Preparing for the Inflation Reduction Act – Part 3: The impact on valuation, business development, mergers and acquisitions

So far in this blog series, we’ve looked at the considerations for mitigating the impact of the US Inflation Reduction Act (IRA) on clinical development and lifecycle management. But what are the potential knock-on effects on the valuation of biopharma companies, and the industry as a whole? 

There’s no denying that the IRA will have a profound and wide-ranging impact, both within and outside the borders of the US. So far in this series, we’ve already explored what the IRA means for the global biotech/pharma industry, and highlighted some of the key things to think about during clinical development, indication selection, or lifecycle management. 

For the final instalment, we will take a look at what the IRA means for the valuation of biopharma companies, as well as its impact on business development, mergers & acquisitions (M&A).     

Impact on drug valuation  

Considering all the factors discussed so far in this blog series, it’s clear that the IRA will change how a company is valued by potential investors.  

The total expected sales of a given drug is a crucial factor in determining the valuation of a biotech company. Given the dramatic impact the IRA will have on drug prices in the US – the largest pharmaceutical market in the world – the global biopharma industry is now looking at a significantly different return profile.  

Currently, a drug is typically on the market for 10-14 years before patent expiry opens it up to generic competitors. This window of profitability narrows to 9 years under the IRA for a small molecule, with a knock-on impact to lifetime value. 

For example, consider a small molecule drug with peak worldwide sales of $1B/year. Let’s say 2/3 of its revenue is generated by the US, and that US and ROW launches are in the same year. The peak sales period is reached between years 9-14, and generic launch occurs at year 15. For the sake of simplicity, competition risk, inflation, and gross to net are all excluded.  

We can now model three different scenarios shown in figure 1 below: exclusion from CMS listing under the IRA, or a hypothetical mandatory price cut of 25% from year 9 onwards for either 50% or 100% of US patients being prescribed the drug through Medicare. 

In the worst-case scenario of 100% Medicare exposure, the revenue from US sales drops from 66% to 56%, equating to a total cumulative revenue loss of around $1.1B. A 50% exposure results in roughly $600M loss in total revenue.  

Figure 1: Impact of IRA pricing restrictions on lifetime drug value. Three different scenarios are depicted: 1) exclusion from CMS listing (black line); 2) hypothetical mandatory price cut of 25% for 50% Medicare exposure (green line); 3) hypothetical mandatory price cut of 25% for 100% Medicare exposure (yellow line).  

The effect here is much larger than just lost revenue at the commercial stage. It also has a profound impact on the net present value (NPV) – a key metric used to determine the value of a drug programme. Plotting this loss back to the early stages of development could result in a non-existent NPV or even one that enters the negative figures at the preclinical stage.  

This makes it even more challenging to invest in seed stage small molecule companies, compounded by the fact that companies will still need to raise the same amount of money to carry out their work despite being valued at a much lower amount. In the long run, this will stifle innovation and investment across the industry as a whole.  

Going back to the large $1.1B value in lost cumulative revenue above, this could easily be as much as the cost of a complete drug development program. Even for biologics, under the same assumptions outlined above, there is still a loss of approximately $500M in total revenue (or a 5% loss in the worst-case scenario), which could also impact capital raises and subsequent clinical development.  

It’s also worth noting that while we are yet to see the full impact of the IRA in terms of finance flowing into the sector, there has certainly been a drop off in investment into venture capital companies since the IRA came into force. A pattern we may see is less capital going into the top of the funnel, and more need for funding on a biotech-by-biotech basis, representing a huge shift from a capital risk perspective.  

Taking all of this together, it’s clear that a well-executed clinical development path, regulatory strategy, and lifecycle management plan will have a major impact on a company’s valuation and deal terms, as well as the likelihood of any partnerships or acquisitions.  

It is therefore now more important than ever for companies to be able to demonstrate the value of their drug and be able to prove this in the clinic. This is particularly important for smaller, emerging biopharma companies who will feel the effects of the IRA even more strongly – especially those developing small molecules.   

What impact would the IRA have had on some historical development decisions and deal values? 

Case study 1: AbbVie – Pharmacyclics  

As an example of how the IRA might affect acquisition value, let’s look at AbbVie’s $21B purchase of Pharmacyclics back in 2015.  

AbbVie’s valuation of Pharmacyclics was based on IMBRUVICA (ibrutinib) being a first-in-class therapy that was already approved in three orphan indications and under investigation for a range of solid and haematological oncology indications. The acquisition took place at year 2 post-FDA approval with peak sales of $9.8B achieved in 2021 (year 8). 

IMBRUVICA has now been named as one of the first 10 drugs to be selected by CMS for mandatory price negotiations in 2026. As it stands, the value of IMBRUVICA has already dropped considerably as a result of the CMS listing.  

If the IRA were in place at the time of the acquisition, AbbVie would have only had 7 years to maximise its revenue growth and achieve peak sales before the steep IRA discounts kicked in. This would have removed an even larger portion of cumulative revenue from year 9 onwards and reducing the value of IMBRUVICA further.   

Case study 2: AstraZeneca – Alexion 

Similarly, AstraZeneca’s $39B acquisition of Alexion in 2021 may never have occurred, or at least not at the same valuation.  

A major factor in AZ’s interest in Alexion was around its two blockbuster C5 inhibitor drugs, SOLIRIS (eculizumab) and its follow-up ULTOMIRIS (ravulizumab), approved in rare diseases.  

SOLIRIS was first approved in 2007 for paroxysmal nocturnal haemoglobinurea (PNH) and later gained approval for a further three indications. The most recent of these was for neuromyelitis optica spectrum disorder (NMOSD) in 2019, 12 years after the initial approval. It is also one of the drugs likely to be listed by CMS for price cuts in the future. ULTOMIRIS was first approved for PNH in 2018, with the most recent approval for NMOSD coming 6 years later. 

At the time of acquisition, SOLIRIS was already creeping towards loss of exclusivity (LOE) in 2025. Ahead of this LOE, Alexion was actively switching patients over to ULTOMIRIS. Had the IRA been in place at the time of the acquisition, SOLIRIS may have already been subject to mandatory pricing discounts, significantly impacting its value. In turn, this would have downgraded the valuation of SOLIRIS, ULTOMIRIS and, ultimately, Alexion. This is likely to have also deterred the further development of these medications in additional rare diseases. 

Strategy is key 

So, how can biopharma companies give themselves the best chance of optimising their valuation in this new reality?  

The most important strategy is to improve the probability of technical and regulatory success (PTRS). Most drugs fail in clinical development and getting this right is the fastest way to ensuring any drug reaches patients. As we have outlined in our previous blogs, there are many things to consider, and strategies that can be implemented to improve this.  

A second key tactic is to focus on speed. By rapidly designing and executing effective clinical trials, it’s possible to significantly accelerate clinical progress and give a drug the best chance of securing first-in-class status. Getting this right early on will limit the risk of any regulatory pushback, which could have a huge impact on drug value.  

However, being first isn’t always as important as being best. There are many examples across the pharma industry where a follow-on drug has gone on to become a blockbuster due to its improved efficacy.  

To capitalise on this strategy, it is still important to ensure the lead time of the first approval is not too large, especially within oncology. A 2023 Nature review concluded that even if a drug does secure best-in-class status, it is paramount that it launches within two years of the first-to-market product in order to gain a decent total market share. With the value lost by the first competitor due to mandatory pricing reductions, a short lead time becomes vital under the IRA. For example, regardless of small molecule vs biologic, every year that a launch is delayed behind a first-in-class competitor equates to a year in lost sales. It also equates to that competitor being a year closer to mandatory pricing negotiations under the IRA. This could easily result in $1B+ in lost revenue. 

An alternative to working faster is to work smarter, by identifying a market where there is no other competing drug with the same mechanism of action. Indeed, under the IRA we are likely never going to see a situation where multiple PD-1 checkpoint inhibitors or anti-TNF-alpha drugs are in development for the same indication. 

Overall, in the post-IRA world, getting clinical development and regulatory strategy right can be just as important as the commercial strategy in determining market advantage.  

The IRA is here – be prepared! 

The first step towards preparing for the Inflation Reduction Act is not to ignore it. The IRA is already law, and its effects will be felt worldwide throughout the biopharma industry. Though some might be holding out hope that a new administration in the US might change the impact of the Act, the discounts are here to stay.  

For any pharma company – regardless of location, modality or indication – the best way to cope with the impact of these changes is to understand how to prioritise drug development programmes, value them correctly, and leverage the right investment to support them. 

Need a hand?  

Weatherden is a specialist consultancy group dedicated to helping biopharma companies navigate the challenges of clinical development and bring life-changing medicines to patients.  

Get in touch to speak to one of our experts and learn how to give your drug the best chance of success in light of the IRA.