How the Inflation Reduction Act is shaping pharma procurement strategies

words by Ian Boyd, Luca Di Giuseppantonio

The pharmaceutical industry is no stranger to disruption – but few developments have reshaped procurement agendas with as much force as the U.S. Inflation Reduction Act (IRA).

This article examines how pharma procurement and supply chain teams can respond to the legislation’s impact, outlining the operational and strategic shifts needed to stay competitive in a more constrained and cost-sensitive environment. The IRA is rapidly altering how the pharmaceutical industry thinks about costs, investment, and innovation. While its future remains uncertain under the current administration, it paves the way for companies to rethink how they can leverage procurement for lasting competitive advantage.

The IRA’s impact on drug prices – and what it means for pharma procurement

The 2022 Inflation Reduction Act introduced several provisions to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government, including (but not limited to):

• Inflationary rebates: Starting in 2023, pharmaceutical manufacturers must pay rebates if drug prices exceed the inflation rate. 
• Medicare drug pricing negotiation: Drugs that are high-cost for Medicare will be subject to federal price negotiations. The greater the share of a product’s revenue from Medicare, the larger the potential financial impact of these negotiations. For example, Pediatric indications and vaccines – which have limited Medicare exposure – would experience lower impact, while areas such as oncology and metabolic disorders will face greater scrutiny. Additionally, drugs that receive multiple orphan indications may lose their exemption from these negotiations, discouraging pharma companies from post-market indication expansion.
• Expansion of required discounts: From 2025, manufacturers must apply 10% discounts to drug costs in the initial coverage period and then 20% in the catastrophic coverage period.
   

These measures can significantly shorten a drug’s period of full-price commercialization and therefore limit its lifetime revenue. To maintain a strong return on investment, pharmaceutical companies must reduce pre-marketing-associated drug costs and enhance operational efficiencies – with procurement and supply chain teams taking the lead.

Rethinking innovation and investment in light of the IRA

We’re starting to see the downstream impacts of the IRA, particularly in how pharmaceutical companies approach pipeline product development, innovation, and M&A activity. So far, pharma companies are:

• Prioritizing areas with lower Medicare exposure and reallocating resources 
• Accelerating post-merger integration to speed up the path to profitability
• Reassessing marketing products in the US due to reduced ROI

Another notable trend is the shift away from “pipeline-in-a-product” drugs toward multiple single-indication orphan drugs. Under the IRA, single-indication orphan drugs are exempt from Medicare price negotiations, diminishing incentive to pursue post-market expansion of a product’s lines of therapy. However, this also comes with its own set of challenges, requiring significant additional R&D, product launch, and marketing costs.

The biopharmaceutical industry has historically not been the most cost-conscious, especially among growth-stage companies focused on rapidly expanding product pipelines and market share. With smaller profit windows, a stronger focus on operational efficiency is no longer optional – however, it also opens up new opportunities for procurement and supply chain teams to set their business apart in a challenging market.

Actionable levers: How pharma procurement teams can respond

So, how can pharmaceutical procurement and supply chain teams navigate the impacts of the IRA? We propose three main courses of action:
 

Preparing for a shifting landscape

There are many unknowns regarding the political and economic outlook, but one thing is clear: the IRA is accelerating the need for smarter, faster, and leaner operating models across the pharmaceutical industry. To stay competitive, pharma companies must proactively embrace this shift – with their procurement and supply chain teams at the forefront of this strategic transformation.