New rules places upon the pharma industry will have a significant impact on how investors view the industry.
The current administration has made many decisions that could have a significant impact on the pharma industry, including President Trump’s executive order enforcing a most favored nation policy on pharma drug pricing. While the industry and the government are still working out the details of how this policy will work, the industry is exploring all of the potential impacts it could have. John Standford, executive director at Incubate, spoke with Pharmaceutical Executive about how this ruling might impact the industry.
Pharmaceutical Executive: How is federal policy reshaping life sciences investments?
John Stanford: Federal policy is reshaping life sciences investments through a combination of uncertainty in Washington, funding cuts, and proposed price controls.
First, the continuous cycle of White House announcements, legal challenges, and changes in direction has roiled capital markets in recent months, although that appears to be subsiding. While investors are generally risk-tolerant, life sciences are at the riskiest end of the investment spectrum, so this sector feels a greater magnitude of impact when the market is volatile.
Specifically, investors are concerned that NIH cuts, FDA reforms, and other proposed changes from the Trump administration will limit the pipeline for the next generation of medicines. NIH-funded basic research is foundational to the entrepreneurial environment. Some policymakers have questioned whether the NIH's role could be fully privatized, but that would take years, if not a decade, and require developing new sources of private capital.
The most immediate concern for investors is the White House's proposal to implement a "Most Favored Nation" drug pricing model, which would effectively import foreign price controls. This approach would significantly disrupt the risk models that allow investors to support biotech research and development. Any major shifts to drug reimbursement for manufacturers would reduce their capacity to invest in early-stage startups and acquire small biotechs––disrupting the virtuous cycle that powers the development of new medicines.
Investors see promise in two proposed reforms to the Inflation Reduction Act (IRA). The recently introduced Ensuring Pathways to Innovative Cures (EPIC) Act would eliminate the pill penalty by giving small molecule drugs the same 13-year timeline before being eligible for Medicare price setting as biologics. Currently, small molecule drugs are eligible for price setting at nine years, creating an arbitrary imbalance that disincentivizes small molecule investment and development. The ORPHAN Cures Act, included in Congressional Republicans' proposed budget reconciliation bill, would restore investment incentives for rare disease drug development. It would fix the IRA's limited orphan drug exemption, which discourages research into whether existing rare disease treatments could benefit additional patient populations.
PE: What patient populations and research areas will be most impacted by the new federal regulations?
Stanford: New federal changes, such as NIH cuts and Most Favored Nation pricing, will have a broad impact across a variety of disease areas, since they involve direct cuts to research funding and the revenue that drug manufacturers rely on to sustain research and development. Our recent survey of early-stage biotech CEOs reflects widespread concern:
The majority say below-cost reimbursement structures lead to negative outlooks for companies, indicating that foreign reference pricing models would further threaten investment.
The Inflation Reduction Act's pill penalty and limited orphan drug exemption are already affecting research for rare diseases, cancer, and neurological conditions. Small molecules' ability to cross the blood-brain barrier makes them especially promising for treating brain cancer, Alzheimer's disease, and other neurological diseases.
Our Life Sciences Investment Tracker shows that at least 26 drugs and 51 research programs have been discontinued since the IRA's passage, including potential treatments for leukemia, bladder cancer, multiple myeloma, and several rare diseases. Another analysis shows small molecule funding dropped 70% since the IRA was introduced.
PE: What policy reforms would benefit startups and R&D?
Stanford: Three reforms would benefit startups and R&D investment:
The EPIC Act would rebalance incentives for small molecule drug development by providing small molecule drugs and biologics equal 13-year timelines before eligibility for Medicare price setting.
The ORPHAN Cures Act would help ensure that rare disease drug development remains financially viable. Under the IRA, orphan drugs are exempt from Medicare price setting only if approved to treat a single rare disease. The ORPHAN Cures Act would extend that exemption to drugs approved for multiple rare conditions, restoring incentives to research whether existing treatments could benefit patients with other rare diseases.
The American Innovation and R&D Competitiveness Act would allow startups to deduct R&D expenses the year they occur rather than amortizing them over several years. For biopharma companies operating pre-revenue and on tight budgets, this change would improve cash flow to sustain operations and critical research.
Startups conduct the lion's share of innovative research. Small biotechs developed 55% of FDA-approved drugs from 2011 to 2020.
Together, these reforms would help create a more predictable investment environment and ensure the life sciences ecosystem remains viable for high-risk, high-reward ventures.
PE: Why is biopharma M&A at record lows?
Stanford: Several factors are contributing to the slowdown in biopharma M&A activity.
At a baseline, the inherent unpredictability of scientific discovery plays a role in M&A. Some years bring a wave of viable assets, while others don't.
However, companies are hesitant to pursue new deals amid uncertainty in capital markets due to the policy environment. Pharmaceutical tariffs would increase companies' operational costs, leaving them to tighten budgets elsewhere. The threat of importing foreign price controls via a Most Favored Nation drug pricing model would make it difficult for investors and companies to assess future returns with confidence. As a result, firms may delay deals or reduce acquisition activity.
