As Life Sciences Manufacturers Come to Terms With New Legislation Set Forth in the Inflation Reduction Act (IRA), They’ll Need to Look Toward Other Areas of Their Business for Capital Gains
INFLATION REDUCTION ACT
Signed into law on August 16, 2022, the Inflation Reduction Act (IRA) got a lot of attention and support for its renewed focus on energy, climate, and corporate tax provisions, and IRS tax enforcement. More recently, there’s been a renewed focus on the potential impact the IRA may have on provisions about prescription drug pricing and the Affordable Care Act—all of which may affect manufacturers in the life sciences industry.
IMPACT ON LIFE SCIENCES INDUSTRY
The legislative changes set forth in the IRA offer cost-savings for consumers, but are likely to increase financial pressures on both Research and Development (R&D) and manufacturing in the Life Sciences sector. The three most notable areas that will be impacted are:
- Changes to Medicare and Medicaid
- Impact on R&D
- Implications for Pricing Strategies
CHANGES TO MEDICARE AND MEDICAID
Historically, Medicare is prohibited from negotiating drug prices, but the IRA now allows the Secretary of Health and Human Services to negotiate drug prices directly with manufacturers. Previously, this meant that manufacturers could charge whatever they wanted for their pharmaceutical products, but allowing the government to negotiate drug prices could reduce the cost of drugs for seniors and, in the process, save the government billions of dollars in spending. However, this could mean tighter regulation on drug prices which could potentially decrease the overall revenue for pharmaceutical manufacturers, which in turn, could affect their ability to invest in new products through R&D.
IMPACT ON R&D
If the price of pharmaceutical products increases at a greater rate than inflation, a provision within the IRA will require drug manufacturers to pay a rebate, which this added cost has the potential to discourage manufacturers from utilizing capital for investing in R&D. This may have a particular effect on drugs that are expensive to develop and whose profitability will be hampered. This new legislation could deter pharmaceutical manufacturers from investing in R&D for drugs that may not be profitable if their prices are capped. With reduced investment in R&D, companies may be forced to look elsewhere for ways to increase profits and grow their business.
EFFECT ON PRICING STRATEGIES
Lastly, the IRA has given the Centers for Medicare and Medicaid Services (CMS) the authority to regulate pricing for certain drugs, which may force life science companies to rethink their pricing strategies. This new regulation could limit the amount that manufacturers can charge for certain products, which will have a significant impact on the industry en masse. While the intention of the IRA is to foster a more affordable healthcare system and help create more accessible and less costly medications for patients, it’s likely there will be some unintended consequences of this blanket legislation.
RESTRICTING COMPETITION FOR SMALL MANUFACTURERS
With this new legislation taking effect, smaller pharmaceutical companies and other life sciences manufacturers may find it difficult to stay competitive. Larger, more established manufacturers will have the resources to weather the impact of price caps and reduced overall capital. Also, government regulation of pricing will almost certainly lead to greater delays in innovation and research, taking longer for drugs to reach market, especially as most small to medium-sized manufacturers will be hesitant—or even unable—to invest in R&D.
FINDING CREATIVE SOLUTIONS
Despite these potential setbacks that are certain to impact life sciences manufacturers, the Inflation Reduction Act represents an important step forward in the Federal Government’s efforts to make healthcare more affordable and more accessible for all. Life science companies may need to reconsider their pricing strategies if they hope to remain competitive in an evolving business landscape, or they could consider shifting focus to developing products that are less expensive to manufacturer or those that target smaller patient populations. Life Science manufacturers may also need to consider alternative streams of revenue beyond Medicare and Medicaid, or at the very least, they’ll need to take steps to reevaluate their operation and cut costs where they can. As the industry adapts to these changes, it’s important that manufacturers know they can lean on their local MEPs. The NJMEP team brings decades-worth of experience to the Life Science sector and our no-cost assessment may be just what your manufacturing business needs to uncover hidden value within your facility. In the meantime, it’s important to keep abreast of any updates and monitor the impact this new legislation will have on patients, providers, and life science manufacturers.