In a Big Week For The Inflation Reduction Act (IRA), What Next, and What Does it Mean to Healthcare PSFs?

To use the shark analogy - just when leaders and managers at healthcare PSFs thought it was safe to be optimistic about their business because their clients were not affected by the IRA list, encouragement comes from President Biden to rapidly extend the list from 20 to 50 drugs that will have their prices negotiated.

To add to the growing clarity about the future of the IRA and drug price negotiations in the USA, the legal argument put forward by Astra Zeneca (AZ) that the IRA was unconstitutional (basically because it interferes with the right to open trade) was struck down with a clear judgement that HHS can proceed. AZ said they will go to the supreme court to challenge the ruling, and at the same time they have to enter the negotiation process with HHS for Farxiga.

President Biden made his announcement in an election year because he knows the IRA policy on drug price negotiations is popular with voters. His opponents knows this too, and it seems increasingly unlikely that they will do much, if anything, to change it should they win the election. Bear in mind that the first 20 drugs on the list account for over $50 billion in sales in the US alone and, though not all of this will be saved of course, the potential for reduced earnings on these blockbusters is obvious - and the list may extend more rapidly than originally proposed.

What do these two news items of news mean to the professional service firms serving the pharma and biotech companies?

• It's getting more difficult to convince yourself that a) the IRA will go away with a change of administration or successful legal challenges, and b) it will not affect you because your client's drugs are not on the list. The IRA will impact all companies and all vendors somehow
• To think your clients will "Wait and see" is not a good approach. Ask your clients. They are already doing a lot to mitigate the impact of the IRA, whether it is cost saving, acquisitions, mergers, it is happening
• Your future scenario building (surely, you build future scenarios for your business?) needs a new axis. No longer is it a low impact IRA moving to a high impact IRA, it has become High to Extremely High impact, with significant consequences for PSFs
• If you were hoping (hope is never a strategy) that things will go back to how they used to be, there is no basis for that hope. Clients have changed for ever, and the shark is not going away
• You can't save your way to success. It may be a good thing to look at how your business runs and get rid of excess, create efficiencies, automate. But if your product or service are not well developed and positioned, you will not succeed. Focus on your client, what they need and how you can uniquely deliver for them. Likewise, the answer is not to try and sell more of a service that is increasingly unattractive, but to develop the services and products that are attractive, this is what the best companies are doing, and quickly
• If you're an owner and thinking of selling, your business is now worth much less than it was. Pharma is worth at least 4% less than it was and this trickles down to you! Investors know this and see the impact of client pressures on margins and growth prospects and if the calls I'm on are any reflection, they are very focused on differentiation (more than they used to be) because they know Me-too companies will struggle - and many already are. It's a topic for another article, so only briefly here - the concept that having a me-too company and selling your client list and margin because clients are loyal is outdated. Clients have new needs and were never loyal, it was just that things didn't change much. Now things are changing a lot clients are changing the type and number of PSFs they work with. I hear this all the time

Back to the shark. They say sharks never sleep, and it seems the IRA and its development don't either. There is the potential for it to become a big deal in the forthcoming election because it is popular, and it may be most popular with the undecided middle class voter, so the candidates may want to be seen to be saving the squeezed middle class money on their rapidly growing healthcare insurance. If this turns out to be the case, watch for escalation.

When the client sneezes, the service sector catches a cold

I learned this phrase many years ago, and it is a truism. The actions of pharma and biotech as a response to the IRA (and other pressures on their earnings globally) are making PSFs rethink what business looks like, rethink how they position their business, what they invest in, what their core is, and of they are not rethinking they are already behind in a short and fast race.

Owning something, differentiation, and meaningful value are critical. Having an investment plan that creates something you own, delivers something new that the new client really needs, are essential. You need to get on with it, the shark is bigger than it looks when you can only see the fin, and it is capable of moving faster than you can.

A CAVEAT

This article, and others I have written about the IRA, do not express my point of view on the merits or otherwise of the IRA. I leave that to others. My focus is on the likelihood of implementation and the likely impact of the IRA on pharma and biotech, and those that support them. Observations are, as best I can, based upon high quality evidence and data, though forward looking commentary such as mine does not have the luxury of evidence.