Decoding Drug Pricing in the ERA of IRA: From Lab to Patients' Wallets

The journey from the research lab to a patient’s bedside for a drug is long, costly, and risky. Manufacturers make significant investments over many years to research, test, and gain regulatory approvals for drug candidates. However, the journey doesn't end there. Even after approval, manufacturers have many follow-up ongoing studies and initiatives, face competition from generics and biosimilars, and the process of securing coverage and reimbursement from payers. With recent legislation like the Inflation Reduction Act authorizing Medicare to negotiate certain drug prices, the drug pricing debate is more heated than ever. The biggest concern around this negotiation process is that it poses a threat to manufacturers' ability to recoup their research and development investments. At the same time, payers and patients are calling for lower costs to relieve healthcare spending burdens. This complex landscape highlights the nuances surrounding fair drug pricing and the need to balance incentives for innovation with affordability. In this blog, we will explore the drug development process, the pricing complications manufacturers face, and the pros and cons of generic and biosimilar competition.

The Inflation Reduction Act and Medicare Negotiations 

The federal government has released a list of the first 10 drugs that will be subject to price negotiations with the government, as part of the Inflation Reduction Act’s (IRA) attempt to lower drug costs. For more on the Inflation Reduction Act, click here. This means that Medicare can now negotiate the price of these drugs and penalize companies refusing to participate in negotiations. Medications included in this list target conditions ranging from stroke and heart disease to cancer and diabetes. There are certain types of drugs excluded from the IRA provision, including orphan drugs, plasma-derived products, and small biotech drugs. Other exclusions include drugs that accounted for less than $200 million of Medicare spending in 2021.   

The monthly cost of the medications targeted by the IRA ranges from $600 to $17,000. The federal government aims to make these commonly prescribed, vital medications more affordable for Medicare beneficiaries. With the release of this list, the public has expressed confusion and concern about the high sticker prices of certain medications. Why are prescription medications in the United States so expensive? 

The process of drug discovery, development, and FDA approval can be expensive and takes upward of 15 years. Here is a brief overview of the drug development process: 

Discovery Research: The development of a new drug starts in a laboratory where researchers will create or discover a compound and experiment with absorption, dosage, and effectiveness.  

Pre-Clinical Research: From here, a new drug goes through preclinical research including in vitro and in vivo toxicity testing. Animal testing for toxicity occurs during this step. Once the drug is considered safe enough for clinical research, companies can submit an Investigational New Drug Application (IND) to the FDA.  

Clinical Trials: After an IND is approved by the FDA and local Institutional Review Board (IRB), the drug will go through several phases of clinical trials to assess dosage, efficacy, side effects, and the potential adverse effects on humans. 

• Phase 1: In Phase 1 of a clinical trial, 20-100 healthy participants will participate while researchers aim to determine safety and dosage information. If a new drug does not reveal unacceptable toxicity levels, it may proceed to Phase 2. 70% of drugs in Phase 1 make it to Phase 2. 
• Phase 2: During Phase 2 of a clinical trial, several hundred participants will help test a new drug for up to 2 years. The main goal of this step is to evaluate the efficacy and side effects of the new drug over time. 33% of drugs in this phase make it to Phase 3. 
• Phase 3: 300 to 3,000 volunteers with the targeted condition will participate in Phase 3 for up to 4 years. In this phase, researchers will examine the efficacy of the drug and monitor adverse reactions. 25-30% of drugs in Phase 3 make it to Phase 4, which is post-approval safety monitoring.  

• Phase 4 Post-Market: This step takes place after official FDA approval of a new drug and involves thousands of participants. The drug may be prescribed by authorized healthcare providers, and the long-term effects of the medication can be assessed in a real-world setting. During this time, researchers may evaluate additional potential uses of the drug or rare side effects . 

FDA Approval: After evidence for the drug’s safety and efficacy has been formally gathered, companies must submit a New Drug Application (NDA). FDA approval of a new drug takes between 6 and 10 months, and costs around $2 million.  

This is a broad overview of the decade-long process, but it reveals the intricacies of developing, testing, and gaining approval of just one medication. In 2019, the pharmaceutical industry spent $83 billion on R&D of new drugs, this is up to $2 billion per drug. With billions of dollars and years of research on the line, it is no surprise that the pharmaceutical industry is not happy with drug cost negotiations. Some pharmaceutical companies have even filed lawsuits against the federal government with claims that their revenue will decrease impact research funding for new drugs. The market for certain drug classes may narrow as it becomes more difficult to compete with negotiated prices.  

Although this news has just broken, the impact of these changes will not be seen for several years, as negotiated prices do not go into effect until 2026. The next round of drugs chosen for negotiation will be released in February 2025. 

While high cost of R&D is often cited as the reason for the price of prescription drugs and treatments, few studies examine the convoluted nature of pharmaceutical spending. A recent British Medical Journal study disputes the claim that R&D is the cause of high drug prices and found 57% higher spending on general, administrative, and selling costs than R&D. On the other hand, there may be increases in R&D spending due to a focus on “niche” drugs for rare diseases, rather than chronic disease treatment. Development of these orphan drugs is an emerging market within the pharmaceutical industry.  In 2016, orphan drugs accounted for 41% of FDA drug approvals in the U.S. The FDA provides incentives for the development of drugs or medical devices for conditions that affect less than 200,000 individuals. These incentives include 7-year market exclusivity, tax credits, and user fee waivers. Given the limited market of orphan drugs, prices are significantly higher than other medications. The IRA’s exemption of orphan drugs from negotiation only applies to medications with a single indication. Drug companies may be disincentivized from investing in potential second indications, as this would open the opportunity of negotiation from the federal government.  

Generics, Biosimilars, and Interchangeability  

One mechanism for reducing drug costs to patients involves the use of generic drugs. 9 out of 10 prescriptions filled in the U.S. are generic drugs. These medications have the same active ingredient, strength, and route of administration as the targeted name-brand drug. They must offer the same benefits and expose patients to the same level of risk associated with the brand-name medication. Generic drugs can skip certain redundant clinical and animal trials and there is often increased market competition. This leads to prices about 85% cheaper than name brand alternatives.  

Another method for decreasing drug costs is the use of biosimilars. Biosimilars differ from generics, as they are developed from living organisms (plant cells, bacteria, yeast, e.g.). The biological source of biosimilars leads to variation between lots of the drug. Bioequivalence does not have to be established for biosimilar approval, instead, manufacturers must establish that differences from the reference drug are not clinically meaningful. Like generics, biosimilars must have the same route of administration, potential side effects, and strength as original biologics. Biosimilars are helpful and cheaper alternatives to original biologics. Patients often choose these biosimilars due to variations in insurance coverage.  

If a biosimilar meets certain requirements, it can be approved as an interchangeable biosimilar by the FDA. Clinical studies for interchangeable biosimilars must prove that there is no additional risk or reduced drug effectiveness when switching between a biosimilar and reference biologic.  These biosimilars can be substituted for a reference biologic without consulting the prescriber—a similar process as generic substitution. In most states, pharmacists must disclose the interchangeability information to prescribers at some point after filling the prescription, typically within 5 business days. Prescribers have the authority to request medications be “dispensed as written,” this would prevent a pharmacist from using an interchangeable drug.  

In September of this year, the FDA released new draft guidance recommendations for biosimilar interchangeable labels. The new recommendations suggest that interchangeability information on biosimilar labels is not helpful for prescribers and pharmacists. Since both biosimilars and interchangeable drugs are considered safe and effective when compared to a reference biologic, the FDA claims interchangeability label information is unnecessary. If these recommendations were implemented, pharmacists could fill prescriptions of a biologic with a biosimilar regardless of its interchangeability status.  Concerns surrounding this draft guidance involve consent, communication, and potential health implications.  

The FDA draft guidance reflects the agency’s current perspective on the topic of biosimilars. The guidelines for interchangeable biosimilar labels are not officially changing at this time. The docket provides an opportunity for healthcare professionals to submit their comments and suggestions for the FDA’s consideration.  

The process of developing a drug and seeking FDA approval is complex and requires years of research, thousands of participants, and billions of dollars. Ensuring the safety and efficacy of new drugs and creating novel medical treatments are top priorities. Regulatory and funding changes from both CMS and the FDA are causing a shift in the pharmaceutical landscape in ways that will have an impact for years to come.  

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