The United States and the Global BioPharma Market

While the world may have marched on from the halcyon days of the mid-20th century where the United States was the undisputed center of the global economy, the country’s continual impact should not be understated. Particularly as it concerns the biopharmaceutical industry, the US remains a powerful influencer; not only has it proved to be fertile ground for the growth of pharmaceutical powerhouses such as Pfizer and Johnson & Johnson, the country’s 330+ million population is a substantial target for overseas pharmaceutical companies.

That is not to say that powerful players, including the likes of China, Japan, and the European Union (EU) member countries are of lesser importance. Rather, it stresses the reality that the US, for the foreseeable future, is the largest pharmaceutical market; Fortune Business Insights valued the US at a world-leading $534 billion in 2020 and anticipated strong growth to $861 billion by 2028 (1). Correspondingly, a comprehensive understanding of the global biopharmaceutical market is contingent on thorough knowledge of the US landscape and ongoing events in the country. In this vein, while the ink has long dried on the Inflation Reduction Act, the bill must be examined with close scrutiny to understand its full impact on the global bio/pharmaceutical market.

Unpacking the inflation reduction act

Following narrow votes in both chambers of the US Congress, President Joe Biden signed The Inflation Reduction Act of 2022 (IRA) into law on Aug. 14, 2022 (2). While the $740 billion bill was a compromise among senate Democrats following failure to reach a consensus on a proposed $2.2 trillion framework (colloquially referred to as the “Build Back Better” bill), which aimed to have a transformative “cradle to casket” impact on American healthcare, IRA is nonetheless set to have a discrete impact on the healthcare throughout the country.

While the bill does not solely focus on healthcare, it introduces several key reforms that are set to introduce price controls on medicines. The bill will limit out-of-pocket costs for Medicare beneficiaries at $2000 a year beginning in 2025, passing additional costs onto drug manufacturers. Additionally, starting in 2026, the US government will also be able negotiate Medicare prices on 10 widely-used, costly medicines; this number will be expanded to 20 in 2029. If this price is rejected by the manufacturer, they will be charged a significant fee (3).

One aspect of the bill that has raised a few eyebrows is the difference in the negotiation window between small molecules and biologics; small molecules sit at nine years following FDA approval, whereas biologics are 13 years (4). This variation has led to many outspoken critics of the bill, including John Stanford, executive director of the Incubate Coalition. Incubate is an organization representing various venture capital organizations that seeks to “educate policymakers on the role of venture in bringing promising ideas to patients in need” (5).

“The bill shows a misunderstanding of the basic science—we shouldn’t be incentivizing biologics or small molecules,” says Stanford. “If the cure for Alzheimer’s is a biologic infusion, great. If it’s a small molecule, that’s great too. But now, from an investment perspective, I’m more interested in 13 years than nine years, and that’s a big flaw that’s going to have pretty damning consequences over the next couple of decades.”

According to Stanford, the discrepancy may have arisen from an existing misconception that small molecules were already disadvantaged from an investment perspective. The existing framework for exclusivities is five years for small molecules and twelve years for biologics, but this understanding does not factor additional factors, such as the role of the 20-year patent and possible add-ons.

However, while most agree that some amount of innovation will be lost as profit margins slim and investment risk increases, there is little consensus as to what that will look like. For instance, the US Congressional Budget Office estimated that the drug negotiation provision would ultimately result in a 1% decline in new drugs being introduced to the US market over the next 30 years (6). Others, such as Stanford, feel strongly that this will have broader consequences.

“Capital flows like water. I don't think tomorrow life sciences funds are going to dry up. But there's more barriers, more risk, now going to be associated with it,” says Stanford. ““We have dramatically decreased the perceived reward while increasing the risk.”

Stanford’s argument is that companies will look to diversify and mitigate risk. If $100 million in investment capital would have completed seed funding for 10 life science companies in the past, after these changes, that amount might only fund five life sciences companies as investors look to segments such as banking or technology for alternative investment opportunities. The inherent complexity of the biopharmaceutical development process already makes it a risky bet for venture capitalists; increasing the burden placed on them has a strong possibility of decreasing investor interest in innovations that would otherwise be seen as interesting.

In a similar vein, one could argue that there are already potential knock-on effects from the bill impacting the industry. For instance, the IRA attempted to codify a $35 price cap on insulin for recipients with Medicare and private healthcare coverage. However, because regulating private insurers fell outside the purview of reconciliation (a legislative process that allows for certain bills to pass with a simple majority of votes) that portion of the provision was put to a vote and axed from the bill (7). However, the provision remained intact for Medicare recipients, and arguably set a precedent for Eli Lilly and Company’s decision to cap their insulin prices in the United States at that price in March 2023 (8). Regardless of whether one believes Lilly would have set the cap independent of the bill, it remains prudent for industry experts to acknowledge its potential downstream impacts on bio/pharmaceutical businesses.

Contextualizing changes

Of course, the US doesn’t operate in a vacuum—it’s just one part of the greater global biopharmaceutical market. A market which, as discussed in the 2022 CPHI annual market report, has effectively bottomed out in terms of investment, with hundreds of billions sitting in parked capital (9). Investment, however, is cyclical, and the authors of the report acknowledged that this money will likely have to enter the industry at some point within the next 18 to 24 months. In this regard, of note are the findings of Pharmaceutical Technology’s annual survey where approximately half of industry respondents felt that cell and gene therapies presented the biggest avenue for growth (10). However, if the IRA does have a negative impact on investment in US biologics, it begs the question: where will this money go?

“If the US has been degrading its investment appetite through policy, threats to intellectual property, and price controls, China has been going the other way,” says Stanford. “China has extended intellectual property. China is trying to make a warm investment environment.”

China’s rapid economic growth has been the story of the 21st century, and the biotechnology market is no different. The Chinese biotechnology market had total revenues of $23.2 billion in 2020, representing a compound annual growth rate (CAGR) of 8.5% between 2016 and 2020 (11). If the disincentive is strong enough for investors to take pause, it’s entirely possible that looser regulations and the potential for greater profits could bring them to China.

Another contender is Europe, which, as of 2021, had a pharmaceutical market valuation of $282.75 billion (12). Stanford suggested that if the EU were to relax various price controls, à la China’s recent efforts or the US’ implementation of measures such as the Bayh-Dole Act in the 1980’s (13), the EU could easily pick up many of the investment dollars being left on the table in the US.

However, where the capital ultimately ends up is largely moot in terms of US interests: while the government would certainly prefer these dollars go to strongly aligned countries, any investment outside of the US is obviously not preferred. Congress has aggressively pursued bipartisan measures at keeping industry in America; the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act (14), which aimed to take semiconductor business from countries such as China, was passed shortly before the IRA. If the bio/pharmaceutical provisions in the IRA move an equal or greater amount of investment out of the US, then Congress’ efforts at keeping industry housed within the US would be hampered.

Measuring scope

The question regarding the IRA isn’t necessarily what will happen regarding investment funding, but, rather, how big of the pie will be leaving the country, and where is it going? No one, including Stanford and his contemporaries, is expecting a mass exodus of biotech funding from the US. If the Congressional Budget Office’s number sticks, most businesses wouldn’t bat an eye. If the impact is more in line with the expectations of Stanford and company, it could severely stifle market growth.

Unfortunately, while it would be courteous of investors to kindly explain why they chose one option over another in detail, oftentimes the downstream effects of decisions such as this are hard to isolate—investors themselves might not fully appreciate the various confounding factors that led them to a decision. However, as competition continues to build in the global bio/pharmaceutical market, tracking where biotech investments in totality are occuring could perhaps give at least a glimpse into the answer.

References

1. Fortune Business, US Pharmacy Market Size, Share & COVID-19 Impact Analysis, By Type (Branded and Generics); By Therapy Class (Oncology, Anti-diabetics, Autoimmune Diseases, Respiratory, Pain, Nervous System Disorders, Dermatology, Antihypertensive, Mental Health, HIV Antivirals, Multiple Sclerosis, Anticoagulants, Other Cardiovascular, ADHD, GI Products, Viral Hepatitis, Sex Hormones, Antibacterial, Hormonal Contraception, Ophthalmology, and Others), By Setting (Retail Pharmacies, Mail Order/Online Pharmacies, Others), Regional Forecast, 2021-2028; Jan. 2022.
2. H.R.5376, US House of Representatives, 117th Congress, 130th Session (Washington, DC), Sept. 27, 2021.
3. Wechsler, J. New Legislation Overhauls Medicare Drug Pricing and Benefits. Pharmaceutical Technology 2022 46 (9).
4. Ferrechio, S. Biotech Investors Sound Alarm on Senate Drug-Pricing Bill. washingtontimes.com, Aug. 3, 2022.
5. Incubate Coalition. About Incubate. incubatecoalition.org/about-incubate (March 3, 2023)
6. Congressional Budget Office. How CBO Estimated the Budgetary Impact of Key Prescription Drug Provisions in the 2022 Reconciliation Act. cbo.gov/system/files/2023-02/58850-IRA-Drug-Provs.pdf (March 3, 2023)
7. Luhby, T. Democrats Lose Effort to Cap Insulin at $35 for Most Americans Before Passage of Senate Reconciliation Bill. cnn.com, Aug. 7, 2022.
8. Eli Lilly and Company, Lilly Cuts Insulin Prices by 70% and Caps Patient Insulin Out-of-Pocket Costs at $35 Per Month. Press Release, March 1, 2023.
9. CPHI, CPHI Annual Report 2022: Psychedelic Approvals, VC Driven Contract Services Boom and Next Generation Manufacturing (12th edition, June 2019).
10. Playter, G. Crossing the Same River Multiple Times. Pharmaceutical Technology 2023 47 (1).
11. Research & Markets, Biotechnology in China - Market Summary, Competitive Analysis and Forecast to 2025; October 2021.
12. Grand View Research, Europe Pharmaceutical Market Size, Share & Trends Analysis Report by Product (Branded, Generic), by Type (Prescription, OTC), by Therapeutic Category, by Region, and Segment Forecasts, 2021 - 2028; 2021.
13. H.R.6933, US House of Representatives, 96th Congress (Washington, DC), March 26, 1980.
14. H.R.6933, US House of Representatives, 117th Congress (Washington, DC), July 1, 2021

About the author

Grant Playter is associate editor for Pharmaceutical Technology.