Biotech And The Inflation Reduction Act: Sussing Out The IRA

Speaker 1:
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Yaron Werber:
Thank you for joining us for another exciting episode in our Biotech Decoded podcast series. I'm Yaron Werber, Biotechnology Analyst at TD Cowen. I'm super excited to be joined today by John Murphy in this episode called sussing out the IRA to discuss how the Inflation Reduction Act will impact innovation in biotech. It's a very hot topic. John is the Chief Policy Officer and Healthcare Council at the Biotechnology Innovation Organization, or BIO. He was previously an assistant general counsel at Pharma, an associate at Hogan & Hartson and senior consultant at McBee Associates. John, thanks for joining us. Always great to see you. Really appreciate your time.
John Murphy:
Yeah, thanks so much for having me. Really crazy time right now, lots to talk about.
Yaron Werber:
And it's very timely. We're recording this, for those of you who are listening, it's mid-July 2023 just to give you a sense, and CMS recently came out with some guidance so it's very timely. John, let me start by the Inflation Reduction Act has drawn a lot of attention. Some people think it's a friend, some people think it's an enemy. I think it's a little bit more of a frenemy the way we look at it. There's some positive provisions for the industry, really closing the donut hole, but let's be realistic, there's a lot of headwinds here to innovation as well. When you're looking at it and BIO is looking at it and the four, 500 companies that are members of BIO are giving you feedback, what's the greatest risk to innovation posed by this act?
John Murphy:
Yeah, so you're right. It's hard for us to evaluate the couple of positives, which I'm sure we'll talk about without really honing in on the negatives and I'll say forefront is just the presence of how the government has defined negotiating these products. I think the presence itself of the price controls transcend all of the other issues that we don't like about this as probably the premier obstacle because for many of the investor community, it's not just the establishment products that are affected. I mean this changes the paradigm for even small biotechs when they're looking at that present value calculations in a potential buyout or in a potential IPO for an asset category because as you see, in the way the Inflation Reduction Act price controls are designed, it's not that long into the future where the vast majority of products covered in the Medicare program end up being touched by this just because of the cumulative nature of the law.
Yaron Werber:
Right. Absolutely and it's a great point. And I got to tell you here on our side at TD Cowen, as a franchise, as a biotech franchise, we've already really started incorporating our thoughts about what this could mean long-term as to which companies we're ultimately going to be getting involved in. So broadly, which area of the bill is BIO as an organization on behalf of the industry is really mostly focused right now on trying to lobby and try to improve or change near term?
John Murphy:
Yeah. So in the near term, two tracks and there's a discrete ask in each. So there's a regulatory track at CMS and there's a legislative track. The regulatory track really initially was focused at trying to change aspects of the final guidance that related to how Medicare was negotiating the program. A couple of areas we had been focused on specifically revolved around the orphan drug interpretations. So many in the industry have been very concerned about the very stark contrast between a product that has an orphan designation that's approved for only indications in that designation. That's the only piece under the law that qualify for the exemption. There had been asks for CMS to broadly interpret that to allow for a product that gains an additional designation, but that doesn't have approved indications in that designation to at least keep the exemption during the period of research and development that accompany that additional designation. Many people thought that CMS had the authority to do that in the guidance.
Unfortunately, when the guidance came out, CMS doubled down and basically said it had no authority to do so and actually was going to clarify that any product that falls outside of that very narrow single orphan designation and only approved indications in that designation, anything else in that space falls out of the exemption, except for certain circumstances where you run a product. So the regulatory ask remains, I think we will continue to push CMS to update because it has been very clear that its final guidance only applies to year one and they'll look to make revisions in year two. I'm not so optimistic about major revisions, but I think we do want to continue to push on the orphan drug side. On the legislative side, I would say there are a number of asks. On the top legislative ask I think is to change the small molecule disparity that applies in the law. So right now, a small molecule product is potentially selected after seven years and then can be negotiated after nine years on the market, whereas a biologic is at 11 and 13.
And I think broadly, the industry is looking to increase the small molecule years on the market to be at parity with the large molecule. That by the way doesn't solve the problems under the IRA, but at a minimum it creates a more equal landscape for investment both in the small molecule and large molecule space, which we are seeing actually right now play out in the oncology space given the predominance of small molecule research in oncology that now has a bias against investment because of that shorter timeframe.
Yaron Werber:
And so you raised two great points. Let's actually talk about the second one first, the nine versus 13. And at that point, as you mentioned for the listener, at that point, seven years into the lifespan of a small molecule or 11 years into biologic, you already have a two-year horizon into negotiations and price changes. It really doesn't leave a lot of time to monetize that either as a DCF or the way these stocks really trade on forward-looking PE. But you mentioned this is not something CMS can change and we've done listening sessions together with CMS along with many other people. That's the first thing they say is, "Hold on, that's not for me. You got to go and address that with Congress." But that's in many ways also interlinked to PDUFA and to Obamacare. And so what's the chance and what's the appetite in Congress to take this on? Is there any chance this is going to get revised or very unlikely?
John Murphy:
So I will say there has been, with the IRA passage in the review mirror, there have been I think bipartisan receptivity to at least understanding that that dynamic causes a problem, particularly in this small molecule cancer space. So I think there is an openness to discussion across the aisle in Congress about the need to make moderate changes to the IRA in the future. Whether that happens in the next two years I think is a very different conversation. It's going to be politically challenging to do anything that affects the IRA in the wake of the presidential elections in 2024 because for those of you who follow the president somewhat closely, you'll notice that he had a campaign speech last week and a bunch of policy documents that came out that really built on the administration's boastfulness of passing the IRA and bringing down drug costs.
So I would say while at a staff level and at a member level, there is an understanding of the problems that nine versus 13 dynamic has created, I think the broader political narrative in the next two years is going to make those changes a very significant uphill battle. So I wouldn't say I would bet much money on that change happening in the next two years, but I would say if you look at the ACA as potential base case for how this might work, there were lots of incremental changes to the ACA in the out years that were politically feasible that you had a good data case to be made. And I think the industry now is focusing on how do we make as good a case as we can for not just the nine versus 13 change, but a host of other changes that we can certainly talk about that would make the law slightly less innovation negative.
Yaron Werber:
Okay, that's a great point. Let's go back and the orphan drug exclusivity is a big, big hot potato for biotech just given how much the sector traffics in this area. You mentioned year one versus year two and CMS's ability to interpret during development, most of us have been really mostly focusing on upon approval, right? When you get the second approval with the same new molecular entity, you lose your exclusivity. But you mentioned a lot more you, you're talking about during development. So can you clarify that?
John Murphy:
Yeah. So CMS in the final guidance came out with a number of explanations as to how they're going to apply the orphan drug exclusion. And what they've really said is there are two issues that I think they are wrong about, but nevertheless they've stood fast on. One is this idea that if you were to obtain a second orphan drug designation for purposes of a research program, CMS views that as knocking you out of the orphan drug exclusion even if you don't have an approved indication yet. And they talk a lot in the guidance about how they feel like their hands are tied by the statutory text. I think it's a very conservative reading. I think there were other ways they could have gone about that, but they doubled down on that. The other issue, which I think you alluded to, Yaron, is when does the product start counting the nine or 13?
What CMS says in the final guidance is the second anything related to that act of moiety is approved by the FDA. That represents a bigger problem I think in the cancer space because oftentimes we see product launches in very narrow applications generally in the orphan space while you're funding broader trials in earlier stage or in a wider patient population. What we know now based on CMS's final guidance is that the second that fourth line indication or whatever gets approved by FDA, the clock begins to count for the nine or for the 13. And then if you have a subsequent approval that obviously knocks out the orphan indication, they're going to look back at the first date approval as the day that they're going to count for Medicare. So I think to your point about monetizing an investment, oftentimes those early stage cancer approvals that are in a small subpopulation finance the broader R&D in a wider population, but your monetizable opportunity might be much lower if you catapult the product into a higher Medicare spend with that subsequent approval.
Yaron Werber:
Yeah. I mean if you think about it from an innovation standpoint, it really disincentivizes completely any even filing a second orphan drug exclusivity indication and doing any work off label and development. Essentially at that point, you will basically shut down anything outside of the first approval.
John Murphy:
I think that's right. And you are stuck with a situation where you either hold back the approval and await studies and a broader population so you launch everything at once, or, and this is probably more biased in the cancer space than anywhere else, you just rely upon Compendia guidelines to carry the product in the broader off-label space and don't necessarily target a label indication for that NCCN or rather Compendia space and you just float. And I think that's bad for innovation, right, because it disincentivizes the additional research that you naturally want companies to do.
Yaron Werber:
Yeah. What we're hearing from companies now increasingly is that they're going to do multiple development pathways at once, which if you think about it is not staggered, it's expensive, it's fairly risky and it doesn't allow them to execute, increase their market cap, finance again and continue development. And so it really makes operating company and financing company much harder. The other key area of uncertainty that requires clarification is how CMS is going to calculate the maximal fair price for each drug. That's something that they're beginning to flesh out, they're going to start negotiating in short order. There's going to be a lot of trade secrets and a lot of secretive information that the companies and sponsors are sharing both in the investment community and obviously the sponsors themselves want to have some clarity as to what's going on in case they're the investing in a company or developing a follow on product or competitive product. What do we know so far and what do you foresee happening?
John Murphy:
Yeah. So I think that the actual calculation of the maximum fair price remains probably the most mystifying aspect of the law. And as you rightly point out, that's fairly concerning because the first 10 drugs are going to receive notifications from CMS in September, and we're sitting here in the middle of July. And CMS just released last week a draft of the negotiation form that each manufacturer's going to get. We and many others are still pouring over that trying to articulate what we can glean from that information. But what we do know is CMS has set forth a number of negotiation data elements in the guidance that manufacturers are going to need to submit. And a couple of things that you can draw from that that are concerning, one is there is a tremendous focus on a robust stream of R&D data that relate only to the selected product.
And as you know, Yaron, and many of the companies in the space know, oftentimes you're financing multiple R&D programs via the revenues from one approved product. And so in other words, the cost of failure in those programs is amortized against those products that actually make it to the market. CMS has taken a much more narrow view, at least initially in how it's going to look at negotiation data elements by only asking for information related to the specific product that's being negotiated. So it raises the question of how open they'll be to additional information about a hundred million dollar loss in, let's say, Alzheimer's when your selected product is in anti-inflammatory, but that Alzheimer's product was spiked, you internalize the cost and you have to bear it somewhere on the balance sheet. So I think that's a real concern that we still don't have a good answer to.
The other issue I'll point out is that there has been some lore that CMS is going to use some of the billions of dollars it was provided under the IRA to contract with a third party to do some of the technical analysis of maximum fair price calculation. It remains to be seen who that third party will be and what the marching orders will be for that entity. Again, something I would say hastens concern because all of this is going to play out in the next six to nine months. So government is not necessarily very nimble.
Yaron Werber:
So what happens, let's say, if a company, I'm going to make it up, is working on an oncology acid or inflammation acid, and there was compound, A went through phase two and had some talks, and now they're advancing a backup into phase one. And if you think about it, they've spent... Yeah, so you can argue compound two is benefited from all the initial R&D spending on compound A, compound B as a backup, but then is CMS going to start clocking okay, so you just started compound B today, you're starting from 0 cents? Or you going to be able to say, "No, look at it. This is just a follow on extension. We're already in, three, four, $500 million in?"
John Murphy:
Yeah, I think you're going to see manufacturers attempt to quantify that as broad-based R&D spend because I think they have to. I think they owe it to their company and their investor base to try and make as good a case as they can to CMS to justify where a price is in relation to the expenditures associated with the company to get a product into the clinic and then ultimately, to the bedside. And if it takes four products in the clinic, and you see this in a lot of multi portfolio research programs in the bigger companies and even to a certain extent smaller companies, I think it's going to be something every company pushes to show CMS the math. And now the real question is how much of that math does CMS internalize in its own worldview?
Because you've got to remember, the real concern here is that the law's very prescriptive that CMS will ultimately make one offer, manufacturer then has 30 days to provide a response and then the way the law looks at least is CMS then can come back and say, "Here's our final offer, take it or leave it." It doesn't leave an enormous amount of room for back and forth. Now, CMS has a bit provided for some additional meetings in the final guidance, but the timeframe remains very compressed, right? And if you think about HTA negotiations in Europe, those generally go about a year. It's just not going to be the case here. And so I think CMS, it's been a little bit purposefully oblique on that case because I think they want to give themselves as much flexibility as possible in this first round.
Yaron Werber:
So one of the other questions, there's three different tier thresholds, right, under the law? Can you review what those are? And again, those are the minimal discounts. CMS doesn't have an upper ceiling or lower trough, whatever floor as to where they go ultimately. Can you just review those?
John Murphy:
Yeah. So effectively, CMS has been defined under the statute ceiling prices that they have to at least bring a product below in order for the negotiation to be qualified by the statute. And it phases in. So you have these short monopoly products which have been on the market for nine years or less, the middle tier between that nine years and 16 years. And then what they're called long monopoly drugs. By the way, these terms are just created by the statute. It's not like you guys would see that in a normal research report, which are 16 years or more on the market and the ceiling price goes down each time a particular molecule hits that benchmark. And something often not discussed because this hasn't gone out in CMS guidance yet is actually the statute requires CMS to renegotiate drugs when they hit these milestones.
So a product may get negotiated early phase and it's, let's say, 66% or 80% of non-FAMP is the statutory ceiling price, my sense is CMS will try and negotiate below that. But then once a product ages into that next benchmark, the law requires CMS to renegotiate the product so that it goes below that new benchmark. And the reason that has not been discussed very much is because CMS, given the time constraints in the rulemaking, did not yet propose how they're going to conduct that process. They indicate they're going to do that next year. I understand why they're doing that, it is something that won't happen in the 2026 phase, they'll have to wait. But if you're in the boardroom and you know your product is getting selected year one or even year two or year three, it is a material question. What is the renegotiation process going to look like and how is CMS going to conduct it? What's the timeframe?
And that's actually something just I'll acknowledge to you BIO has been raising when we have one-on-one meetings with CMS is we recognize you all are under a very specific time crunch, which was through no fault of your own. But our companies are making development decisions based upon the entire scope of the law 10 years from now. So understanding the renegotiation process is almost as important for these companies as understanding how they'll be selected in the first space.
Yaron Werber:
So just remind us, it's the three thresholds and one would imagine that... Let's put aside the three timeframes for now. Based on an evaluation, there's going to be some kind of an objective, theoretically objective price that here's what this product is worth regardless of what it is, right?
John Murphy:
Yeah.
Yaron Werber:
So as you think about how do they move the lever, is it that they're thinking, "Look, here is a product where it used to be $200 a bottle," let's say we now need to do the first tranche which is, what, 25% down.
John Murphy:
Yeah.
Yaron Werber:
Okay, so now the 200 is 150 or 160, and then once you age into the next tranche which is, what, down 35 then you go up to 35 and then you go down to 60, or is it going to have a different qualifier, or is it going to depend on what's going on at the market at that point?
John Murphy:
Yeah. You ask a really good question and that's an area we have little insight in from how CMS is thinking about it. I mean there's two different camps I've seen emerge and people hypothesizing how CMS is going to make these offers. You have a number of folks in the health policy community would talk about it's likely that objectively CMS will be best suited to try and target a price right around that ceiling price because that's what the law prescribes, it gives them cover and takes some of the subjectivity out of it and potentially lessens the likelihood that that will be challenged. And we could put a pin in that question about challenge for a second because I'm sure we'll talk a little bit about this, but there are judicial preclusion provisions of the law. I think many of them are not insurmountable, so we can talk about that a little bit. But there's another camp that I have seen emerge where there are people hypothesizing that CMS will make a very, very aggressively low initial offer and require a manufacturer in its response to justify the need to bring the product up.
And CMS has lots of data to bring to bear that's not necessarily publicly available. They understand the rebating in the Part D space in particular, they understand where products are classified, how they're actually reimbursed. So there's other folks that are articulating that they could go real aggressive. My personal view is that that is harder to defend for CMS, right? It's just picking a number that's very low without having some objective criteria to justify why. And I have not been convinced yet in the current guidance that they have clearly articulated an objective criteria for going very low. My feeling is that they'll be closer to the ceiling price and then in a renegotiation circumstance, the same because they can point to, "Well the law requires the price to be X for this product at this age, so we're going to bring it down." But I do think they may, and I take them at their word, that they're going to really look at this first year and the 10 drugs and how the marketplace responds to the negotiation data elements, how the marketplace responds to the ultimate prices.
And I could see them titrating their approach as this goes on. I mean they've been very open that they plan to revise guidance for the subsequent years. So I could very easily see CMS coming out and saying, "Well we've tried it here. We think there's more room to get more value for the American public," because again remember, this is going to play out during election year.
Yaron Werber:
Okay, that's a great point. A lot of the questions that we get is this is relating to Medicare Part D, goes into effect 2026, right, for orals, Part B for orals and self-injectables, Part B goes into effect in 2027. And what does it cover? Both managed Medicare and the historical fee for service Medicare? Or just clarify that because that's a point with a lot of confusion.
John Murphy:
Yeah. It covers all of the Medicare programs. How it is inserted into the managed Medicare space I think is still being worked out with the plans, but it's clear that the maximum fair price needs to be made available, or I guess or better, right? I mean I'm sure CMS is never going to stand in the way of getting a better price than the maximum fair price. But the maximum fair price is going to need to be offered in all of the Medicare space. So you rightly point out we're going to start to see this tested in Part D and it's going to matriculate over to Part B as CMS gets more experienced with this program. But that's going to be a challenging transition, right? Because an oral solid dosage form given at a pharmacy is a very different payer environment than an injectable in an outpatient setting or in a clinic.
So it's something that I think CMS is going to have to do some additional guidance on to talk about how they plan to roll this out in the Part B space. And we've already started talking to the agency about when are you planning to do that? How do we give Part B companies advanced notice of your anticipated approach, which we just don't have yet.
Yaron Werber:
Yeah, it's the complexity of the healthcare system specifically related to PBMs and formularies. So we all know that the actual sticker price is not the real price, right? So if CMS needs to do at least a 25% reduction in the first tranche, the first time period, most products, even oral oncology now in competitive areas oftentimes have more than 25% gross to net or already at 25% gross to net. So the price, let's say if they do 25%, so that $200 bottle is now 160. But realistically, I'm just going to make it up, let's say the PBMs are getting it right now on behalf of their plan sponsors for 150. So lower price. Does that mean the PBMs can still do their thing and try to negotiate further concessions and further rebates? Or no?
John Murphy:
Oh yeah, I think they will attempt to, yes, because the law requires the product that's negotiated to be available on the formulary, but it stops short of saying it needs to be first tier or it needs to be offered without utilization controls. And so my sense and my operating opinion is that the PBMs are still going to look at the products as they do any other product in their formulary and they're going to ask for some ability to negotiate supplemental rebates or just base late rebates to jockey for formulary position. I think that that will still happen. I guess there are questions, there could be manufacturers who are in a position where they don't want to agree to that and they're going to rely on the laws' requirement that a product be subject to formulary and perhaps their product has a unique characteristic that even if subject utilization management, the vast majority of doctors are going to want to push for it and override.
And in states that have physician prevail requirements, they could still put a successful portfolio together. But my sense is that's probably a little bit of an outlier. I still think that PBMs in this space are going to want to go after as much as they can these products, or really any products, particularly because you're going to be looking at a lot of spaces where you're going to have brand to brand competition, one's going to be negotiated, the other's not. And there's still going to be price elasticity there for products to try and get preferred formulary replacement.
Yaron Werber:
Yeah. So again, it's a lot of onus on really developing innovative, definitely best in class, if not first in class products and access is obviously becoming a huge barrier even in the U.S. now, and obviously continuing to get worse in Japan. Now, let's talk about the frenemy part here. There is a benefit here, the friend is that they did cover the donut hole, which we all know companies in biotech and biopharma have contended with by doing a lot of patient support programs, certainly in the first quarter, obviously increased SG&A, but ultimately once they covered it, volumes went up. So the good news is they are covering the donut hole. So in that sense, what we've seen is some of the headwinds before in Q1 are going to get more abated. The challenge now is that, and that's back to the frenemy/enemy part, is now this is going to require Part D plans to cover 60% of the catastrophic costs starting in 2025 up from 15% now.
And of course, I believe catastrophic is, what, anything over two to two and a half grand monthly at that point. So if you think about any innovative product or a couple of products, you're running into that right away starting in January or certainly in Q1. So at that point now the plan is on the hook for 60% and they're going to have to transition that over to the sponsor. So at that point, the game has been so far you can win if you're a company either by providing a high cost high rebate product, or you have to have a lower price cut of option. Now, we're beginning to think if you're looking for 60% of the cost a sponsor or a plan, you don't really care about the rebates as much anymore. You have a lot of grants to make up, so you're probably going to move to the lowest cost alternative and probably lock down and really restrict excess in formularies. Can you talk about that a little bit?
John Murphy:
Yeah, and actually this was a point that was brought up in the guidance as well in, the final guidance. So there's long been this concern. So on the one hand there's a big win. So it has been an industry priority, it's been a patient community priority to provide some cap on out-of-pocket spending for beneficiaries because obviously under the donut hole and then into catastrophic, you had patients paying 5% of catastrophic into infinity, right? And somebody in a high cost therapeutic area, that was a lot of money. So now you do have starting in 2025 a $2,000 out-of-pocket cap for beneficiaries in the Part D program. And that is a profound win on the patient side. But you raised exactly the right point that everybody's been worried for that Congress basically paid for that cap by saying, "Well fine," the plans just pay more and the back end, the government's not going to reinsure it all. And so the plan liability went way up.
I think there is already approaches at CMS to ask the agency, "Well how are you going to police access given the fact that on the one hand, you've given patients the benefit of capping out-of-pocket costs," but that is hollow if patients have to jump through every hoop imaginable just to get access to their therapeutic. And the agency understands that and has acknowledged that that's going to be something they have to figure out a way to police. I think the specifics behind how they're going to police that have been a little bit hollow thus far. They talk a little bit about well ASPE, which is another agency under HHS, has some ability to do analytics in the formulary space. They can police it there, but it's really not satisfactory. And you're right, there's a tremendous concern particularly in crowded classes, there's just a race to quite frankly at least costly alternative, right, and providing coverage.
And only particularly in 2025, there'll be no negotiated drugs. So in other words, you don't have guaranteed formulary placement for even the 10 that will come on in the Part D space in 2026. So I think that'll be the first year for everybody to really take a look at this and say, "What does the access landscape look like in the wake of the out-of-pocket changes?" And I noted at the beginning CMS acknowledged this in the guidance that came out the other day or the other week where they acknowledge they're going to have to work to look at formulary practices in the light of this, and I think they'll do some additional rulemaking. They plan to do some of that in the fall is my understanding. So we're going to have to be laser focused on that because it can't be that we got a win on one hand, but really it's very hollow on the other hand.
Yaron Werber:
Yeah. Yeah, that's a good point. And Part B is largely excluded from that, right? By [inaudible 00:33:41] how the economics really work.
John Murphy:
Yeah, exactly. And honestly, I think the Part B space is probably an area that everybody will look at to try and fix some of the out-of-pocket exposure in that space down the road. But given managed Medicare and the way those plans have operated, I think it's not necessarily as big an issue in the broader Medicare population right now.
Yaron Werber:
Yeah. And the ASP plus six or ASP plus 4.3, that's not changing.
John Murphy:
No. No. And actually, that does raise a question for those products that do get whacked in the Part B space is something that will have to be discussed. The docs stand to lose in that circumstance where functionally, right, I mean obviously rebating aside and all that, but you know do have a situation where if you see a part B product in the out years that gets a big significant price decrease because of the IRA, that 4.5% goes down for the doc. And they were not very vocal during the entire legislative process trying to stand up on that issue. But it remains an issue that I think docs are going to see some material change in five, 10 years.
Yaron Werber:
Well the real question, if you think about, there's so many PD-1s right now, there's so many anti-TNFs, there's so many IL-12s, 23s, there are a lot of options. Some drugs oftentimes are considered to be a little bit better than others. A lot of times what we hear access really drives utilization. But the real question on a buy and bill landscape is when KEYTRUDA gets negotiated down, do you just start using more [inaudible 00:35:22]?
John Murphy:
Yeah. I think that you ask the right question. I mean it'll be interesting to see what payer practices begin to evolve to, because I imagine all of the good analyst houses out there, I know you guys too, I mean everybody has already done their projections for what are the drugs that are most likely to get selected in the first three years? And I have to imagine that there's only really three main payers anymore, and they're all very sophisticated and they're all probably looking at those lists and starting to internalize what are our options? To your point in the cancer space, what are options in the TNF space? Unless you're in a scenario where you have just an incredibly better alternative from the data, if they're all reverting closely to the mean, you're going to see I think payers starting interest to practices to just see where they can get the best rebate dollar.
Yaron Werber:
Yeah. I mean we've heard panels talking about how, now I'm shifting over to the practice management side, that oncology groups are going to continue to integrate and probably get acquired by hospital systems.
John Murphy:
Or private equity fund. In any case, you are seeing that just massive consolidation is going to lead to a much more sophisticated management of the dollar that ultimately probably, I have to say that as a patient advocacy, it probably doesn't benefit the patients in the long run at a macro level, but it's going to ensure that the PBMs can still squeeze out the earnings that they're going after on a quarterly basis for their investor class.
Yaron Werber:
Yeah. I mean if you think about it, again, this is a totally corollary point, but the cost of medical education in the U.S. is so astronomically high relative to their ability to pay back the loans, now going to compress the infusion clinic, rheumatology, neuro and oncology segments too. Let's talk about the friends again. So one of the big positives is CMS has now confirmed that cell and gene therapies are going to fall under the plasma derived drug exclusion. And so a CAR-T won't get negotiated and ex vivo lenti cell therapy, gene therapy won't get negotiated. What about an adeno, an associated adeno gene therapy?
John Murphy:
Yeah. I think that the CMS circumstance here is they're treading very carefully on how much information they provide on that exclusion because you have a number of cell and gene therapies and then derivative therapies that all derived from either blood plasma or just whole blood and lots and lots more development in that space. And I think CMS is very carefully wording its interpretation so it doesn't inadvertently create a massive loophole. That's just my speculation. Obviously I'm not speaking with full knowledge of how CMS is doing this. But I think early on there was a reticence amongst the broader industry to ask for clarification because there was a concern that CMS would narrowly clarify that exemption into maybe just the factor spaces or just the very traditional plasma derived space.
But I think it was helpful for CMS to provide a little bit more context because it obviously gives the cell and gene therapy space some room to breathe. But I am cautious to say I think beyond what they've talked about, I do think CMS going to take more of a case by case look at anything that doesn't fall squarely within that exception they've already outlined, because I think they don't necessarily know where all the science is going, and that's not a commentary on their education, it's just I think the science is evolving so quickly that they're very worried about inadvertently making this thing huge when they have articulated they think it's a narrow exception.
Yaron Werber:
Makes sense. Let me actually circle back quickly and go back to the orphan drug exclusivity. So there is the TTR space, both on the peripheral neuropathy and the cardiomyopathy space, peripheral neuropathy, for example, there's already been two drugs approved from Alnylam and [inaudible 00:39:29], and vutrisiran or AMVUTTRA. Obviously, AstraZeneca and Ionis are hot in pursuit now and in short order, hopefully cardiomyopathy indications going to be approved as well. All of those already have their orphan drug exclusivity essentially. Does that mean that they're all now going to trigger this, or is this going to be something that only starts a grandfathering process?
John Murphy:
Yeah, I don't think necessarily CMS is looking at a grandfathering process. I think that they're going to look at these things de novo, regardless of where they sit. The TDR space RNAi more broadly is also a good base case for arguing why small molecules aren't necessarily easy to develop and manufacture, which was the baseline justification for treating them differently than biologics. But that's a different point. But I think they're all in a space where each company at a portfolio level is going to have to be evaluating what they think their IRA exposure is with the understanding that hereto force CMS has been extremely conservative in how it's interpreting its authority on the statute. And so those guys who have more than one orphan indication across an active moiety, even if they're separated by dual NDCs are still going to be needing to look at the applicability of this in their portfolio.
Yaron Werber:
And so when you're thinking about the two sides of TTR amyloidosis, the polyneuropathy and the cardiomyopathy, are those two different indications or are they two different manifestations of the same indication?
John Murphy:
Yeah. So I don't know specifically how FDA has defined that. I haven't looked into it as to whether or not they treat that as one orphan designation or two, but I do think that is a good example of why we think CMS shouldn't have been so narrow in its approach to this because if you look at those two products, I think I just saw a review where John Maraganore talked about bringing that company up, and that was 20 years of work and development to get those two indications which are very small patient populations. And I think CMS needs to evaluate, and Congress really should have done a better job evaluating, the challenges facing rare and orphan disease research because it approached it as well what we can't have, and the reason the orphan drug exemption was written the way it was is because they really didn't want a product that had one or two orphan indications, but then some mega blockbuster population that got itself out from negotiation.
There was one or two products that you all probably know that were the focal point of Congress's desire to make a very narrow exemption. But in that case, they threw the baby out with the bathwater by saying well really, anybody who's doing targeted research in the orphan space is now on notice that a different research program can knock you out.
Yaron Werber:
So the next question is the whole concept of dosage forms, strengths and the concept of the same active moiety. So for example, when you look at Regeneron's EYLEA, they recently developed a high dose eight milligram formulation versus the approved two milligram formulation, and that data showed a dramatic efficacy improvement. But are they going to ultimately get negotiated as the same aflibercept active moiety regardless of the formulation? And it's also relevant to IV versus Sub-Q?
John Murphy:
Yeah. So CMS has been fairly clear on this point, although I think they're wrong. And I think this is an area most ripe for someone to challenge CMS's approach in the future, we'll have to wait and see if that happens. But CMS has taken the position that any product that shares an active moiety or active ingredient with a negotiation eligible product is going to be lumped into the negotiation paradigm, and they're going to extrapolate the maximum fair price application across the dosage forms across the vial size, across the indications. So that's a pretty comprehensive approach. I think it's inconsistent with the statute in the sense that a newly developed product that gets approved by FDA under a separate national drug code, separate BLA, separate NDA, that product will not have been on the market for nine years or 13 years.
But CMS is taking the position that it nevertheless is subject to negotiation because a precursor product shares an act active moiety that is subject to negotiation. I think that's flatly wrong. I think many people in town share that view with me. But CMS has nevertheless doubled down on that interpretation in the final guidance. And so I can't help but think that that's something that would be ripe for any company that is selected to try and challenge because I think it's a little bit outside the scope of authority CMS has.
Yaron Werber:
Yeah. So Merck and Bristol now were the first wave of litigators against the IRA. What legs do they have to stand on and in what way would the industry really push back and challenge this?
John Murphy:
Yeah. So right now there are four pieces of litigation that are challenging the drug price negotiation provisions. All of them are constitutionally based challenges. So you have Merck and Bristol, then there's a challenge from the U.S. Chamber of Commerce and one from Pharma, our sister association across town here, I think all of them have made very good articulated arguments that relate to speech aspects of the law and that relate to some of the fines associated with the negotiation. And my view, and I've litigated a number of these cases in the past in my career, the constitutional challenges against a statute passed by Congress are always an uphill battle. Courts provide a significant degree of deference to Congress in the laws it passes. But I think in this case, what you see is four separate organizations bringing somewhat similar constitutional challenges. And that should really say something to you about how much of a problem the law places on a number of the areas.
So if you take for example the fines associated with a manufacturer deciding not to agree to the final offer from CMS, you not only have what could be upwards of 90% of US-based revenue confiscated, but there's additional civil monetary penalties which could trigger under the federal healthcare program laws' additional investigations and potentially the expulsion from participation in Medicare by the program. So I do think it's a credible argument that it cannot be a fair exchange of ideas and a credible negotiation when one party, the manufacturer isn't really able to walk away from the table. That looks to me a lot more like a taking, which is articulated by a couple of these lawsuits because it's really the government coming in and saying, "We are only going to pay X." And in a normal capitalist environment, the government does have the authority to say, "We're only going to pay X." But many people have the ability to say, "Okay, that's fine." I say, "No," and I'll just forego my contract with the government.
But in this case, you just don't have that luxury because the way the healthcare system is structured, so many things relate to your pricing with the government that being a component of the Medicare negotiation program not easily pulled out, maybe in certain rare cases where you have pediatric only indications, you weren't looking for the Medicare program to begin with, or maybe there's a case to be made in certain markets like the obesity market. But I think for the general company, you can't really walk away from Medicare. And so I think that's a good argument to make. Whether that kills the IRA negotiation program, we're still going to have to wait and see. We haven't seen the government's response yet in any of these cases. And we haven't gotten a view into how any of the four different district court judges are going to look at this. But I also think that these are not the only four pieces of litigation that will come out of this. My sense is now that the guidance is finalized and the list will be published in September, you may see some additional challenges based on CMS's authority.
Yaron Werber:
And that CMS authority will be challenged, what specifically will be challenged, their ability to then set the price?
John Murphy:
So I think one is some of its interpretations under the guidance. So as we talked about the active moiety issue before, I think that's probably the most ripe. There had been a ban on disclosure of information in the original guidance that would've been ripe for a challenge that CMS actually I think smartly took out because they recognized they were vulnerable to some First Amendment challenge in the case of their interpretation of the guidance. But nevertheless, I think that the act of moiety issue is going to be one. I also think what will be interesting to see is if CMS makes modifications to the guidance for year two or year three, what does that do for a company that was subjected to the original guidance in year one? And how do they look at their obligations under the initial guidance versus the obligations required of company in year two or year three?
And does that provide a change in how a company might think about challenges? But that'll take a little bit of time. The one thing I will say is I think constitutional challenges at a broader level are the kind that are likely to take down the entire negotiation program if they are successful. Whereas as applied a challenge to CMS is going to delay things, but ultimately get CMS a slap and they might have to go back and re-look at these things. Now, that could still be a meaningful win, for instance, in the case of the act of moiety situation if it happens. But I just think you have to look at them in two different ways.
Yaron Werber:
All right, terrific. John, let me go now into my favorite part of each podcast that's a little bit more personal so we can really get to know our guests. If you had any superpower, what would it be?
John Murphy:
Oh, I've always wanted to be able to fly because I hate flying on commercial airlines. And so in my mind, I would be able to fly places on my own.
Yaron Werber:
And so how do you deal with a service provision? Who's going to offer you drinks when you're flying?
John Murphy:
Well that's a good question, I've never really thought about that. I guess I'd have to be able to fly with a cadre of folks, so maybe some superpower to bring everybody with me.
Yaron Werber:
That'd be pretty useful.
John Murphy:
Yeah.
Yaron Werber:
And if you had to change one thing in your childhood, what would it be?
John Murphy:
That's a good question. I think I would've played more sports because I only played ice hockey growing up. It was the only thing I played. Not a lot of ice hockey being played here by this 42-year-old guy in D.C., would've been nice to have played other sports.
Yaron Werber:
You grew up in Wisconsin, so ice hockey was an integral part of life.
John Murphy:
It was all year round when I was a kid.
Yaron Werber:
All year round. Great. John, as always, thanks so much for joining us. Really appreciate it.
John Murphy:
Yeah, thanks so much for having me.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.

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