How IRA May Be Affecting Biotech Financing

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Recent data and commentary offer insights into how biologics vs. small molecule patent protections under the Inflation Reduction Act pricing scenarios is impacting investing in the biotech sector.

According to GlobalData’s Pharma Intelligence Center Deals database, US biotechs saw 48% or $1.1 billion more in innovator drug venture financing, reaching a total deal value of $3.2 billion in 2023 over innovator small molecules. Overall, venturing financing for biologic drugs reached a total deal value of $48.9 billion between 2018-2023 (YTD). 1

A Mizhou Securities industry commentary from its recent healthcare banking panel noted that M&A strategy between large and small biotechnology/ pharmaceutical companies could be affected by the Inflation Reduction Act (IRA), in terms of price capping and patent life reductions.2 Under the IRA, biologics are granted a 13-year protection period before price controls come into effect, while small molecules undergo price negotiations after only nine years of approval.

The Mizhou Securities industry commentary from its recent healthcare banking panel also noted: “Although the definition of life is not technically referring to the patent cliff, for all effective purposes, companies will likely treat this as loss of patent exclusivity.” And this could result in uncertainty around smaller companies potentially selling their assets earlier, or at a discount, in the face of risking decreasing lifecycle and valuation in the small molecule space.

Ophelia Chan, Business Fundamentals Analyst at GlobalData, commented that these provisions of the IRA could “…result in favoring biologics even further over small molecules, influencing future decisions regarding biotech financing and drug development pipelines.”

However, the Mizhuo summary takes the examination of biologics vs. small molecules one step further. With small molecules representing 90% of approved drugs, and when these drug patents expire are easier and cheaper to reproduce and enter the generics market to increase revenue. They posit the following: “Just this year, nine transactions have taken place among small molecule drugs. This begs the question, are these deals a result of small molecule drug developers getting ahead of the IRA? Additionally, will small molecule transactions look different in the future and will they still occur?”

Mizhou panelists also noted the following:

  • There are expected to be 10 to 15 biotechnology IPOs in 2023
  • Oncology remains the leading category for investments (24 transactions)

References:

  1. Inflation law drives biologic drugs to outpace small molecules in venture financing in US, finds GlobalData, July 4, 2023.
  2. 4th Annual Mizuho Therapeutics Expert Seminar - Healthcare Banking Panel Takeaways, July 12, 2023.

*Regulation Analyst Certification (AC) The views expressed in this research report accurately reflect personal views about any and all the subject companies. No part of compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

*Mizuho Securities USA LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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