IRA, Uncertainties Within Law May Be Challenging for Biopharma

The Inflation Reduction Act (IRA) will allow Medicare to negotiate prescription drug prices, starting with a limited set of therapies in 2026. But while some aspects of the law are clear, some uncertainties around others exist. Biopharma companies need to start preparing as much as they can for some of the challenging situations that may arise, recommends one industry expert.

Josh Schimmer, an analyst at Evercore ISI, pointed out during a Nov. 17 webinar hosted by his company that the IRA has “many, many moving parts, some of which are…really quirky, some of which seem a little unsustainable in terms of the dynamic that they might have. It’s going to impact so many companies in this industry sooner or later; some might be spared. But those are probably going to be smaller companies. So the bigger you are, the more likely you are at some point to have to face the IRA.”

The law requires the HHS secretary to negotiate with manufacturers over prices for some single-source brand-name drugs and biologics that do not have either generic or biosimilar competition and are covered under Medicare Part D and Part B. Price negotiations will start with Part D drugs in 2026, with Part B products added in 2028. More specifically, 10 Part D drugs in 2026, another 15 Part D agents in 2027, another 15 Part D and Part B medications in 2028 and then another 20 Part D and Part B products in 2028 and subsequent years.

The drugs to be negotiated will be chosen from the 50 drugs with the highest Part D spending and the 50 with the highest Part B spending. For the 2026 start, on Sept. 1, 2023, HHS will release a list of 10 Part D drugs to be negotiated based on their spending from June 1, 2022, to May 31, 2023. Negotiations will occur between Oct. 1, 2023, and Aug. 1, 2024, and the maximum fair prices for the products will be published by Sept. 1, 2024.

Manufacturers will have the “opportunity…to go back and forth” with HHS during the negotiation process, noted Tess Cameron, a principal of strategic finance at RA Capital Management, L.P., during the webinar. “The company can submit if they think that HHS offers something that they don’t agree with.”

However, according to Cameron, “this is not really negotiation. This is price controls.” That’s because of the process, she maintained: “You enter into an agreement, the manufacturer submits this information to the secretary on cost,…the secretary makes an offer, the manufacturer accepts or makes a counter, and then the negotiation concludes.”

Options are few for companies that are not happy with the negotiated price, she explained. They can choose to withdraw all of their products from Medicare and Medicaid, an “interesting” decision because “that is actually potentially an option for a small biotech that has one or two drugs. But that certainly isn’t an option for the big pharmas that we hope one day buy some of those small biotechs who have developed those drugs.

“Another option is that you can withdraw your drug from the U.S. market,” she continued. “Or you can pay this crazy excise tax.” Some companies have mistakenly assumed that while a 95% excise tax is “pretty bad,” that it would still allow them to have 5% of their sales. “Actually, the excise tax is exclusive of the excise tax itself, so it’s actually a 1,900% excise tax. Like, that’s pretty crazy.”

Asked if companies could sue HHS, Cameron responded that “this is just cut out from the law that says the determination of maximum fair price is something that is not subject; there shall be no administrative or judicial review of any of the following. So, hey, you can always try, right? People are obviously going to try, but when is this going to happen? That probably only starts when HHS has actually published the first maximum fair price in 2024, it will take years to conclude, and we’ll have to see which brave soul is willing to just go up against HHS and push them on this.”

While the IRA specifies that the negotiation process will be between companies and the HHS secretary, Schimmer wondered whether it really would be solely the secretary or a group of people negotiating.

“I think that’s definitely a group of people, and we’re learning just how big this group is going to be because we’ve started to see job postings,” said Cameron. “This is a $3 billion infrastructure that is being created by HHS.…I think that we can expect this is going to be a pretty broad group of individuals; there’s a lot of focus on health economists.”

Law May Create ‘Weird Incentives’ for Biologics, Biosimilars Manufacturers

The law also allows a negotiation delay of up to two years for those biologics that expect to see a biosimilar competitor launch during that time frame. But it does not provide that delay for a drug that is expecting a generic competitor to come onto the market, pointed out Schimmer.

“Yeah, it’s really silly because it can absolutely happen because it’s really based on a point in time” between when a drug gets selected for negotiation and the actual process of negotiation, agreed Cameron. “What’s interesting about this law is if we go back to previous versions,…they gave a lot more HHS discretion for which drugs to pick and select. Here’s the thing: This law needs to get scored.…They wanted to use this law so that they could have a lot of other things that they cared about related to climate and related to the ACA, like subsidy extensions. So they needed this bill to really score well. And the CBO [Congressional Budget Office] was saying, ‘Well, hey, you’ve left all this HHS discretion. We don’t know how to score this.’ So what they did is they took out a lot of HHS discretion in the version of the bill that got passed so it would score well with CBO. But what that does is it says, ‘Secretary, you have to negotiate first the top 10, then the 15 and then 15, and then the 20. And they took out any discretion to be like, ‘Look, HHS, wouldn’t you be silly to negotiate the drug that ends up going generic and have any generic competition before you actually get to price control it?’ But they took that discretion away.”

The IRA also does not allow a company to launch a biosimilar of its own drug — essentially a version of an authorized generic — to take advantage of the two-year delay, noted Cameron. In addition, “the law makes it quite clear that if there’s an agreement between the biosimilar company and the reference biologics company, that agreement means that you don’t actually get this two-year delay.”

However, she contended, this “essentially incentivizes a biologic company to be like, ‘Hey biosimilars company, why don’t we have an agreement, so that you manufacture this drug, [and] we’re not going to worry about the two-year delay thing because that doesn’t really matter.’ And if that biosimilars company wants to win agreements like that with other referenced biologics companies, they will be incentivized to minimize the amount of share they take. And they will be incentivized to minimize the price reduction that they take as well. So there’s this weird kind of game theory where you’re like, ‘Hey, maybe…as a biologics company, I kind of want a biosimilar company to come onto the market because then I don’t get negotiated, but I don’t want that biosimilar company to take too much market share or reduce the price too much because then it’s bad for both of us.’ And a smart biosimilars company is going to know that, and they’re going to try and win these agreements based on being marginally competitive” — a “favorable duopoly.”

In this situation, said Cameron, “the biosimilar company wins, the biologic company wins, and HHS and the FTC are like, ‘What the heck? This is not what we intended.’ And they have all kinds of tools in their belt to think of ways to undo that. But it does create these weird incentives like that.”

Nuance Exists With Orphan Exemption

Drugs that have an orphan drug designation as their only approved indication are exempt from negotiation. But some nuance exists in this aspect of the law.

Of an average annual approval of 50 agents, among the negotiation-eligible ones, about eight are orphan drugs, and of those, about seven have multiple orphan indications, according to an analysis by Cameron’s company. Schimmer wondered about whether, for example, an orphan drug approved for the treatment of cardiomyopathy caused by transthyretin amyloidosis would be exempt from negotiation, but orphans approved for the treatment of cardiomyopathy and polyneuropathy caused by ATTR would not be.

“We’ll have to see if there’s more specific guidance that comes out from CMS next year,” said Cameron. “But the way that the law is written is essentially, if you have you have the one orphan designation, and if you have it approved for multiple indications that are all contemplated within your one orphan designation,” that drug would be exempt from negotiation.

For instance, she said, in the case of Tagrisso (osimertinib), “the orphan drug designation indication statement actually reads pretty broadly for EGFR positive, and the Tagrisso label has many different indications, but they are for different lines of EGFR positive, so that’s equal. So then the question for ATTR becomes, how does the orphan drug designation read? Is that orphan drug designation something that is for ATTR, and it doesn’t get into more details about like polyneuropathy or cardiomyopathy, in which case maybe you’re safe, I think for both of those. But if it spells it out,” and a drug “one designation for ATTR polyneuropathy and…a second orphan designation for cardiomyopathy, then…that’s going to be tough.”

Also murky is whether the negotiation list will lump together different lines of an agent, such as Humira (adalimumab) and Humira Pen, both of which are on the top spend list, said Schimmer. Will HHS go by the active pharmaceutical ingredient?

“That’s something that needs to be clarified in guidance,” asserted Cameron, adding that her expectation is that it will be based on the new drug application (NDA) or biologics license application (BLA). If a drug has “some different dosage forms and different forms of administration” and “those are all grouped under the same NDA or BLA, I think those will get lumped together.”

Also excluded from negotiation are small molecule drugs that received FDA approval less than nine years from the time of the list determination and biologics approved less than 13 years. In addition, drugs that have Medicare spend of less than $200 million in 2021 are excluded as well.

Cameron noted that there is “this concept of line extension that is specifically called out in the law. And this is a really interesting one that HHS is really going to have to clarify next year. What we do know is that any line extension does get aggregated for the purposes of determining if a drug is eligible for negotiation. And so what that means is if you have…two formulations of a drug, and…there are two NDAs, and one of them has $120 million in Medicare revenue, and the other is $100 million in Medicare revenue,” a manufacturer might assume those are safe from negotiation.

However, “what we know is that…it says in the law that you’re going to sum up for purposes of determining negotiation eligible; you’re going to send those up and say, ‘OK, so that drug is negotiation eligible.’ But if just one of those has” been on the market for 13 years and the other has been around for five, will the latter BLA be negotiation eligible as well? “Our view is that probably not; it might just mean that you get aggregated together for the purposes of that first one being negotiation eligible. Because new BLA, new NDA, new clock, but it’s just a source of uncertainty that’s very vexing, and we do hope [it] gets clarified in the new year.”

Schimmer noted that this situation will be important for high-dose Eylea (aflibercept) “because I know Regeneron is going to try to make that a new BLA, and Eylea may or may not be coming up for negotiation because there may be a biosimilar on its way.” So if the 8 mg Eylea is approved next year, “is that going to be subject to negotiation along with 2 mg Eylea,” assuming there is not a biosimilar?

“It’s unclear,” responded Cameron. “The view that we have heard from the experts that we’ve talked to…is that it would be treated as a different clock because it is a new BLA.…However,…let’s pretend it’s not treated as a different clock, and CMS comes out with guidance that says,…’We have this super broad definition of line extensions, and line extensions are going to be referenced back to that initial approval of the first reference product.’ Well, then…that might actually be great for high-dose Eylea. Because if HHS does that, and biosimilar competition comes in for Eylea before CMS gets into the negotiation for Part B drugs in 2028, does that mean that everything is exempt, and high-dose Eylea will never get negotiated? So it’s really interesting because you have these different ways of looking at the law.…So that line extension concept is a key one that is yet to really be fully clarified.”

Cameron said that companies “developing a drug or thinking about developing a drug” should reach out to No Patient Left Behind to help articulate their agent’s value proposition. She also spoke at a September webinar on the IRA that the group hosted.

Some manufacturers have been downplaying the impact and imminence of the IRA, saying it’s a few years away or only impacting “the big drugs,” she said. But “I think it’s really important to debunk some of those myths, because it’s not far away, we’re going to find out in September of 2023 which drugs are going to be selected, and we’re going to find out in September ’24, what the prices are that are going to be negotiated.”

The IRA “is here, right? So we can’t dance around this and be like, this is just going to go away, or…there are these exemptions, and this is just going to be fine. It is here. We have to acknowledge it, and we have to work with it and optimize within this framework.”

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