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-- Heard on the Street -- WSJ

The Wall Street Journal · 01/06/2023 05:30

By David Wainer

Big pharma loves to bemoan the impact on future drug research when lawmakers get tougher on the industry. The truth is usually a lot more complicated.

In a 2021 study, for instance, three academics including Massachusetts Institute of Technology finance professor Andrew Lo looked at what happened to innovation when drug companies were no longer able to resort to one of their favorite tactics: paying generic makers to stay off the market, known as "pay-for-delay." A 2013 Supreme Court ruling had essentially barred such agreements. What the researchers found was that companies actually responded by increasing their research and development spending to find new drugs.

The incentives debate is now front and center again due to the Inflation Reduction Act, which requires the federal government to negotiate prices for some drugs. Merck Chief Executive Officer Robert Davis was just one of many to warn it will be "highly chilling on future innovation."

The 274-page legislation passed in 2022 doesn't look likely to be a massive damper on innovation, but it will surely have an impact on how capital is allocated. When companies look at their R&D budgets, they will have to consider the law's ramifications. Alnylam Pharmaceuticals, a biotech company based in Cambridge, Mass., recently pointed to one potential problem when it said it would hold off on the development of a drug for a rare disease indication because that drug already had an orphan designation for another disease. An orphan designation is an approval provided by the Food and Drug Administration for products that treat rare diseases. Alnylam ascribed its decision to the law's exemptions for drugs that receive a single orphan designation.

Critics say companies are trying to scapegoat the law when it is unclear those R&D projects were moving ahead anyway. "It's in the industry's best interest to say the sky is falling," says Stacie Dusetzina, a health professor at the Vanderbilt University School of Medicine.

Still, there is no arguing with the fact that the bill is reshaping many incentives drug companies face. For example, critics of the law point out that it eliminates the incentive to conduct additional research once a drug has been approved -- a common strategy to extend patent protection for a drug -- because prices are negotiated after nine years for small-molecule drugs and 13 years for biologics. As Kirsten Axelsen, a visiting scholar at the American Enterprise Institute explains, many oncology medications are first approved for severely ill patients and over time those drugs are tested for patients in earlier stages of the disease.

"Thanks to that, we're now able to hold back the progression of cancer so that many of the major cancers have five-year survival rates of longer than 90%," says Ms. Axelsen, who is also a policy adviser to law firm DLA Piper.

Defenders of the law argue that companies will just have to do those studies sooner. "There may be some changes on the margin," acknowledges Anna Kaltenboeck, who helped write the Inflation Reduction Act and now oversees drug pricing practice at ATI Advisory, "but at the end of the day, if they want to reach their peak revenue sooner, then the incentive is to do those studies earlier to get it under the belt as soon as possible."

The law also could shift investment toward drugs that target the general population and away from seniors. That is because it only empowers Medicare to negotiate prices, leaving the commercial market wide open.

But the law also creates powerful new incentives that could drive up prescription use by seniors. The legislation caps beneficiary out-of-pocket costs at $2,000 a year, provides a $35 a month out-of-pocket cap for insulin and makes vaccines free under Medicare. A recent study by Prof. Dusetzina and other academics showed that Medicare beneficiaries were much less likely to fill their cancer drug prescriptions if they didn't have low-income subsidies. That suggests that the new spending caps could allow millions of people to gain access to drugs where affordability was previously an issue.

Perhaps the most serious concern is that the law picks winners and losers by favoring biologic drugs over small molecules, which face price reductions four years sooner than their larger molecule counterparts.

Small molecule drugs are chemically derived and simpler to make and can usually be taken orally by patients. These drugs -- think medicine cabinet essentials like aspirin or statins -- dominated the pharmaceutical industry during the 20th century. Biologics, therapies that are extracted from living organisms, are usually given through an injection and, because of their higher price tags, make up the bulk of today's top-selling drugs. While biologics are at the cutting edge of medicine, discoveries of new small-molecule drugs continue to be made.

Eli Lilly's CEO, David Ricks, noted in a recent earnings call that "it sends a signal to investors" that small molecules "aren't wanted and are worth a lot less." That could tip the scales toward more development in biologics, a likely unintended consequence of the law.

MIT's Professor Lo says that is like effectively creating a tax on small molecules, or a subsidy for larger ones. He argues that such unintended consequences are the unfortunate byproduct of sweeping legislative efforts that have to be passed in small time windows, and it is up to lawmakers to figure out what isn't working and fix it along the way.

Until Congress gets around to that, though, companies will have to respond to incentives in the bill as it is.

(END) Dow Jones Newswires

January 06, 2023 05:30 ET (10:30 GMT)

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