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Will the Biotech Rebound Run into Pricing Policy Obstacles?

The biotech industry is poised for an innovation-led rebound, but drug pricing is already in the election crosshairs. Meanwhile, policy initiatives on patent rights raise potential threats for the sector.

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By Brian Abrahams
Hosted by Joseph Coletti

Published March 1, 2024 | 13 min read
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Key Points

  • Biotech is buoyed by cooling interest rates and innovation, and FDA flexibility and lower FTC hurdles to M&A should also benefit the group. However, drug discounting embedded in the IRA will have a negative effect if the Act is unchanged.
  • Behind the election rhetoric, both political parties have mixed approaches to future healthcare and drug pricing policy.
  • A new proposal for patent march-in rights would be disruptive but may be designed for election impact rather than realization.
  • More states are planning drug pricing boards, though legal challenges will push any impact back years.
  • Regulatory and tax policy developments outside the U.S. will also have varied impacts on the sector.

Sector faces new patent cliff if IRA passes

As interest rates cool, biotech may see renewed investment and stock price growth. Government regulators are more permissive than ever, while strong innovation should help the sector turn the corner. However, the industry faces headwinds, led by the Inflation Reduction Act.

It’s facing multiple court challenges, but the likelihood remains that the IRA will be rolled out as it stands. The cases against the IRA seem unlikely to succeed, given their complexity and the government’s broad authority in this area – plus the factor of congressional gridlock.

The drug discounting embedded in the IRA will have a tangible negative impact for biotech players, if implemented. The effect will resemble an artificially created patent cliff being triggered prior to the expiry of a patent. This is already affecting the way companies shape development.

The IRA could have positive effects too. Big pharma companies will need to replace the revenues lost to discounting. That will provide more incentive for M&A activity, which benefits mid-cap biotechs.


Drug pricing policy in the crosshairs

Pre-election rhetoric on drug prices is already ramping up. Democrats are campaigning to expand the IRA, while Donald Trump has accused biopharma of ripping people off.

More specifically, the two parties’ approaches are both mixed. The Biden administration has reportedly been seeking to introduce controls on drugs at launch, using price reviews. On the positive side, they have discussed expanding mental health access and funding community hospitals, which could both drive treatment volumes.

Trump has said he would repeal the Affordable Care Act, which could curb volume benefits of universal healthcare. However, he would not cut Medicare funding, so that could continue to drive drug volume for elderly patients.

“Pharma and biotech are really easy to vilify, and calling for lower drug prices polls very well”

Brian Abrahams, Head of Biotechnology Research


March-in rights, deal scrutiny and court action

The Biden administration recently published a framework for so-called patent march-in rights. This would effectively remove patent protection where the government deemed drug price or access too constraining. That could be highly disruptive if implemented, though we currently see it as pre-election posturing.

On M&A deals, the Federal Trade Commission (FTC) has taken a harder stance lately. But smaller companies and deals – which are key drivers of biotech – are rarely a target, and deals are still being done.

In the federal courts, a class action lawsuit against Gilead will determine whether companies have a duty to innovate. That could have major implications for pharma, though settlement before a final ruling is likely.


States ramp up healthcare laws and pricing action

State drug pricing boards are an underappreciated threat to the sector. Four states now have active price review boards, and 16 others have advisory boards or are considering them. However, legal challenges are likely to push full implementation beyond 2026.

The states have enacted 49 healthcare laws this year – 50% more than in the past two years.

“States are seeking material drug discounts of 30% or more – we think this could be a real risk”

Brian Abrahams, Head of Biotechnology Research


Beyond the U.S.: global policy impacts on biotech

The European Commission’s proposed pharma overhaul proposes unfavorable changes, such as regulatory exclusivity adjustments, greater unification on access and pricing, and a push towards efficient biosimilar or generic entry. However, it will take years for this to become law.

Globally, the 15% minimum tax rate will take effect this year across many countries, limiting biotechs’ ability to use foreign domiciles as tax havens.

There are mixed developments in Canada, where a plan for agile licensing would bring drugs to market six months faster, but drug price reform is also being proposed, using 11 reference countries. Meanwhile, recent pro-industry patent rulings and initiatives in both China and India could spur more biotech investment.

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