Economy, IRA, Pharma Competition May Impact Industry in 2023

The pharmaceutical industry likely will continue to battle challenges posed by a variety of factors in 2023, including global economic issues, competition and the Inflation Reduction Act (IRA). The biosimilars space in particular is expected to undergo a change as the world’s top selling drug, AbbVie Inc.’s Humira (adalimumab), finally faces competition from a number of companies. But industry experts tell AIS Health, a division of MMIT, that they expect a number of positive 2023 developments in pharma.

AIS Health: What are some pharma issues to keep an eye on in 2023, and why?

Kristin Pothier, principal and National and Global Healthcare and Life Sciences Deal Advisory and Strategy leader at KPMG: The ongoing challenging macroeconomic climate is an issue to continue to keep an eye on as the sector continues to grapple with headwinds such as persistently high inflation, rising interest rates and divergent expectations of potential buyers and sellers that may limit the volume and value of transactions.

Additionally, the Inflation Reduction Act will require price negotiation for many best-selling drugs. The legislation will likely cause the industry to raise drug prices at launch and will impact forecast assumptions for future blockbuster drugs. This could lead to further de-emphasizing small molecule therapies.

There will be a continued focus on the looming patent cliff. Although the situation is not as severe as a decade ago, a coming spate of patent expirations for major biopharma companies could again threaten revenues. Between now and 2030, more than $230 billion in sales could be at risk as almost 200 drugs, including dozens of blockbusters, lose patent protection. That coming revenue shortfall increases the urgency for bringing new drugs to market and is likely to motivate additional M&A as companies add promising therapeutics to their pipelines.

Lastly, pipelines that fill the patent cliff and remain competitive in the market are filled with targeted drugs. These drugs require definitive diagnostic tests and detailed patient and sample mapping, and ensure the right therapy is being used for the right patient at the right time. What has been called precision medicine is the future of medicine, and we’ll see the diagnostic companies, clinical reference labs and HCIT [i.e., health care IT] companies all supporting the patient work-up needed to effectively prescribe these drugs, [which] forms the scaffolding from which pharma continues to build around.

AIS Health: How might the economy impact manufacturers?

Pothier: We currently have three main concerns for the U.S. economy in 2023: persistent inflation, further interest rate rises and a potential recession. If high inflation persists throughout 2023, manufacturers in health care and life sciences (HCLS) will face higher input prices that will squeeze margins. Labor costs will also rise, as workers in an already tight labor market demand pay raises to match inflation.

If rates continue to rise in 2023, then manufacturers will face higher costs of capital, reducing the appetite for making investments and deal making, and potentially threatening the viability of the most highly leveraged firms. Our recent survey of HCLS manufacturers found that many are looking to M&A in the technology sector that will enable them to use technology to address shortages in staffing.

If the economy tips into recession, the HCLS sector has traditionally been resilient, as consumers tend to cut discretionary spending before cutting spending on health care, and a recession may even ease some of the pressures on manufacturers caused by labor shortages and rising wage demands.

Other economic factors at play in 2023 will be the continued trend for onshoring of manufacturing, which will be disruptive in 2023 but a boon for U.S. manufacturing in the long term, and the ongoing global supply chain issues, as a result of the spread of COVID in China, that will cause continuing bottlenecks in manufacturing.

AIS Health: What might we see with respect to the IRA?

Pothier: The passage of the Inflation Reduction Act last August represents some of the most significant health care legislation since the passage of the Affordable Care Act, giving Medicare the ability to negotiate drug prices with manufacturers. Medicare will gain the unprecedented power to negotiate prices of up to 60 drugs by 2029, starting with 10 in 2026.

Beginning in 2026 (2028 for Part B drugs), manufacturers of high-spend drugs may start to rethink indication/label extension and other strategies that can “mark” or “unmark” their products for Medicare price negotiations. This move may inadvertently reduce incentives to bring new drugs or indications — such as those in oncology, where a given drug may have several follow-on indications — to market by limiting the potential for revenue maximization.

Additionally, it is likely the shift in R&D priorities to innovation will continue to accelerate. Drug manufacturers have already become less inclined to develop high-cost competitive “me-too” therapies. These drugs not only face higher entry hurdles but also may receive limited Medicare coverage if clinical profiles are at parity vs. incumbents. This trend has already taken root and will likely further accelerate, fueled by the IRA, in the future.

Andy Szczotka, Pharm.D., chief pharmacy officer at AscellaHealth: The IRA includes several provisions that will impact prescription drug benefits and with a goal to reduce drug spending by the federal government for their sponsored programs. Key elements of the IRA will likely impact the prescription drug benefit, including specialty drugs.

The IRA requires drug manufacturers to pay a rebate to the federal government if prices for single-source drugs and biologicals covered under Medicare Part B and nearly all covered drugs under Part D increase faster than an indexed rate of inflation. If price increases are higher than inflation, manufacturers will be required to pay the difference in the form of a rebate to Medicare. Drug manufacturers may respond to the inflation rebates by increasing launch prices for drugs that come to market in the future. Payers may be able to negotiate rebates and/or price protection as part of providing access to these new therapies, but leverage may be limited when there are no therapeutic alternatives available or when drugs are covered under a Part D protected class. This may increase the cost of these newly approved therapies.

The IRA amends the design of the Part D benefit. For 2024, the law eliminates the 5% beneficiary coinsurance requirement above the catastrophic coverage threshold, effectively capping out-of-pocket costs at approximately $3,250 that year. Beginning in 2025, the legislation adds a hard cap on out-of-pocket spending of $2,000 and to be indexed in future years. Capping out-of-pocket drug spending under Medicare Part D will be especially helpful for patients who take high-priced therapies, such as specialty drugs. This may improve the affordability of specialty therapies for these patients in the future.

The IRA also provides the federal government the ability to directly negotiate pricing for certain drugs with the highest total spending, including specialty drugs, beginning in 2026. While there will be no immediate impact on specialty drugs, this will be a consideration as the federal government develops their pricing negotiations for these high-impact drugs, which also include specialty drug agents.

The impact of these provisions is that it will provide an additional avenue to enhance the accessibility and affordability of specialty medications to patients but likely will have minimal influence in 2023. Impact will likely be greater beginning in 2024.

AIS Health: What do you expect to see within the biosimilars industry? What kind of impact do you think the Humira biosimilars will have?

Pothier: Much of what happens within the biosimilars industry will hinge on the implementation of the IRA. According to a recent Insight from KPMG, to incentivize biosimilar uptake, the IRA temporarily increases Medicare Part B add-on payment for certain biosimilars from 6% to 8% percent of the reference product’s average sales price (ASP) through the end of 2027. This provision, along with cost saving at the core of the IRA’s mission, may create attractive opportunities for bioequivalent-focused generics manufacturers to turn their focus to higher complexity generics.

The drugs most likely to be impacted in the near term will set a standard for how the industry and payers plan for similar future drugs. How companies choose to fill their pipelines could be altered by the IRA, which will impose negotiated Medicare prices beginning in 2026 for [the] 10 top-selling drugs and expand the list of affected therapies to as many as 60 by 2030. When asked how the IRA is impacting their companies’ M&A strategies, 32% of respondents to our 2023 Healthcare and Life Sciences Outlook said biosimilar targets have become more attractive to them.

Elan Rubinstein, Pharm.D., principal at EB Rubinstein Associates: I expect Humira biosimilars’ market share to increase rapidly in 2023.…Not clear to me is whether, in 2023, major PBMs’ most common drug formularies will cover reference brand Humira and its biosimilars at parity, or if some will disadvantage reference brand Humira relative to Humira biosimilars via “fail first” coverage policies or via preferential biosimilar drug tier (associated with a lower patient cost share).

Szczotka: The initial adalimumab biosimilar, [Amgen Inc.’s] Amjevita, is anticipated to be market available in late January 2023 and will be the exclusive adalimumab biosimilar for the first six months. [Editor’s note: The drug launched on Jan. 31, after the deadline for this article.] The next adalimumab biosimilars are not anticipated to be market available until late June 2023, and then more are anticipated to be released in third- and fourth-quarter 2023. The initial impact with only a single biosimilar for the first half of 2023 is expected to be minimal since the product will only be available in the lower strength (50mg/ml), will not be interchangeable and is not latex free. Since the majority of Humira use (i.e., >85%) is in the higher concentration strength (100mg/ml), Amjevita will only have a limited opportunity to capture market share and will likely be priced similarly or slightly below the branded Humira.

The impact of the adalimumab biosimilars will likely be more significant in the third and fourth quarters of 2023 with the introduction of multiple other manufacturers (potentially up to 11 different products, depending upon FDA approval), product interchangeability, product concentration, availability as citrate- and latex-free formulations and expected lower pricing. Payers will likely be narrowing their potential choices of adalimumab formulations to assist with lowering the cost of the product for the patient and their clients. Their choices will be based on these various factors, net cost and product availability.

An additional benefit likely seen with the introduction and adoption of the adalimumab biosimilars will be having the physicians and providers gain a broader understanding and familiarity with biosimilars as an additional clinically and cost-effective tool to help stretch the limited health care dollar for patients and payers. As other key biosimilars are launched in 2023 and 2024, this should help with their market adoption.

The biosimilar landscape will have a large shift in 2023 due to the adalimumab launches. This will impact the overall acceptance of biosimilars moving forward. To date, the overall acceptance of biosimilars in the U.S. has been slow as compared to some European countries. However, over time, we are seeing a gradual increase in the year-to-year acceptance and use of the currently available U.S. biosimilar agents. This will be aided indirectly by the adalimumab biosimilar launches.

The biosimilar landscape will also continue to expand into existing and new therapeutic classes such as ophthalmology, oncology and immunology. In ophthalmology, there are two biosimilars to Lucentis [(ranibizumab) from Genentech USA, Inc., a member of the Roche Group]: Byooviz [(ranibizumab-nuna) from Samsung Bioepis Co., Ltd. and Biogen Inc.], which was launched in July 2022, and Cimerli [(ranibizumab-eqrn) from Coherus BioSciences, Inc.], which is an interchangeable biosimilar launched in October 2022. Two additional biosimilars to Lucentis are in Phase III trials and expected to seek approval within the next two years. Additionally, there are at least nine biosimilars to Eylea [(aflibercept) from Regeneron Pharmaceuticals, Inc.] which are in various stages of development, and the first biosimilar approval is expected in 2023.

Immunology biosimilars are anticipated to expand and will include the TNF [i.e., tumor necrosis factor] inhibitors such as Stelara [(ustekinumab) from Johnson & Johnson unit Janssen Biotech, Inc.], Simponi [(golimumab), also from Janssen] and Cimzia [(certolizumab pegol) from UCB, Inc.]. Stelara will lose exclusivity this year, but there are currently no biosimilars that have yet been FDA approved. Nine biosimilars are in the pipeline for Stelara, with two pending FDA approval in 2023. In addition to Stelara, Simponi and Cimzia will lose exclusivity in 2024, and currently the development for biosimilars for each is underway, with a potential launch in 2024. Actemra [(tocilizumab) from Genentech] is another biologic that has two potential biosimilar launches in 2023.

The oncology area will see additional biosimilars this year as well. Three biosimilars to cancer supportive care biologics were approved by the FDA in 2022, and [two of] their U.S. launches are expected in 2023. They include…[Amneal Pharmaceuticals, Inc.’s] Fylnetra (pegfilgrastim-pbbk) and [Fresenius Kabi’s] Stimufend (pegfilgrastim-fpgk), both Neulasta [(pegfilgrastim) from Amgen Inc.] biosimilars. There will be much more competition for products such as Avastin [(bevacizumab) from Genentech], Herceptin [(trastuzumab) from Genentech] and Rituxan [(rituximab) from Genentech and Biogen] in the coming year, with potentially [an additional] six biosimilars for Avastin, five for Herceptin and four for Rituxan.

The trend upward is expected to continue and, as a result, will provide additional product options to enhance choices to life-saving biologics while enhancing cost saving opportunities.

AIS Health: Are there any impacts from the COVID-19 pandemic that we might we see in 2023?

Pothier: As the pandemic waned, we saw a rebound in demand for elective surgeries that had previously been put off during COVID-19, and we expect this to continue into 2023. We also saw increased funding, new research and advances in testing, particularly at-home testing. As a result, another legacy of the pandemic will be more decentralized testing, moving testing from reference labs to hospital labs, urgent care centers, pharmacies and at-home testing. Another impact of the pandemic was the increased use of telemedicine, as patients and medical staff tried to remain physically apart. Although it will not be as prevalent as during the pandemic, we expect this telemedicine trend to remain in 2023 and into the future.

AIS Health: Are there any expected competitors to particular drugs or within a therapeutic class that you are anticipating will have a big impact?

Pothier: The field of cell and gene therapies continues to see an emergence of new modalities and delivery technologies. However, we’ve seen the growth of precision medicine to advance patient outcomes. The ultimate goal for precision medicine is that it just becomes “medicine,” tailoring treatments to an individual’s unique genetics and lifestyle, enabling doctors to target specific diseases more effectively. Together with groundbreaking cell and gene therapy, it provides new hope in the fight against certain types of cancer and illnesses.

There are other nucleic-acid technologies evolving, such as anti-sense oligonucleotides, mRNA, RNAi and other modalities; all of these will continue to compete with “one-and-done” gene therapies.

The key point in the competitive pharma landscape is that all large pharmas are now competing against each other and are in combinations, which dilute the potential for a sole blockbuster. Each pipeline must be much richer to compete in this environment. In addition, each pharma must have a support strategy embedded in their programs, from specialized patient services to diverse clinical trials support to diagnostics and lab support for all targeted drugs from initial R&D to global commercialization.

Szczotka: In addition to the introduction of Humira biosimilars, the most significant specialty drugs with expected patent loss in 2023 allowing for a first-time marketplace launch include Stelara and Actemra. While these products are part of the same autoimmune therapeutic class as Humira and the upcoming biosimilar launches, each product currently holds market share in their respective therapeutic areas.

Actemra is used to treat rheumatoid arthritis, polyarticular juvenile idiopathic arthritis (PJIA), active systemic juvenile idiopathic arthritis (SJIA) and hospitalized patients with COVID-19 and has two biosimilars awaiting FDA approval. Actemra had reported sales of more than $3 billion in 2021. Stelara, which is used to treat plaque psoriasis, psoriatic arthritis, Crohn’s disease and ulcerative colitis, also has two biosimilars awaiting FDA approval in 2023. Stelara had more than $9 billion in sales last year. It is anticipated that both products will have biosimilar competition in late 2023.

AIS Health: Are there any results expected this year from clinical trials that you’re keeping an eye on?

Pothier: 2022 was a year where we saw approvals by the FDA of drugs addressing critical health challenges such as obesity and diabetes, and 2023 promises to be a year of further progress. Most notably, I’m keeping an eye on trials in areas such as oncology, muscular dystrophy and Parkinson’s disease. We are also watching and working with companies to make clinical trials more relevant, efficient and effective. Being able to better find, qualify and retain diverse populations in clinical trials is a major priority for all stakeholders. New methods, some stemming from COVID, like comfort in executing virtual clinical trials, will continue to change pharma’s approach, and budgets, for a stronger return on investment.

AIS Health: What do you think we may see in terms of M&A activity this year?

Pothier: We are confident that investor vision and appetite remain strong, and we expect deal volumes to grow this year even as economic conditions continue to be challenging. Respondents to our investor survey also are bullish about M&A activity in the coming year, with 60% expecting more deals in 2023 than in 2022 vs. just 8% predicting that deal volume will fall. We think that a projected decline in industry valuations will propel dealmaking; however, there will be some headwinds this year such as persistent inflation, rising rates, a potential recession and a scarcity of quality targets that could act as a drag on dealmaking.

The tailwinds that drove M&A in the last two years — the need for innovation and the need to fill pipelines — remain in force. Companies are sitting on a lot of cash and assessing their opportunities to make strategic investments now that will set them up to gain a competitive advantage as we come out of a possible downturn. Whether investing in new technology platforms, enhancing their digital ecosystem or reimagining approaches to new geographies, deals are likely to continue to reflect the new reality of the industry, a reality that balances scientific and clinical advancement with cost.

AIS Health: Is there anything I’ve neglected to ask about that you’d like to add?

Ash Shehata, KPMG national sector leader for Healthcare and Life Sciences: 2022 is a story of both tailwinds and headwinds. Hospital systems are dealing with rising labor and supply costs while biopharma and medical device companies have been exposed to supply chain, logistics and labor issues that slow down production. Now is the time for HCLS leaders to adjust their strategies to build durability and resilience within their companies.

Contact Pothier and Shehata via Marissa Ross at marissaross@KPMG.com, Rubinstein at elan.b.rubinstein@gmail.com and Szczotka via Caroline Chambers at cchambers@cpronline.com.

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