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How is the Inflation Reduction Act affecting biotech investment?

The law on every company’s and investor’s mind: the Inflation Reduction Act (IRA), which allows the government to set the prices of certain drugs.

The final day of the 2023 Biotechnology Innovation Organization (BIO) Investor Forum began with a conversation about the outlook for the law and its impact on investment decisions. Regardless of whether the law stands, is amended, or goes away entirely, companies need to strategize their next steps.

“Investors have always had a very sophisticated view of what to look for in biotech,” said Meenakshi Datta, partner at Sidley Austin LLP and co-leader of the firm’s healthcare practice, in an interview at the event. “But now, more than ever, I’m seeing investors fold in the regulatory considerations that come from the IRA and thinking very strategically about things like the orphan drug exemption, the plasma exemption—really factoring that into their playbook of diligence when they’re looking at potential investments,”

“In terms of strategy, I like what I’m seeing,” she said during the panel. “Companies have the opportunity to be very methodical and strategic” about the drug development areas they’re pursuing—such as, for example, pursuing a promising cell or gene therapy administered in the in-patient setting, which can be positioned outside the IRA.

“Having these conversations as early as possible to position the company in the best light as possible to potential existing investors” is key for biotechs looking for investment, she said.

“I’m not saying it’s easy, but it’s a thought process that is happening far earlier than I’ve ever seen before,” she said.

So, what will happen to the IRA?

While companies shouldn’t plan on the IRA being taken down, they are factoring potential scenarios into their strategies for the next 18-20 months.

There are more than seven lawsuits filed by companies to block the IRA, plus lawsuits from industry groups and the Chamber of Commerce.

“Lots of different things could happen—nobody has a crystal ball,” said Datta. “I’ve got to think something’s going to happen,” because the government would have to win every lawsuit for the challenges to go away.

If any plaintiff prevails at the U.S. District Court level, the U.S. government is likely to appeal, teeing up a potential U.S. Supreme Court case by 2025—“before the most favored nation prices actually go into effect,” Datta explained.

Will Congress change the IRA?

BIO's John Murphy and Sidley Austin's Meena Datta at the 2023 BIO Investor ForumBIO's John Murphy and Sidley Austin's Meena Datta at the 2023 BIO Investor Forum
BIO’s John Murphy and Sidley Austin LLP’s Meenakshi Datta at the 2023 BIO Investor Forum in San Francisco (Credit: BIO)

Meanwhile, there is momentum “to make some changes that could be beneficial in the short term,” said BIO’s Chief Policy Officer John Murphy.

“I do think we are going to see this law—should it stand—undergo some changes,” he continued.

For example, the bipartisan Optimizing Research Progress Hope and New Cures (ORPHAN Cures Act) would change the IRA’s incentive structure to encourage follow-on investment into orphan drug development. Currently, orphan drugs are exempt from the IRA only if they’re approved for a single indication. The ORPHAN Cures Act would allow products to remain exempt from price controls “so long as approved uses are exclusively for rare diseases. The bipartisan legislation would also clarify that the negotiation clock starts for an orphan product only once it loses the exemption,” explains MassBio.

“If we can widen the exemption, that will give a lot of space for investors to feel more confident,” said Datta.

There could also be room to widen the plasma products exemption, as well as fixed-dose combination products (such as vaccines with annual updates).

In the meantime, investors should “share your insights with the drug development community” about how they’re making investment decisions, said Datta, “so that the drug developers can make more informed decisions and higher quality decisions on what to focus on with their development.”