The case for amending the drug pricing provisions of the Inflation Reduction Act

The Inflation Reduction Act (IRA) significantly expands government oversight of the US economic model for prescription drug innovation. The price controls 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, and may 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 permit Medicare to set prices for small molecule drugs nine years after FDA approval, while biologics are granted a longer time – 13 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 average time period before small molecule drugs typically face a generic competitor is 14 years. For biosimilars, essentially the lower priced version of a large molecule permitted to enter the market, the period is 12 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 situation is unfortunate for a number of reasons: most notably, because small molecule therapeutics are essential in treating certain diseases such as various cancers.  Companies that invest in drug development will find that developing large molecules may 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.

Such outcomes are concerning. Unlike chemically derived medications, biologics are more complex molecules made from living organisms, but that in itself doesn’t make them better drugs. Biologics can’t cross the blood-brain barrier. Some small molecules can. That makes them essential for fighting neurological diseases like Alzheimer’s and certain brain cancers. Think of the implications of reducing investment in treatments for Alzheimer’s disease, which causes horrific suffering for so many and costs the US health system more than $1 trillion per year. Biopharmaceutical companies have spent tens of billions of dollars pursuing treatments and cures for this disease.  Will they continue to take on such research without clear financial incentives?

The IRA has some worthy provisions. It finally 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. All vaccines will be free.

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. But drug pricing provisions in the IRA may slow this process or even halt it.  This is truly an unintended consequence that can be fixed if politics can be set aside.