, what is the Inflation Reduction Act (IRA) and how will it impact UK life sciences?  On Tuesday 27 June 2023, BIA hosted a webinar attempting to demystify the IRA – a U.S. law that will affect how the United States government pays for pharmaceuticals – including timelines, the reactions Stateside, and UK concerns, considerations, and potential opportunities.  Saqib Lab, BIA’s Head of Content looks at the key themes discussed.

We were joined by:

• Steve Bates, Chief Executive Officer, BIA
• Crystal Kuntz, Vice President for Healthcare Policy and Research, BIO
• Steve Usdin, Senior Editor, Washington, BioCentury
• Matt Wetzel, Partner, Goodwin Procter

If you were unable to attend or you would like to listen again, below is the recording of the Webinar.

What is the Inflation Reduction Act (IRA)?

The IRA is a U.S. law that was signed into effect in August 2022. The IRA has a number of provisions that impact the life sciences industry, including the following:

• The Medicare drug price negotiation program, under which the Medicare program (the primary U.S. federal government healthcare program for America’s seniors aged 65 and older) will require the highest-cost single-source drugs and biologics without generic or biosimilar competition to engage in a price “negotiation” process with the government.  Small molecule drugs could be selected to enter the negotiation program as early as 7 years after the first FDA approval of the first indication of the drug; large molecule drugs could be selected at 11 years after the first FDA licensure.  Depending on how long the product has been on the market without competition, a drug that is forced to enter the price negotiation program under Medicare could face a price decrease of 25-60% of the drug’s average price.  The first set of 10 drugs will be selected for the program on September 1 of this year, for price caps that will go into effect 1 January 2026.
• The IRA includes a requirement that manufacturers of drugs and biologics (including generic and biosimilar drugs) pay a Medicare rebate if they raise drug prices faster than the rate of inflation. 
• The IRA changes the way that Medicare beneficiaries pay for their drugs. Under the new law, beneficiaries’ annual out-of-pocket expenditures will be capped at $2,000.  (Currently, out-of-pocket expenditures can reach close to $7,500.)  Drug manufacturers will be required to provide a 10% or 20% discount off a drug’s price, depending upon whether a beneficiary has reached their out-of-pocket spend cap during the year. 

What is CMS’s role in IRA in the U.S.?

The Centers for Medicare & Medicaid Services (CMS) is the agency responsible for implementing the IRA’s Medicare drug pricing provisions.  The agency is currently releasing proposed guidance, including considerations for how CMS will select drugs for the drug price negotiation program, how it will set an initial offer price (notably, CMS will look to pricing for a drug’s “therapeutic alternative” as the place to start negotiations), and how it will calculate inflation-based rebates.  Despite the initial guidance, there is an overall lack of certainty as to how the negotiation process will work in practice.

CMS is already facing legal challenges in implementing the IRA.  In particular, four lawsuits have been filed by pharmaceutical manufacturers and trade groups opposing the implementation of the drug price negotiation program, citing largely Constitutional concerns over the lack of judicial and administrative review for the program and the excessive fines and penalties that manufacturers may face for refusing to participate.

Despite these challenges, CMS appears committed to implementing the IRA. The agency believes that the law has the potential to lower drug prices for Medicare beneficiaries and improve access to affordable drugs.

Lawsuits challenging the scheme

It is likely that more lawsuits will be filed in the coming months and years. The outcome of these suits may be a delay of the IRA’s drug price negotiation programme.

Changes in the political landscape

The political landscape in the U.S. is also constantly changing, and if there is a change in the presidential administration or the composition of Congress, it could lead to changes in the law.  For example, Congress may choose to amend certain provisions of the law that protect orphan drugs (but only if they have received one orphan designation – not multiple designations) or that only offer limited exemptions from the drug price negotiation program for small biotechs for just a brief window of time.

Are small biotechs exempt?

Yes, but only for a brief period.  Small biotechs are exempt from the price controls imposed by the IRA, and to qualify for the exemption, a drug must meet the following criteria:

• The drug must have accounted for more than 80% of the company’s Medicare revenue in 2021.
• The drug must have accounted for less than 1% of total 2021 Medicare Part B or Part D spending.

However, the exemption is only available for years 2026, 2027, and 2028.  In 2028 and 2029, small biotechs may receive the benefit of a price floor (if subject to the negotiation program).  If a product is not on the market today, however, it will not benefit from the small biotech exception, which is not automatic and is reviewed by CMS on a case-by-case basis.

Impact on UK life sciences

It is too early to say what the ultimate impact of the Inflation Reduction Act will be on UK and global companies. However, it undoubtably will impact on the UK sector, and is arguably already doing so, even if companies are unaware of it. Valuations of products, pipeline prioritisation of big pharma, etc. are already being modified because of the IRA.

BIA is monitoring developments and will plan a follow-up webinar in Autumn 2023 to update our members.

Further resources

• For further coverage and analysis, BioCentury In Depth, takes a deep dive into the IRA.
• BIO toolkit (IRA resources at top)
• BIO recent convention and focus on IRA
• Vital Transformations study funded by BIO showing significant, negative impacts of the IRA on R&D