Epoch 35: IRA UPDATE - THE UNLUCKY 10

Price Controls, Initial Products, Projected Financial Implications

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Hello Avatar!  Welcome to another week of biotech analysis. This week was a historic one with regards to the IRA as the list of the first 10 drugs to fall under price controls was released.  While the list itself drew a lot of attention, to be honest the materiality of the list is really still up in the air as it will remain unclear where the “negotiated” fair price will land in the fall of 2024.  Nevertheless, knowing which drugs are in play does remove a layer of ambiguity.  Luckily, many curious minds at the investment banks which cover pharma have applied a forward looking lens and attempted to make some assumptions and model potential financial implications.  Always follow the money we say!   Today we will run through some of the early modeling to get a sense of how much damage is in play.

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Lots to cover this week, let's get started!

IRA UPDATE

The past week was a slow one in terms of biotech news, but a big one in terms of IRA news.  As many of you are aware, the list of the first 10 drugs to enter into “negotiations” (i.e., price controls) were announced.  Today we will take you through insightful commentary from the Leerink, Goldman, JPM, and Credit Suisse teams to help bring you up to speed where we stand.

As a reminder, while the announcement of the first 10 drugs to enter price controls is historic, it is not very material in the short term.  The rubber will hit the road when we see what price is assigned to these drugs as “fair”.  That should happen in September of 2024.  Then beyond the first cohort things get interesting in Year 3-4+ when the entire cohort of drugs under price control swells to 50+ - there is no cap on this madness!  Yes you read that correctly, the number of drugs under price controls will continue to grow year after year.

If you are looking for additional background on IRA we refer you back to our previous writings:

• 2022

  • No More Small Molecule Medicines from Biotech?

  • Epoch 42 - A Trojan Horse Enters With MASSIVE Biotech Implications

  • Epoch 49 - Inflation Reduction Act: Make Them an Offer They Can’t Refuse 

• 2023

  • Epoch 21: LIMITING THE DAMAGE OF THE INNOVATION REDUCTION ACT (IRA) 

THE 1ST 10 DRUGS IN US HISTORY SUBJECT TO GOVERNMENT PRICE CONTROLS

Let's jump right into it.  Below are the first 10 drugs subject to “negotiation” under the Inflation Reduction Act (IRA) which kicks in in 2026.  

The 10 drugs selected were prioritized based on their total gross covered prescription drug costs under Medicare part D.   As one can see below this represents ~$50B in drug spend from June 1, 2022 through May 31, 2023.

One can see from the chart below the key dates which lead us into 2026.  Today is just the beginning - which drugs are in scope.  February 2024 will be the next key when the government is to unveil their initial offer on what a fair price should be for each of these drugs.  Get your popcorn ready and expect fireworks on that announcement!

One interesting dynamic noted by the Goldman team is that there are two instances where there are two drugs on the list that directly compete against each.  This brings a scenario where CMS will be putting two drugs in the same class against each other.  We suspect this was done intentionally to extract maximum value from manufacturers.  The two examples are from the blood thinners Eliquis (Bristol/Pfizer) vs. Xarelto (Johnson & Johnson) and SGLT2s Jardiance (Lilly/Boehringer Ingelheim) is joined by Farxiga (AstraZeneca).

Also noted as surprises is the exclusion of larger drugs such as  Xtandi (Pfizer), Ibrance (Pfizer), Pomolyst (Bristol Myers) and Invega Sustenna (Johnson & Johnson).

It is also noteworthy that certain products lucked out and will encounter an impact lasting one year or less. JNJ's Xarelto (in collaboration with Bayer) and Novartis' Entresto, both anticipated to lose exclusivity in 2027, will only be under price controls for a year.  Additionally, Merck’s Januvia and AZN's Farxiga facing patent expirations in 2026, thereby mitigating the impact of price controls on these products as well.

Lastly, moving back to the timeline of key events, to keep it simple we highlight the 3 most significant upcoming events.

• October 2, 2023:  The deadline for both companies with a chosen drug and the general public to provide data and information about the drugs to CMS, in response to the drug's selection, is approaching.

• February 1st, 2024: CMS intends to announce an initial proposal to every engaged company. This proposal will encompass the utmost equitable price along with a brief rationale, wherein CMS outlines the considerations encompassing aspects such as therapeutic alternatives, research and development expenses, production and delivery costs, and additional variables. Subsequently, companies will be granted a span of 30 days to react, entailing either an acceptance of the initial proposition or the presentation of a counteroffer. Following this phase, there is a possibility for a company to engage in up to three negotiation sessions with CMS, spanning until August 1, 2024.

• September 1, 2024: The definitive disclosure of the agreed-upon prices for the ten chosen drugs, slated to become effective from January 1, 2026, will be made.

MODELING POTENTIAL FINANCIAL IMPACTS