Maintaining R&D Investments in the IRA Era

Developing effective lifesaving drugs requires significant research and development (R&D) investments. New medications cost an average of $2.3 billion to develop,1 largely funded by existing drug sales. At the same time, pharmaceutical companies are under increasing pressure from the government to reduce prescription prices, which presents a significant hurdle to maintaining the R&D pipeline.

Industry leaders and economic experts are concerned that the Inflation Reduction Act (IRA),2 with its price negotiations and caps, could further stifle research investments. According to Model N’s 2025 State of Revenue Report,3 nearly two-thirds of pharmaceutical leaders are worried about how the IRA will impact their pricing strategies.

Pharma manufacturers must adjust legacy pricing processes to maintain medication access while still supporting drug development. While difficult, this is doable. Effective revenue management and artificial intelligence (AI)-powered data analysis can help manufacturers navigate the pricing pressure.

The IRA’s impact on R&D

Under the IRA, pharma manufacturers must negotiate Medicare drug prices for specific medications with the federal government. The parties reached an agreement on the first 10 drugs in 2024, and the Centers for Medicare and Medicaid Services announced the next 15 drugs up for negotiation earlier this year,4 which includes revenue-driving GLP-1s. The larger number of drugs included in the second set signals the federal government’s intent to accelerate cost reductions across a broader spectrum of therapeutic areas.

In addition to price negotiations, the IRA requires manufacturers to pay rebates to the government if they raise drug list prices faster than inflation, and it caps out-of-pocket expenses for Medicare recipients.

Some experts and industry leaders worry these provisions could potentially have a chilling effect on R&D in several ways:

Diminished revenue for investment: The IRA’s pricing actions will likely compress revenue streams and reduce capital for R&D investments. After Medicare-negotiated prices take effect, manufacturers lose pricing flexibility, resulting in lower revenues for products that traditionally help fund research for new therapies. Inflation price caps restrict manufacturers’ ability to offset increasing operational costs. Maintaining compliance also requires dedicated resources that could detract from research initiatives. Research from the University of Chicago estimates IRA provisions could lead to a 31% decrease in pharmaceutical revenues through 2039 and result in 135 fewer drug approvals.5

Reduced incentive for innovation: The price limits may discourage companies from pursuing new therapies, particularly those targeting Medicare beneficiaries. The potentially low—or even negative—return on investment makes R&D difficult to justify fiscally. With reduced revenue certainty, manufacturers may deprioritize high-risk or long-term projects, focusing instead on safer or more immediately profitable therapeutic areas.

The reduced incentive is particularly pronounced for biosimilar and generic development. If government negotiations significantly reduce brand-name drug prices, the profit margin for potential generic and biosimilar versions also drops. Combined with rebate structures that favor brand names, spending time developing and launching these lower-cost alternatives may not make financial sense.

Stifled post-approval research: The IRA's negotiated prices cover all of a drug’s indications, regardless of when the new uses are approved. This means pharma manufacturers cannot price the drug differently for the new treatment, further limiting their ability to recoup research investments. Additionally, a drug with multiple indications may attract government interest in negotiations more so than one with a single therapeutic use.

These factors disincentivize post-approval research, resulting in fewer treatment options for patients and curtailing evidence generation to track long-term health outcomes. Postmarketing studies generate more than just new indications; data from these kinds of studies demonstrates a drug’s safety and efficacy and informs prescribing practices. Research in Health Affairs demonstrates the IRA’s potential impact on this research.6

General uncertainty: The market uncertainty generated by the IRA increases financial risks and complicates forecasting. If manufacturers don’t know which drugs will be included in future negotiations, they can’t predict revenue or prioritize research areas. The IRA also shortens the period during which manufacturers can charge market-driven prices, forcing companies to estimate the value of a drug over a shortened time frame. Pharma companies may hesitate to pursue long-term projects if they can’t accurately assess potential returns.

After just one year of negotiations, the IRA is already impacting pharma companies’ strategies. In Model N’s aforementioned State of Revenue Report, 87% of surveyed executives say they’ve already altered their launch plans for specific diseases or therapeutic areas.

The promise of AI-driven drug discovery

Reducing the costs of R&D is difficult given the focus on safety, increasing sophistication of modern therapies, and specific requirements for FDA approvals. Despite scientists’ best efforts, many new compounds fail, and the ones that succeed often take years or even decades to bring to market.7 However, there are some reasons to be hopeful.

AI-powered drug discovery may soon expedite research timelines and reduce development costs. AI technologies enable comprehensive analysis of vast molecular databases to identify the most promising compounds, reducing failure risks and accelerating preclinical timelines. Additionally, genomic analysis and sequencing innovations will enable researchers to identify disease targets and biomarkers for more precise therapies.

Advanced analytics can enhance data quality by identifying ideal clinical trial candidates, quickly evaluating trial outcomes and monitoring adverse events. The result is more effective medications delivered quickly, increasing revenue opportunities.

However, these technologies are relatively new and require investments to implement. In the meantime, pharma manufacturers must overhaul their revenue management processes to maintain funding for drug R&D in this new pricing environment.

Enhancing revenue management processes to protect R&D

Legacy pricing strategies will no longer suffice for pharma companies under pressure for the IRA. They must improve their data gathering, aggregation, and analysis to develop optimized pricing tactics while also reducing revenue leakage.

Successful data analysis requires manufacturers to break down organizational silos and incorporate external sources to obtain and consolidate data from drug portfolios; R&D efforts; current contracts; sales; the supply chain; and competitor prices, along with market preferences and trends.

Manual data gathering no longer suffices in the complex market. Pharma companies should invest in automation to ensure they have comprehensive, current, and actionable data. AI-powered platforms can analyze this information to model different scenarios, such as the impact of IRA price negotiations on revenue, inflation penalties on Medicare segments versus commercial market revenue, rebate strategies for maintaining market access, and gross-to-net implications across different payer channels.

Such insights can inform launch and pricing strategies to maintain market access and margins. In many cases, success may require sophisticated rebate and contracting approaches. A robust revenue management platform enables manufacturers to develop optimal structures and accurately calculate rebates and payments to avoid unnecessary losses.

The future of drug pricing

While the IRA’s long-term impacts on pharma manufacturers are yet to be seen, maintaining market access for drugs and R&D funding will be a delicate balance over the next few years. These companies will need to complement new R&D strategies with more nuanced pricing strategies to continue the steady development of new lifesaving drugs.

By integrating advanced analytics and AI-driven tools into their revenue management processes, manufacturers can anticipate market changes, mitigate regulatory risks, and optimize their portfolios while continuing to support innovation. More efficient and effective revenue management processes will shore up income to support short-term revenue goals while continuing to fund the long-term development efforts that both patients and the industry depend on.

About the Author

Jesse Mendelsohn is a senior vice president at Model N, a revenue optimization and compliance provider for life sciences and high-tech companies.

References

1. Deloitte Pharma Study: R&D Returns are Improving – Regulation Could Stifle Innovation. Deloitte. June 24, 2024. https://www.deloitte.com/ch/en/about/press-room/deloitte-pharma-study-r-and-d-returns-are-improving.html

2. Inflation Reduction Act and Medicare. CMS.gov. https://www.cms.gov/inflation-reduction-act-and-medicare

3. 2025 State of Revenue Report. Model N. https://www.modeln.com/state-of-revenue-report-2025/

4. HHS Announces 15 Additional Drugs Selected for Medicare Drug Price Negotiations in Continued Effort to Lower Prescription Drug Costs for Seniors. CMS.gov. January 17, 2025. https:// www.cms.gov/newsroom/press-releases/hhs-announces-15-additional-drugs-selected-medicare-drug-price-negotiations-continued-effort-lower

5. Philipson, T.J.; Durie, T. The Impact of HR 5376 on Biopharmaceutical Innovation and Patient Health. The University of Chicago. November 29, 2021. https://cpb-us-w2.wpmucdn.com/voices.uchicago.edu/dist/d/3128/files/2021/08/Issue-Brief-Drug-Pricing-in-HR-5376-11.30.pdf

6. O’Brien, J.M.; Motyka, J.; Patterson, J.A. How the IRA Could Delay Pharmaceutical Launches, Reduce Indications, and Chill Evidence Generation. Health Affairs. November 3, 2023. https://www.healthaffairs.org/content/forefront/ira-could-delay-pharmaceutical-launches-reduce-indications-and-chill-evidence

7. Van Norman, G.A. Drugs, Devices, and the FDA: Part 1: An Overview of Approval Processes for Drugs. JACC: Basic to Translational Science. 2016. 1 (3), 170-179. https://doi.org/10.1016/j.jacbts.2016.03.002