IRA Pushes Drug Companies to Favor Biotech Meds Over Pills

Due to recent U.S. legislation which gives biologics a longer runway before becoming subject to government price limits, drugmakers are prioritizing complex biotech medicines over treatments that can be given as pills. Such a shift in focus could result in the availability of far fewer cheap, generic pills in the long run.

Passed by Congress in August 2022, the Inflation Reduction Act (IRA) allows Medicare for the first time ever to negotiate the prices it is willing to pay for certain medications for people age 65 and over. All other developed nations currently negotiate drug prices, which has long made the U.S. the most lucrative market for the pharmaceutical industry.

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Thanks to the IRA's drug pricing provisions, the Congressional Budget Office (CBO) estimates the new legislation will reduce the federal deficit by $237 billion over the next decade.

However, the pharmaceutical industry has largely opposed the IRA, and companies have begun implementing strategies to mitigate its impact.

The IRA protects “small-molecule” drugs, which are mainly pills, from negotiation for nine years. Meanwhile, “large molecule” biologics (generally injections or infusions) receive a 13-year exemption.

“The difference between a nine- and 13-year product line is about 50 or 60% of the value,” said CEO of Eli Lilly Dave Ricks. “In 10 years, we'll have far fewer small molecules being developed than we do today.”

Ricks says the new rules “really just disincentivize investment in what ends up being convenient drugs, drugs for tough conditions like cancer and drugs that get really cheap when they go generic.”

The CEO said Lilly has already dropped a small-molecule blood cancer drug from its pipeline because “we just couldn't make the math work.”

Lilly is now considering eliminating more of its early-stage pill programs, and it is directing its small molecule development group to only pursue opportunities “that would be clearly good enough within nine years to be winners.”

Small molecules, which can be taken by mouth, absorbed into the bloodstream, and easily penetrate cell membranes — think aspirin, blood pressure drugs, and statins for high cholesterol — account for most medicines on the market today.

Generic copies are typically priced at 90% discounts when such small molecule drugs lose patent protection. However, the competition in "biosimilar" versions of large molecule drugs is usually much lower, and the discounts much less steep.

In a recent survey conducted by the industry trade group Pharmaceutical Research and Manufacturers of America (PhRMA), 63% of member companies said they expected to shift research and development investment away from small molecule drugs.

President of PhRMA Stephen Ubl said the group believes the IRA should not set different exemption periods based on drug type. "We would like that provision to be fixed," Ubl said.