The Impact of the Inflation Reduction Act on Investment in Innovative Medicines: A Project-Level Analysis.

Abstract

The impact of Medicare's price negotiation on long-term pharmaceutical innovation and patient welfare remains one of the most widely debated topics across stakeholder groups. Existing policy simulations have tried to assess the policy impacts on innovation based on either empirical estimates of elasticity of innovation from the literature or structural models estimating the joint distribution of expected revenue and expected costs at key stages of pharmaceutical development. Since investors exert significant influence on investment programs that companies advance in the real world, a program-level analysis of how investors make their investment decisions can inform the key assumptions for policy simulations and generate more realistic insights. Using an illustrative case example, we constructed a net present value (NPV) model to examine how Medicare price negotiation will impact discounted value and investment decisions at six key timepoints of new drug development, highlighting key factors in investor decision-making not explicitly considered in existing empirical literature or policy simulations. Our analyses showed that IRA would lead to a 40% reduction in the NPV at the time of launch. The reduction was greater in earlier stages of development due to expected dilution and discounting, resulting in discontinuing this project at earlier decision points. The case study demonstrated that the negative impacts of price negotiation at nine years were more pronounced for small-molecule assets in the earlier stages of development (e.g., preclinical or Phase 1) than those in the later stages, implying a possibly much larger impact on innovation than suggested by existing empirical literature and observed in the short term.