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  • Jonathan Poyer

The Inflation Reduction Act Coming For Biotech

Drug pricing legislation has returned to the forefront as Sen. Joe Manchin (D-W.Va.) and Senate Majority Leader Charles Schumer (D-N.Y.) appear to have agreed to a grand bargain.

The so called "Inflation Reduction Act" purports to allow the Centers for Medicare & Medicaid Services (CMS) to negotiate drug prices. Analysts and policy experts suggest the legislation is better described as enabling price controls for certain drugs, upending the patent-based exclusivity system that has been in place for decades. One of the most contentious provisions is the ability for CMS to set prices for patent-protected small molecule drugs after they are marketed for 9 years and biologics after 13 years. While the price controls would be limited to patients with government insurance, it is expected there would be significant spillover into the commercial insurance market.

Novel pharmaceutical product launches often ramp slowly, with the majority of the profitability concentrated in the last years before patent expiry or the end of the brand exclusivity period. Under the current system, the average exclusivity for branded medicines is approximately 14 years. Policy experts are suggesting the proposed legislation incentivizes setting initial drug launch prices higher to offset the shorter exclusivity period and other provisions that may limit subsequent price increases.

Merck's (MRK) CEO suggested on last week's earnings call that cutting branded exclusivity down to 9 years for patent protected small molecules could have a "highly chilling" effect on innovation in areas like cancer drugs. Investors, industry groups and life sciences innovators have organized efforts to reach members of the senate in an attempt to revamp this more aptly named "Innovation Reduction Act" before the bill is jammed through the reconciliation process by the September 30th deadline. The tight timeline leaves much potential for unexpected twists and turns until a simple majority vote is recorded by the senate.

Investors will be looking for potential defectors from the Democratic caucus, a ruling by the Senate parliamentarian that may impact the proposed provisions or last minute changes that may emerge.

Either way, pharmaceutical and biotech analysts project minimal near term impact given the bill's provisions would not take effect until towards the end of the decade. Increasing the complexity of the Byzantine laws and statutes determining drug pricing and exclusivity may present additional opportunities for pharmaceutical and biotech investors accustomed to deciphering them.

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