The Impact of the Inflation Reduction Act's Drug Price Negotiation Program on Incentives for Clinical Development of New Drugs.

Objectives: We explore the impact of the Drug Price Negotiation Program (DPNP) on investment incentives for drug research and development (R&D).

Methods: We modeled 5 hypothetical scenarios of future drugs selected for the DPNP. Scenarios were defined by disease area, post-approval development strategy, and potential responses to the DPNP, such as delaying, resequencing, or canceling additional indications. We estimated risk-adjusted net present values and internal rates of return at 3 points during development of initial indications: beginning of phase 1, phase 2 (accelerated approval) or 3 (others), and FDA approval. Small molecules and biologics were modeled.

Results: The DPNP had a substantial impact on estimated investment returns across disease areas and post-approval development strategies for the modeled drugs that were assumed to be selected for the program. At the start of phase 1 for the initial indication, DPNP reduced the modeled discounted value of projects, and the estimated net present value reductions ranged from 22% to 95% for small molecules and 14% to 45% for biologics. Estimated internal rates of return were also reduced, by 5% to 14% for small molecules and 3% to 7% for biologics. No modeled response restored investment incentives to pre-DPNP levels; however, some modeled responses improved estimated returns relative to post-DPNP.

Conclusions: Examples illustrated how the DPNP may negatively affect R&D investment incentives for small molecules and biologics that were likely to be selected. Although short-term observed effects may be limited, over the longer term, DPNP-induced reductions in investment incentives may redirect funding away from programs with the largest expected impacts, potentially leading to far-reaching implications for drug development.