The Inflation Reduction Act: A Seismic Shift for Pharma and Biotech

The Inflation Reduction Act (IRA) of 2022 is poised to dramatically reshape the pharmaceutical and biotech landscape in the coming years. While aiming to lower prescription drug costs for patients, the law's pricing provisions are expected to have far-reaching consequences for drug development and investment. Professionals in the industry, especially those focused on small molecule drugs, should pay close attention and consider strategic career moves to stay ahead of the curve.

Massive Drop in VC Funding and Layoffs

One of the most immediate impacts of the IRA has been a steep decline in venture capital investment in biotech startups. VC funding for biotechs totaled just $21 billion in 2023, a 39% drop from $36.9 billion in 2022 and the lowest amount in four years. "No one was spared," notes PitchBook senior analyst Kazi Y. Helal, PhD . "Everyone took a bit of a hit."

This pullback in funding has triggered widespread layoffs across the industry. The biopharma unemployment rate reached a staggering 29% as of January 2024, according to the BioSpace 2024 Employment Trends Report. Promising research programs have been cut short and drug pipelines have shrunk as companies are forced to conserve cash.

The Congressional Budget Office estimates the IRA's drug pricing provisions will cause a $237 billion drop in pharmaceutical revenues by 2031. Other analyses project the hit could be as high as $450 billion from 2026-2032. With a 1% drop in pharma revenue translating to a 1.5% decline in R&D spending, the IRA may result in 135 fewer new drugs coming to market, amounting to $18 trillion in lost health benefits through 2039.

Small Molecules at Risk

While the entire biopharma sector faces challenges from the IRA, small-molecule drugs are particularly vulnerable. The law cuts the period of market exclusivity for small molecule drugs from 13 years down to just 9 years before they are subject to government price setting.

This is a major blow because years 10-13 of a drug's patent life are typically the most profitable, often accounting for around 50% of total profits. By eliminating this critical period, the IRA drastically reduces the incentive to invest in small molecule drug development.

As Eli Lilly and Company CEO Dave Ricks warned, under the IRA "the returns on small molecules in particular will be depressed, and so we'll shift more of our efforts to biologics." We're already seeing this play out - Eli Lilly recently canceled a small molecule program for blood cancers due to the IRA. Alnylam Pharmaceuticals suspended work on a small molecule treatment for a rare eye disorder for the same reason.

The Shift to Biologics

With small molecules facing dimmer prospects, I believe we will see a major shift in the industry towards biologics in the coming years. Large molecules like monoclonal antibodies and cell therapies retain their 13 years of exclusivity under the IRA. While more complex to develop, biologics offer a longer runway to recoup investments and turn a profit.

Recent VC funding trends reflect this pivot to biologics already underway. Cell therapy companies raised $7.7 billion from 2019-2021, while next-generation gene therapy startups secured $7.6 billion over the same period.

"Platform companies will also need to consider setting their sights beyond rare diseases toward more substantial areas of unmet need," notes a McKinsey report on biotech investing trends

Implications for Industry Professionals

For those currently working in small molecule drug development, now is the time to seriously consider making a transition to biologics. While the full impact of the IRA will take years to play out, getting ahead of this shift in the industry could be hugely beneficial to your career.

Leverage your skills and experience to position yourself for opportunities in emerging biological modalities like cell therapy, gene editing, RNA therapeutics, and targeted protein degradation. Build your knowledge in these cutting-edge areas through continuing education, attending industry conferences, and networking with professionals already working on large molecule programs.

Keep in mind that many of the same fundamental principles of drug discovery and development apply across modalities. Expertise in key functions like medicinal chemistry, pharmacology, DMPK, and clinical development is highly transferable. Don't underestimate your ability to adapt and grow into a new therapeutic focus area.

If you wait until it's obvious that small molecules are on the decline, you risk getting left behind as hordes of other professionals flood into biologics. The best opportunities will go to those who act early and establish themselves in this fast-growing segment of the industry. Be proactive in managing your biopharma career to come out on top in this new post-IRA world.

The Inflation Reduction Act represents a seismic shift for the pharmaceutical and biotech sector. While navigating the challenges it creates won't be easy, those who understand the implications and adapt accordingly will be well-positioned to thrive. I encourage you to stay informed on how the IRA's implementation unfolds and take steps now to futureproof your career in this dynamic industry.