At the JP Morgan Healthcare Conference in San Francisco earlier this month, management from Gilead Sciences sounded fairly confident when discussing the firm’s growth prospects. That’s in spite of a new law, set to kick in soon, that will allow the federal government to negotiate the pricing of some high-price drugs.

“With what we know today, although it’s still early days, we do believe that the Inflation Reduction Act [IRA] is going to be manageable,” said Johanna Mercier, Gilead’s chief commercial officer, in a presentation during the investor conference.

The executive’s words contrast with a host of other big biopharma companies. In regulatory filings and investor calls since the law’s passage four months ago, many firms have characterized IRA’s impact in less sanguine tones

But, while it may seem like a difference of opinion, what most executives are saying, essentially, is that they think they can manage through the additional hurdles that the IRA creates, in part because it’s already a complicated commercialization market.

“In terms of pricing, the IRA is one component that informs pharma’s commercial strategy,” said Ellen Licking, senior director of consulting services and communications at Real Endpoints. “It’s not the only one.”

The law’s drug-price provisions authorize Medicare to negotiate prices with drugmakers on a limited subset of pharmaceuticals. That process begins this year, and the first negotiated prices are planned to take effect in 2026 for small molecules, and two years later for biologics. The law also puts a ceiling on annual price increases, with strict penalties for those who flout the rule.

Initially, price-negotiating will apply only to the 10 highest-cost Medicare drugs without generic or biosimilar competition. Those negotiations won’t start until 13 years after approval for eligible biologics, and nine years after approval for small molecules. Drugs like Gilead’s triple-combination HIV pill Biktarvy, categorized as a small molecule, may come up against price curbs sooner than thought. 

The CBO estimates that the Act’s pricing provisions will cut the federal deficit by $237 billion over 10 years. Because of the shorter window for small-molecule drugs before their negotiated prices begin, though, companies say it will diminish innovation and lessen the amount of drugs in development, particularly small molecules. 

The industry has not been shy about making that point clear. “The difference between a nine- and 13-year product line is about 50% or 60% of the value,” Eli Lilly CEO Dave Ricks told Reuters. “In 10 years, we’ll have far fewer small molecules being developed than we do today.”

Lilly and several other companies have publicly stated that they plan to cease development of some small-molecule drugs, including those for oncology. And the trade group Pharmaceutical Research and Manufacturers of America (PhRMA) said that in a survey it fielded, 63% of members said they expected to shift at least some of their R&D away from small molecules.

“There are some known unknowns, but the true impact could be very large,” said Licking. “And so companies are looking at those products that are on the bubble – that may not have been that promising or may have had challenges from a development perspective – and recalculating, is it worth it to go through the development of that?”

Some may say that pharma’s rhetoric doesn’t necessarily jibe with the CBO’s analysis, which held that IRA’s pricing measures “will have a very modest impact on the number of new drugs coming to market in the U.S. over the next 30 years.” 

And when firms say they’re going to prioritize biologics, that’s not solely the IRA’s doing. That ship sailed several years ago when companies began shifting toward biologics, like gene therapies, and toward conditions where biologics play a role, like autoimmune diseases, cancer and genetic disorders. 

That said, most of these announcements have occurred during calls between publicly traded companies and their investors. Considering the extent to which IRA-related earnings concerns have been raised on earnings calls – 26 by one count – and that it would be a crime to deliberately mislead investors, it’s unlikely that drugmakers’ gripes are merely for political posturing. 

The skewing of incentives away from investing in small-molecule drugs and more toward biologics, which are typically pricier, might end up being the law’s biggest unintended consequence. If that were to come to pass, it would likely raise the general tab for medicines – the opposite of what the law intended.

“Companies are responding to the economic status to which they have been given,” explained Licking. “Which is, there is more value to be created around biologics because there will be less pricing pressure due to having more time prior to price negotiation.”

What hasn’t necessarily been talked about as much is how the law’s pricing provisions could affect patients.

“We don’t actually want an environment where all of the new drugs are biologics, are harder to administer and actually come with more costs,” she said. “And there is, as a result of the IRA, a disincentive for a company that’s developed something that’s intravenous to actually reformulate it to a subcutaneous injection that a patient could take themselves.”

As they rethink their portfolio strategies, meanwhile, firms are seeing materially different ROI as a result of the IRA. Alnylam Pharma said the law’s measure to exempt single-indication orphan drugs from price negotiations may end up affecting its plan to expand the indications for its rare-disease treatment Amvuttra. In other words, if the company were to develop a second orphan indication, in this case for Stargardt Disease, Amvuttra would be subject to price negotiation and would risk losing a good deal of revenue. 

Another unintended consequence is that, in the near term, list prices for drugs may actually rise as companies try to account for lower-than-forecasted annual price spikes down the road. The penalty for raising prices above the cost of inflation puts pressure on brands to set their launch price correctly from the beginning. 

“In the past, if you didn’t get your launch price right, you could increase your price to make up for it,” Licking recalled. “That’s not going to be a strategy companies can really use going forward. That whole calculus becomes really important.”

Going forward, the way companies shape their product portfolios in the IRA era could come down to a niche versus blockbuster strategy. On the one hand, the law incentivizes companies to pursue ultra-rare categories where there’s still pricing flexibility and they’re not likely to trigger Medicare negotiation. On the other, products that treat larger populations might make sense, as their sales levels make a negotiation scenario sustainable.

In light of comments made by the CEOs of Merck and AstraZeneca, who warned that the law could make it less likely that their companies would invest in follow-on indications for oncology drugs or launch new cancer meds, will we see a shift away from oncology? Licking doesn’t think so.

“It’s what – 40% of the pipeline for manufacturers? – if not more than that, right now,” she said. “I think, though, that you are going to see companies be a lot more thoughtful about, do they have the data to push forward in a particular oncology indication or not? Is there a rationale for it? The problem is, the way the industry has grown up, there’s this whole notion of growing a blockbuster over time, and the IRA makes it difficult to do that.” 

Companies may find themselves shifting into non-Medicare disease areas. Or, as highlighted by the Alynlam case, choosing to go for as broad an orphan indication as possible. 

IRA’s imprint may also be felt in the way companies value future acquisitions. There’s been a good deal of conversation about what the M&A picture in life sciences will look like in 2023. Many industry watchers are expecting a big year, as companies have the firepower to do deals and are staring down the loss of exclusivity on a number of products over the course of the decade. 

While that increases revenue pressure, companies will think twice when it comes to what they’re buying. They’ll be looking at capital allocation and business development through an IRA lens now, carefully considering the kind of value they get for those assets and the potential to generate revenue.

“[Acquiring] companies also will want to see proof that the product actually can deliver on its commercial potential,” Licking added. “They’re going to wait until a company has shown that it can have sales and get payer reimbursement. So for biotech companies, it requires them to develop commercial strategies and think about reimbursement much earlier in the game.”