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The announcement of “maximum fair prices” for the first 10 medicines targeted under the Inflation Reduction Act (IRA) has renewed questions and concerns about the law’s impact on innovation. While some of the commentary has been well-grounded in the fundamental economics driving drug development, other views have ignored those realities.
Given the immense amount of R&D investment required to continually generate new breakthroughs – a recent Nature Reviews Drug Discovery pegged the global number at $276 billion, most of it occurring in the United States – it’s critical to understand the forces that drive progress.
Economic Forces at Work: Assessing how the IRA might influence R&D spending decisions – and, therefore, the pipeline of new medicines – requires the consideration of two broad factors. These are how much revenue will be lost and how tightly connected are expected revenue and company R&D spending.
- On the question of revenue loss, the government has already claimed that it will save $6 billion in the first year of price controls alone, with most of that coming directly from manufacturers. There is no question that the law will reduce the amount of capital that companies can access. Earlier research sponsored by the Biotechnology Innovation Organization (BIO) suggests there could be a 30% hit to biotech companies.
- On the question of the link between revenue and R&D spending, the evidence is clear: where there is more funding available, R&D expands, with the opposite also being true. This is a phenomenon that is well-documented by economists who have looked at how past policy changes – including the introduction of Medicare Part D and the encouragement of research on Alzheimer’s disease – have influenced this dynamic.
‘Misguided Arguments’: Given that the two variables that influence R&D spending clearly indicate that an R&D slowdown is inevitable – a reality that is being reinforced by biopharmaceutical decision-making over the past two years – the only outstanding question is the extent of the damage. Yet there remain misguided arguments that the IRA will not have a meaningful impact on innovation, largely relying on anti-industry bias and analyses that are unmoored from the fundamental dynamics of medical innovation.
BIO’s View: BIO has been consistent in its criticism of the IRA as a poorly targeted law with unintended – but unavoidable – consequences for research and a number of provisions that create exactly the wrong kind of incentives. The numbers don’t lie: no other industry in the world reinvests as much revenue into research as biotechnology, meaning that government price controls will have an outsized impact on the ability of the industry to continue to uncover tomorrow’s breakthroughs.
