So far in 2023, biopharma companies are backing up their saber-rattling about the Inflation Reduction Act by investing more in biologic drugs as well as cell and gene therapies.
Since the landmark drug pricing law’s passage last summer, pharma and biotech CEOs have rarely missed an opportunity to rail against the law’s nine-year clock before Medicare-negotiated prices kick in on small-molecule drugs.
As a result of the legislation, many execs have threatened to move away from pills and divert more R&D spend into developing biologic drugs, which enjoy 13 years of negotiation-free pricing under the law.
“They’re very concerned about this, and with good reason,” says Kristin Pothier, deal advisory and strategy leader for healthcare and life sciences at KPMG. “Even that extra four years…is a significant amount before you have to start drug negotiation and pricing.”
The Congressional Budget Office estimated that the pricing provisions of the IRA will have a “very modest” impact on drug development over the next 30 years, with 13 fewer new drugs coming to market in the U.S. out of 1,300, or a reduction of 1%.
However, recent financing data suggests the possibility of a more noticeable impact.
This year, U.S.-based biotechs have received a total of $3.2 billion for biologics, versus $2.2 billion for small molecules. That’s according to GlobalData’s Pharma Intelligence Center Deals Database, which captures both biologics and small-molecule drugs in all active stages of development.
“Following the IRA passed last August, we continue to see a shift in the development of biologics over small molecules,” observes Ophelia Chan, a pharmaceutical business fundamental analyst at GlobalData. “In 2023, U.S.-based biotechs experienced a surge in venture financing for innovator biologic drugs, surpassing the funding for small molecules drugs by 48%.”
Over the past five years, U.S.-based biotechs have received $48.9 billion in venture financing for the development of biologics, representing a 19% increase compared to funding for small molecules, which totaled $41.3 billion.
The data suggest business development and M&A strategy are de-emphasizing programs involving pills and shifting more toward biologics, or at least away from drugs heavily dependent on Medicare reimbursement.
“Companies are saying, ‘All right, where does the [IRA] affect me?’ It’s my Medicare population, my chronic disease population,’” Pothier says. “[Drugmakers] are looking at their portfolios and some are saying, ‘Well, maybe I don’t want to be as much in those therapeutic areas where [price negotiation] would be a problem. Why not go into some of these areas where that isn’t so much of a problem, where there’s more biologics, more ability to affect patients that aren’t in Medicare?’”
If biopharma is putting more of a risk premium on small molecules, then one of the law’s unforeseen consequences is that some of the most promising biomedical innovations, like RNAi and many drugs to treat cancer, are getting extra scrutiny.
“A tremendous amount of small-molecule innovation is being hindered or questioned by these pharma companies, just because of what might be happening with drug negotiation,” Pothier adds.
It’s no coincidence, then, that this year’s two biggest M&A announcements in the sector involved large-molecule drugs.
Pfizer made a $45 billion play in Q1 for cancer-focused biotech Seagen and its antibody drug conjugates, which are complex treatments combining multiple biologics. Then, in Q2, Merck announced an $11 billion acquisition of Prometheus Biosciences, which is developing monoclonal antibodies for autoimmune conditions.
Going forward, when it comes to multi-billion-dollar business development and M&A strategies, Pothier predicts a drugmaker tendency toward smaller bolt-on deals as opposed to megadeals. That’s due to a number of factors that, barring the Seagen and Prometheus deals, have added up to a difficult year for biopharma.
Preliminary Q2 data released this week by KPMG shows M&A in the U.S. life sciences sector fell 35% year-over-year to $39.8 billion.
“As we look at all the potential for megadeals of the past, we don’t expect to see that as we move to the end of FY23 and into FY24,” she says.
Aside from the hardships of financing and integration, as well as the necessary divestitures associated with large deals, much of the innovation is coming from small-to-midsize biotechs anyway. In Pothier’s opinion, that means sizable drugmakers are more likely to snap up smaller firms or strike “try before you buy” licensing deals with them.
In terms of the kinds of innovation being prioritized, Pothier foresees a continuation of what she calls “the wrappers” around pharma, a trend that gained steam during the pandemic when interest in COVID-related diagnostics intensified.
“As you work with biologics or with personalized or precision medicines in oncology or other therapeutic areas, the diagnostic that funnels the patient into the therapeutic and the services that allow a patient to be infused and have individualized therapy are just as interesting and important,” she notes. In other words, “Companies are looking for the holistic approach to the therapeutic rather than just the therapeutic.”
She also says many large firms are rationalizing and balancing out their portfolios, which may entail selling off some assets.
“We’re seeing more divestitures over our fence,” she observes. “It’s the era of smart optimization in life sciences.”
