The Impact of the Inflation Reduction Act on Early-Stage Biomedical Investment Decisions
Richard Xie, PhD, senior health economist at RA Capital, explains the measurable impacts of the Inflation Reduction Act on future investment decisions in drug development.
His research finds that the law’s price-setting provisions reduce the net-present value (NPV) of a drug by 40% at launch.
Problem Statement:
How early-stage biomedical R&D efforts will vary by reward size is one of the most debated topics in modeling the societal impacts of the Inflation Reduction Act (IRA). Existing studies typically relied on aggregate data to estimate the elasticity of innovation by examining the relationship between global revenues with the number of drugs launched/in development.
Since ultimately all medicines come to market from investors deciding to fund their development, a micro- level analysis of how investors make their decisions can inform the key assumptions for simulations and generate more realistic insights for policymaking.
Description:
Using a real-world example of a marketed drug indicated for cardiovascular diseases (CD), we constructed a net present value (NPV) model to examine how the discounted value and investment decisions would vary in pre- and post-IRA scenarios. Data inputs on revenue and profit over time were derived from historical data. Key specifications included: a patented period of 14 years, a weighted average cost of capital of 11%, and a risk-adjusted internal rate of return of 12%. The post-IRA scenario assumed that US profits after year 9 after launch is zero in the base case. Sensitivity analyses were performed. Outcomes included NPV and investment decisions at six different R&D stages including preclinical, phases 1-3, filing, and launch.
Lessons Learned:
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. Incorporating discounted profits into empirical analyses reflects real-world investment decision-making, and reveals a basis for potentially greater elasticity of innovation in response to government price-setting in existing literature.
