Inflation Reduction Act R&D Cost Request May Prove Problematic

The US Inflation Reduction Act requires drugmakers to justify new drug prices based on the R&D costs needed to develop a therapeutic during drug pricing negotiations. However, this policy may be short-sighted, according to some experts, as it doesn’t account for the lost investments in failed drugs or the overall value provided to patients.

According to Louise P. Garrison, Jr. and Adrian Towse, “The current market for innovative medicines is regulated through a combination of intellectual property protection (patents and exclusivities) and regulatory statutes and regulations. The result is what economists call a “market design” that incentivizes medical innovation by offering potentially high (but uncertain) rewards for high-risk investments, but then uses competition to keep down prices at later stages of the product life cycle. Patent-protected Food and Drug Administration-approved products that offer additional patient benefit have some degree of monopoly power through a period of patent and exclusivity protection that averages about 14 years. During this period, the manufacturer has the exclusive right to market their compound: Copies are not allowed to be marketed. This does not mean, however, that they do not face competition in the same drug class: Other compounds with the same biological target and mechanism of action can compete with them.”

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(Source: Health Affairs, June 5^th, 2023)