The Inflation Reduction Act – Friend or Foe for biotechnology stocks?



Ailsa Craig
Portfolio Manager
Marek Poszepczynski
Portfolio Manager

In August 2022, a seismic shift reverberated through the biopharmaceutical landscape as the US Government, dabbling directly in drug price negotiations for the first time, ushered the Inflation Reduction Act (IRA) into law. In this blog, we dissect the IRA’s intricacies and explore how it may reshape the investment landscape for biotech companies.

To put this into context, in 2021, US prescription drug spend only represented 8.9% of overall US healthcare spend.* The IRA focuses solely on drugs sold via Medicare which, in 2021, amounted to 21.2% of the US spend on prescription drugs**, so less than 2% of overall US healthcare spend.

Medicare is a government funded health insurance program in the United States that primarily serves individuals aged 65 and older.

Medicare Part D and Medicare Part B

Before we dive into the potential investment implications, it is crucial to grasp the roles of Medicare and specifically, Medicare Part D and Medicare Part B within the complex tapestry of the U.S. healthcare system.

1. Medicare Part D: Medicare Part D is a federal program designed to furnish prescription drug coverage for Medicare beneficiaries. Part D plans are offered by private insurance companies.

2. Medicare Part B: Medicare Part B is dedicated to covering outpatient medical services and supplies. This encompasses physician visits, preventive services, and the provision of durable medical equipment.

Medicare Price Negotiations to start 2026

Effective from 2026, the IRA introduces a structured framework for price negotiations that squarely targets a selected cohort of drugs. This negotiation process unfolds in a phased approach; the first phase features the top 10 drugs with the highest Medicare Part D expenditures. These 10 drugs were announced in August 2023. In 2027, negotiations for 15 more Part D drugs will follow, followed by another 15 Part D/Part B drugs in 2028. This expansion continues into 2029 and beyond, encompassing 20 more Part D/Part B drugs each year.

To be eligible, drugs must meet specific criteria:

  1. Inclusion in the top 50 Part D/Part B drugs with the highest Medicare expenditures.

  2. A tenure on the market for at least 9 years for small molecules or 13 years for biologics.

  3. Single-source status, devoid of any approved generic or biosimilar alternatives.

The drugs in the list of the first 10 drugs to have their prices negotiated are all owned by biopharma heavyweights; three of them are biologics (derived from biological, or living, sources) and seven are small molecule (relatively easy to make from chemicals in a lab).

Prospects for Biotech Stocks

Amidst the debates and discussions surrounding the IRA, it is our view that biotech may benefit. One outcome could be an increase in acquisitions of biotech companies by larger pharmaceutical entities. These strategic manoeuvres would counterbalance the potential revenue impact of the IRA on those larger entities.

The rationale underpinning this hypothesis lies in the fact that larger pharmaceutical companies, which predominantly market mature blockbuster drugs, are poised to bear the brunt of the IRA's provisions. Consequently, the acquisition of early-stage biotech enterprises, with promising pipelines and groundbreaking innovations, may increase.

Exemptions and Excluded Categories

Within the IRA framework, exemptions and excluded categories merit attention. Exemptions encompass drugs that treat just one so called “orphan” disease, affecting fewer than 200,000 Americans, plasma or human whole blood-derived products, certain small biotech drugs (until 2028), and biologics for which the introduction of a competing biosimilar product is imminent.

Impact on Key Pharmaceutical Companies

An analysis of the top 50 drugs by 2020 Medicare spending under Parts B and D shows that certain pharmaceutical giants, including AbbVie (ABBV), Bristol-Myers Squibb (BMY), and Eli Lilly (LLY), are likely to be the most affected. We will watch these three, and others that are heavily impacted, to monitor how they react, but expect to see them considering acquisitions to bolster revenues depleted by these legislative changes.

Potential Impacts on Biotech

The IRA’s pricing provisions bear the potential to significantly reshape the biotech industry in several fundamental ways:

  1. Biologics Take Centre Stage: The abbreviated 9-year negotiation window for small molecules, compared to the 13-year timeline for biologics, may catalyse a shift towards biologics. Nevertheless, we believe that small molecule development will always have a place in drug development.

  2. Shortened Product Lifecycles: Once a small molecule product has been on the market for nine years, it is eligible for inclusion in IRA negotiations. Therefore, the profitable lifespan of a new product may be shortened. This may spur more research and development into new products, but may also lead to delays in seeking approvals for new products in an attempt to avoid starting the ticking of the “negotiation clock”.

  3. Impact on Medicare-Driven Products: In a bid to mitigate exposure to IRA negotiations, pharmaceutical companies might try to reduce their reliance on Medicare-derived revenue. This strategic pivot could potentially impact therapies targeting Medicare’s members, the elderly population, encompassing treatments for cancer, cardiovascular ailments, respiratory disorders, and neurological diseases.

  4. Proliferation of Multiple Indications: Companies might embark on the development of multiple compounds, each tailored for distinct indications instead of attempting to find additional indications that could be addressed by an existing drug. Much success has been had in the past in finding new uses of existing treatments, for example Soliris from Alexion Pharmaceuticals which was first approved for the blood disease Paroxysmal nocturnal haemoglobinuria (PNH), and went on to be approved for Myasthenia Gravis and atypical haemolytic uremic syndrome (aHUS). However, the exemption for orphan drugs treating single diseases might deter companies from exploring this multiple indication strategy. This approach could result in longer development timelines and heightened expenditure and may not necessarily benefit patients or payers. On the other hand, it could be argued that it may prove an incentive for continued innovation across fresh indications.

Potential for Legislative Evolution

The future trajectory of IRA pricing provisions remains dynamic, subject to shifts in political leadership. Should Republicans assume the reins in the 2024 presidential election, alterations to the IRA could be on the cards. Potential changes that the traditionally pro-industry Republicans may consider could be an extension of the duration before a drug becomes eligible for negotiation or the eradication of the excise tax penalty imposed on companies refraining from negotiations - a move that could alleviate pressure on drug manufacturers.


The IRA marks a new era of drug price negotiations, promising substantial impact on the biotech and pharmaceutical spheres. The ultimate repercussions will hinge on a multitude of factors, including potential legislative amendments and the ever-evolving competitive terrain. As negotiations gear up to commence in 2026, the biotech and pharmaceutical industries stand poised for transformative change. Our view is that the IRA's advent could catalyse an increased number of acquisitions of smaller biotech enterprises by their larger counterparts, as part of a strategically positioning to counterbalance any potential revenue shortfalls. This sets the stage for a dynamic and evolving investment landscape within the biotech sector, one which we are keenly monitoring.


* The American Medical Association

** American Medical Association pays-bill-health-spending-chart_1170x780.jpg

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Ailsa Craig
Portfolio Manager
Marek Poszepczynski
Portfolio Manager


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