New Drug Development in 2022: Progress, Challenges, and Prices

Thomas Roberts, MD, MSocSci, Farallon Capital Management, San Francisco, California

Fellow summary authored by Christopher Devine, MD, MBA

Dr. Roberts delivered a comprehensive and timely overview of how capital allocators, regulators, and markets contribute to drug pricing and value, culminating in a discussion on the newest drug pricing provisions passed in the Inflation Reduction Act of August 2022. The presentation began with a historical perspective on drug development – notably, that the rate of FDA new drug approvals has risen substantially over time (from <15/year in the 1970s to >35/year in the 2010s) and the median time to approval has dramatically shortened in recent years (from ~2 years in 1991 to <10 months in 2017). This is due in part to FDA programs that have shortened development times (e.g. Accelerated Approval and Real-Time Oncology Review). Over time, this higher rate of drug approvals has also been accompanied by a rise in R&D spending by pharmaceutical companies, but these R&D dollars have become less productive over that same period. Dr. Roberts discussed the structural challenges of the industry that lead to these outcomes: (1) constant rate of innovation, (2) inherent risks of drug development, (3) large pharma companies struggle to innovate, (4) R&D productivity focused on small companies, (5) crowded pipelines, and (6) smaller and more targeted drug launches.

Many of these structural challenges have led to a state in which the U.S. charges substantially higher drug prices compared to the rest of the world, effectively subsidizing biotechnology R&D. Drug costs can be measured on a relatively similar scale as some of the most expensive substances on earth, and the cost per year of life saved has also risen dramatically over the past two decades. As a result, drug pricing has naturally become a flashpoint in U.S. politics, culminating most recently in the Inflation Reduction Act. This new law outlines the following major provisions:

1. Medicare negotiation for a specified number of high-cost drugs without generic or biosimilar equivalents that are nine (small molecules) or 13 (biologics) or more years from FDA approval (excluding drugs produced by small biotech companies)
2. Inflation rebates if drug manufacturers increase prices faster than inflation for drugs used by Medicare beneficiaries
3. Medicare Part D out-of-pocket caps ($2,000 cap on spending)
4. Cost sharing for insulin limited to $35 per month

These provisions are likely to decrease the number of new drugs approved over time, and may have other implications as well (e.g. manufacturers may increase drug launch prices to overcome inflation rebates). There remains a major divide between prices in the U.S. and EU, with no easy answers that do not involve stifling innovation. Potential changes in pricing models over time may be part of the answer, particularly as new classes of drugs emerge such as gene therapy and gene editing. Dr. Roberts did a terrific job introducing us to a framework for thinking about drug value and how drug pricing will continue to evolve in the future.