The Impact of the Inflation Reduction Act’s Drug Price Negotiation Program on Incentives for Clinical Development of New Drugs

Objectives We explore the impact of the Drug Price Negotiation Program (DPNP) on investment incentives for drug research and development (R&D). Methods We modeled 5 hypothetical scenarios of future drugs selected for the DPNP. Scenarios were defined by disease area, post-approval development strategy, and potential responses to the DPNP, such as delaying, resequencing, or canceling additional indications. We estimated risk-adjusted net present values and internal rates of return at 3 points during development of initial indications: beginning of phase 1, phase 2 (accelerated approval) or 3 (others), and Food and Drug Administration approval. Small molecules and biologics were modeled. Results The DPNP had a substantial impact on estimated investment returns across disease areas and post-approval development strategies for the modeled drugs that were assumed to be selected for the program. At the start of phase 1 for the initial indication, DPNP reduced the modeled discounted value of projects, and the estimated net present value reductions ranged from 22% to 95% for small molecules and 14% to 45% for biologics. Estimated internal rates of return were also reduced, by 5% to 14% for small molecules and 3% to 7% for biologics. No modeled response restored investment incentives to pre-DPNP levels; however, some modeled responses improved estimated returns relative to post-DPNP. Conclusions Examples illustrated how the DPNP may negatively affect R&D investment incentives for small molecules and biologics that were likely to be selected. Although short-term observed effects may be limited, over the longer term, DPNP-induced reductions in investment incentives may redirect funding away from programs with the largest expected impacts, potentially leading to far-reaching implications for drug development.