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18 October 20224 minute read

The potential for unintended consequences in the Inflation Reduction Act

The Inflation Reduction Act (IRA) significantly impacts the US economic model for prescription drug innovation through the imposition of mandatory negotiations in which federal officials set a ceiling price for certain drugs and biologics. The price controls that the IRA imposes on medicines offered through Medicare may have the unintended consequence of reducing the number of new therapeutics created to respond to unmet medical needs.  Moreover, it could also bring about a profound shift in investment, including a shift away from small molecule pills and toward complex biologics. 

This potential change would arise from provisions of the statute that permits Medicare to set prices for some small molecule drugs nine years after FDA approval, while biologics are granted a longer time – thirteen years - without such price setting.

When the protections on the clinical data expire on a drug, another company can copy that medicine using the innovators’ clinical data and offer it for a much lower price.  This is the system established in the Hatch-Waxman Act, and it has resulted in the vast majority of drugs being available as low-cost generics. The median time period before small molecule drugs typically face a generic competitor is fourteen years. For biosimilars, essentially the lower priced version of a large molecule permitted to enter the market, the period is twelve years after the approval of the original large molecule drug.

Eli Lilly’s CEO, David Ricks, observed that “the most damaging thing about [the Inflation Reduction Act] is that it sends a signal to investors and capital allocators …that small molecules...are worth a lot less.”  He is among number of industry stakeholders who have already raised concerns about the potential harmful impacts on small molecule valuations because of the shortened reward period for small molecule medicines compared to large molecules.

This shift in incentives has raised a number of concerns, in large part because the technology in a small molecule therapeutics are essential in treating various cancers and neurological diseases.  Companies that invest in drug development may find that developing large molecules will yield a larger return.  They may also be less likely to invest in research into not only new small molecule medicines, but also into additional medical indications for small molecule drugs already on the market, such as evaluating them for children, which is often done after the drug is approved for adults.

Unlike chemically derived medications, biologics are more complex molecules made from living organisms, but that does not always make them a better choice. Biologics cannot cross the blood-brain barrier while some small molecules can, making them essential for fighting neurological diseases like Alzheimer’s and certain brain cancers. The implications of reducing investment in treatments for Alzheimer’s disease alone could be deeply impactful, given the inherent suffering associated with the disease and the costs to the US health system that already total more than $1 trillion per year. Biopharmaceutical companies have spent tens of billions of dollars pursuing treatments and cures for this disease.  Whether they continue to take on such research with this shift in incentives is an open question, especially when considering that the failure rate for Alzheimer’s investments is over 99 percent.

The IRA has provisions that enjoy widespread support: it caps beneficiary out-of-pocket costs at $2,000 per year and allows the costs to be “smoothed” so they are payable over the course of the year and not due all at once, it provides a $35 a month out-of-pocket cap for insulin, and it makes vaccines free under Medicare.  But research and development of drugs, particularly those that treat diseases of the elderly, brain cancers, and neuropsychiatric and neurodegenerative illnesses hold the promise of reducing untold suffering while saving money for the healthcare system. If drug pricing provisions in the IRA halt or even slow this process, the unintended consequences from this legislation could counteract the good that it does.