The U.S. Inflation Reduction Act (IRA) is reshaping the commercial landscape for drug development, with smaller biotechs and investors in particular thinking hard about how to adapt to the new environment. Meena Datta explains the challenges posed to the biopharma industry by the IRA.

The Biden’s Administration’s Inflation Reduction Act (IRA) has fundamentally changed the business environment for all pharma companies looking to develop drugs for the U.S. market.

From 2026 onwards, the effect of the IRA will be to impose a Maximum Fair Price (MFP) for a fixed number of high-expenditure single-source drugs that are reimbursed under Medicare. The MFP for selected drugs will be negotiated between the U.S. government and pharma manufacturers through a so-called Drug Price Negotiation Program (DPNP).

It is self-evident that no pharma company would elect for its products to be selected under the IRA for an MFP. This means that developers are likely to become strategic in shifting their focus towards categories of products that are excluded from price negotiations under the IRA.

Exclusions can apply to indications of orphan drugs in the same disease state, low-spend Medicare drugs, plasma-derived products and small biotech drugs (for years 2026-2028 only).  Therapies used exclusively at the hospital inpatient level are generally exempt.  Recent guidance from the Centers for Medicare & Medicaid Services clarified that drugs with two or more active ingredients will count as new drugs under the DPNP program, a favorable result for industry.  However, whether certain line extension products will count as new products under the DPNP remains murky.  Further, there is outrage at the policy level that the orphan drug exclusion is unduly narrow, limited to only those orphan drugs that have orphan indications in the same disease state. CMS is not itself able to expand the orphan drug exclusion to cover all orphan indications regardless of disease state, which would require an act of Congress.

The IRA also sets out differential treatment for large molecule versus small molecule products, with injectables being better insulated from the DPNP than pills. Large molecule drugs cannot be selected for the DPNP for at least 11 years from the date of their FDA approval, whereas small molecule drugs can be selected after seven years from the date of their FDA approval.

The effect of the IRA is likely to be that some smaller clinical development stage companies will think about building their clinical development strategy in a way that can minimize some of the new law’s impact if their assets are deployed in a large Medicare population and minimize investor uncertainty.

The distinction between small molecules and biologics also means that investors may favor pharma companies that are able to shift their development programmes toward a biologic of the indication that they are looking to treat. We may even see biologics companies becoming preferred acquisition targets.

Generally, the effect of the IRA is likely to be to accelerate some of the trends that were already apparent in the market prior to its passage. Over the next five years, we are likely to see more companies thinking about combination drug treatments, treatments for orphan and rare diseases, and pursuing more innovative technologies and techniques in the hospital inpatient setting, such as cell and gene therapy. Such innovative therapies are likely to be subject to some of the exclusions of the IRA and may well become increasingly valuable as the incentives in the U.S. shift towards non-mass-market, high-priced, injectable drugs.