With impacts across drug price negotiations, funding sources, and patient burden, the Inflation Reduction Act of 2022 (IRA) is poised to shake up the U.S. healthcare system. Within the IRA, there are four provisions that are poised to transform the pharmaceutical industry as we know it today:

• Lowering prices through negotiation
• Part D improvements and re-design
• Maximum patient out-of-pocket cap
• Prescription drug inflation rebates

The first of these, drug price negotiations, has perhaps gained the most publicity — it calls for the Centers for Medicare and Medicaid (CMS) to negotiate the price of ten Part D drugs in 2026, expanding include up to 100 drugs by the end of the decade. Targets for negotiation will be “top spend” medicines that have been on the market for nine years (for small molecules) or 13 years (for biologics). Based on this clause alone, emerging biopharmas (EBPs) may assume that the law would have little to no impact on them. However, that’s a risky and incorrect assumption, as the IRA’s reach will far exceed those top spend medicines, and have an impact beyond that specific provision. In fact, there will be significant second- and third-order effects that every manufacturer, including EBPs, needs to be aware of.

In a recent webinar, IQVIA offered a robust assessment of the IRA’s potential effects on EBPs. In this blog, we’ll boil down some with the greatest impact and introduce a few “new rules” taking shape over the next decade.

How will the IRA affect EBPs?

First, under the IRA starting in 2026, ten medicines will take deep discounts from Maximum Fair Price (MFP) negotiation with CMS. However, those ten have the potential to multiply quickly, as there will be ripple effects across competitive classes.

Notably, there are some exclusions from eligibility, which could help shape an EBP’s brand strategy. The following are excluded from negotiation:

• Products with single-indication orphan drug designation (ODD)
• Drugs under $200 million in annual Medicare spend
• Plasma-derived products
• Manufacturers with an ODD that makes up more than 80% of its annual revenue

Second, the Part D benefit design is changing, and LIS coverage is expanding. CMS historically has borne the lion’s share of costs (80%) in the catastrophic phase of the benefit design. Starting in 2025, however, they will transfer more of that burden to payers (60%), and, for the first time in the later phases of coverage, to manufacturers (20%).

However, payers are likely to try and recoup their own increased costs by squeezing manufacturers, offsetting the additional cost burden via rebates, fees, and added controls. All of this culminates in a substantial expansion of manufacturer liability in Part D, which will result in an erosion of brand economics.

Third, as revenue and margin profiles shift for products in Medicare, the entire industry will engage in portfolio rationalization. For EBPs, strategies and valuations will inevitably shift to favor novel therapeutics, first-in-class products, and non-Medicare markets. Across the industry, we are already seeing manufacturers reassess their pipelines and drop anything that is unlikely to capture adequate returns on investment, given the additional cost burdens in Medicare.

As we begin to see the effects of the IRA fully unfold over the next few years, there are five “new rules” that may be particularly useful to EBPs as they navigate through the next decade.

Rule #1: It pays to be first.

Being first (or best) on the market will become more critical than ever. Once a Medicare plan locks in a treatment on formulary, the next drugs have a greater likelihood to be NDC blocked, or to experience a payer being heavy-handed with step edits or prior authorizations in order to extract rebate leverage.

Rule #2: Non-Medicare products gain value.

Where Medicare leads, commercial plans are generally not far behind — especially since three of the four largest commercial payers also participate in Part D plans. Given this dynamic, non-Medicare products — that is, therapies for pediatrics or for conditions that affect patients much earlier in life — could become even more valuable to a manufacturer’s portfolio. Playing this out over a decade could create a gap in geriatric research.

Rule #3: Royalty strategies become en vogue.

As an EBP, you are potentially exempt from being negotiated via the IRA’s Maximum Fair Price provisions — a strategic advantage that could be lost if acquired by a larger organization. Staying independent and using royalty/licensing strategies with the larger players could provide a way of monetizing an asset while staying out of the crosshairs of CMS negotiations.

Rule #4: Single-indication orphan drugs are attractive.

Orphan drugs with a single indication will be excluded from price negotiations under the current IRA, but they would again become eligible, should they gain additional indications. Label expansion is a typical part of a drug’s lifecycle management strategy, often through the pursuit of additional indications; however, because of this new condition under the IRA, the decision for maintaining or expanding from a single indication will become an important decision point in pipeline and portfolio investment strategies.

Rule #5: Indication sequencing and stacking gain importance.

The MFP negotiation clock starts ticking with launch, so it will be more important than ever to launch with your primary indication that is likely to garner the highest volume out of the gate. Conversely, launching first with a lower-volume indication could undercut the total economic potential for a product. To help plan for optimal on-market economic and brand performance, manufacturers with multi-use products should consider running multiple indication trials simultaneously.

Four next steps for every EBP

What do these new rules mean for EBPs today? The following may provide you with some guidance on how to begin preparing to thrive in the new reality:

1. Get smart about shifts in liabilities. Every EBP needs to become familiar with how the IRA will shift liabilities across stakeholders throughout the value chain. The law’s impact will drive changes in payer strategy as payers look to pass the pain to manufacturers.
2. Prepare for increased evidence needs. As brand economics erode, one mechanism to maintain value is through higher launch prices. However, higher prices require more meaningful clinical, financial, and real-world Day 1 evidence at launch. Moreover, the need for such evidence only increases over the lifecycle of a product.
3. Prepare for alternative go-to-market needs. Start doing the math on DIY vs. partner vs. acquisition strategies. Explore the potential for using royalty strategies as a way of optimizing the value of your product. Shifting economics and MFP negotiation eligibility alter traditional decision points.
4. Innovation still matters. Biopharma remains an incredibly innovative industry. Yet pipelines are thinning. What does that mean for novel entities, mechanisms of action, roots of administration, and other indications? As pipelines shrink, we believe the potential rewards for EBPs will increase as other players seek to acquire innovative assets.

The bottom line: EBPs are not exempt from the IRA. Start thinking through what it means for your organization.

For more details, watch our webinar, Impact of the Inflation Reduction Act for Emerging Biopharmas.