Will the IRA Change Investment in Orphan Drug Pipelines?

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IRA negotiation eligibility criteria may impact orphan drug investment, affecting long-term innovation and patient access.

The Inflation Reduction Act (IRA) is introducing landmark policy changes to the healthcare industry, raising important questions about launch prices, pipeline strategy, and evidence requirements.  In the IRA Question of the Week series, Avalere answers the pressing questions shaping healthcare stakeholders’ strategic decision-making as the law is implemented.

In this installment, Avalere experts discuss how orphan drug investment could change in reaction to the IRA’s rules on which drugs are eligible for Medicare price negotiation, and how those changes may affect long-term innovation and patient access.

Price Negotiation Eligibility Criteria

The IRA directs the Secretary of Health and Human Services to select drugs for price negotiation from the top 50 eligible drugs by Medicare spending. This list of eligible drugs includes:

  • Small-molecule drugs that have been approved for at least 7 years
  • Biologics that have been approved for at least 11 years
  • Products with no approved/marketed generic or biosimilar

Additionally, the IRA excludes certain drugs from eligibility, including:

  • Orphan drugs with a single indication
  • Drugs that are a small biomanufacturer’s only major product
  • All plasma-related products
  • Products with Medicare spending below $200 million per year

Policies Supporting Orphan Drug Development

Orphan drugs often benefit from several key FDA programs such as accelerated approval, user fee exemptions, tax credits for clinical trials, and up to seven years of post-approval market exclusivity for the orphan indication. These programs expedite the time to market, resulting in a truncated research and development (R&D) timeline and lower capital requirements. Further, novel products offering clinical value often benefit from premium pricing due to high unmet medical needs for small patient populations with limited treatment options. Together, these factors have historically made orphan drug development an attractive option for investors. However, provisions within the IRA designed to protect orphan drugs have the potential to result in the opposite effect.  the opposite effect.

Impacts of Possible Orphan Drug Negotiation

Under the IRA, orphan drugs with a single indication label are protected from drug price negotiation, but  an orphan drug loses its exclusion once it gains additional indications. Label expansion strategies are a common method for manufacturers to realize the full therapeutic and commercial potential of their product. Label expansions also allow manufacturers to recoup more of their additional R&D spending and return value to shareholders or investors. However, if an orphan drug’s label expansion causes the product to lose its negotiation exclusion, the drug’s risk profile significantly changes for investors: the product’s negotiation eligibility reduces the commercial opportunity and the potential return on investment that would otherwise be realized through the label expansion. Consequently, the IRA provisions may increase risk for those investing in orphan drug R&D.

In the short term, these provisions may depress valuations of orphan drugs, leading drug developers to deprioritize orphan indications and stakeholders to make fewer investments due to potential reduced returns. In the long term, US investment in R&D for small population drugs could be significantly reduced, limiting or delaying patient access to drugs that could improve or cure rare diseases.

These orphan drug details underscore one of many scenarios that stakeholders should consider while reflecting on the IRA’s impact on their drug portfolio and pipeline investment strategies. Additionally, IRA guidance is still being published, and it is unclear whether these provisions will be modified as the Medicare price negotiation processes are fully implemented.

What Comes Next?

Drug pricing policy changes will have far-reaching effects for all stakeholders, varying based on product-specific payer mix, channel mix, and market dynamics. Manufacturers, plans, and other stakeholders should evaluate the policies’ individual effects and their interactions as they consider pricing, contracting, and formulary strategies.

Avalere experts in policy, market access, and evidence and strategy can help you understand what IRA drug pricing provisions mean for your organization and consider potential impacts of key implementation decisions. To better prepare for and shape the changing healthcare landscape in 2023 and beyond, connect with us.



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