Biden Administration to Transform Drug Treatments, Not Eliminate Them.

Big pharma companies often complain about the impact of tougher laws on future drug research. However, the reality is usually more complicated.

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In a 2021 study, three academics looked at what happened to innovation when drug companies were no longer able to resort to one of their favorite tactics: paying generic makers to stay off the market, known as “pay-for-delay.” A 2013 Supreme Court ruling had essentially barred such agreements. What the researchers found was that companies actually responded by increasing their research and development spending to find new drugs.

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The debate over incentives is once again at the forefront due to the Inflation Reduction Act, which requires the federal government to negotiate prices for some drugs. Merck Chief Executive Officer Robert Davis was just one of many to warn that this will have a very negative effect on future innovation.

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The 274-page legislation passed in 2022, though not a massive damper on innovation, will surely have an impact on how capital is allocated. When companies look at their R&D budgets, they will have to consider the law’s ramifications. Alnylam Pharmaceuticals, a biotech company based in Cambridge, Mass., recently pointed to one potential problem when it said it would hold off on the development of a drug for a rare disease indication because that drug already had an orphan designation for another disease. An orphan designation is an approval provided by the Food and Drug Administration for products that treat rare diseases. Alnylam ascribed its decision to the law’s exemptions for drugs that receive a single orphan designation.

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Critics argue that companies are trying to scapegoat the law when it is unclear whether or not those R&D projects were moving ahead anyway. Stacie Dusetzina, a health professor at the Vanderbilt University School of Medicine, says that it is in the industry’s best interest to say that the sky is falling.

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Critics of the bill argue that it eliminates the incentive for drug companies to conduct additional research once a drug has been approved. This is a common strategy for extending patent protection for a drug. Kirsten Axelsen, a visiting scholar at the American Enterprise Institute, explains that many oncology medications are first approved for severely ill patients and over time those drugs are tested for patients in earlier stages of the disease.

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Ms. Axelsen, who is also a policy adviser to law firm DLA Piper, says that thanks to recent advances, we are now able to hold back the progression of cancer so that many of the major cancers have five-year survival rates of longer than 90%.

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Some people argue that the new law will just mean that companies will have to do their research sooner. Anna Kaltenboeck, who helped write the Inflation Reduction Act, says that there may be some changes on the margin, but that ultimately companies will want to do their studies earlier to reach their peak revenue sooner.
The law could also shift investment toward drugs that target the general population and away from seniors. That is because it only empowers Medicare to negotiate prices, leaving the commercial market wide open.

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The new law creates incentives that could increase prescription drug use by seniors. The legislation caps beneficiary out-of-pocket costs at $2,000 a year, provides a $35 a month out-of-pocket cap for insulin and makes vaccines free under Medicare. A recent study showed that Medicare beneficiaries were much less likely to fill their cancer drug prescriptions if they didn’t have low-income subsidies. This suggests that the new spending caps could allow millions of people to gain access to drugs where affordability was previously an issue.

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The most concerning issue is that the law creates an uneven playing field by giving biologic drugs a four-year head start on price reductions in comparison to small molecule drugs.

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Small molecule drugs are chemically derived and simpler to make than biologics. They can usually be taken orally by patients, making them more convenient than injectable drugs. Small molecule drugs dominated the pharmaceutical industry during the 20th century, but biologics have become more popular in recent years due to their cutting-edge status. However, discoveries of new small-molecule drugs continue to be made, keeping them relevant in the ever-changing world of medicine.
In a recent earnings call, Eli Lilly's CEO David Ricks noted that the new law sends a signal to investors that small molecules are not wanted and are worth less. This could unintentionally tip the scales towards more development in biologics.

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MIT's Professor Lo says that the tax on small molecules is like a subsidy for larger ones. He argues that such unintended consequences are the unfortunate byproduct of sweeping legislative efforts that have to be passed in small time windows, and it is up to lawmakers to figure out what isn't working and fix it along the way.
Companies will have to respond to the incentives in the bill as it is until Congress gets around to changing it.