The Inflation Reduction Act of 2022 requires that Medicare officials “negotiate” — or set — pharmaceutical prices for the federal government to purchase specified high-priced, small molecule drugs (pills, tablets and capsules) as soon as nine years after the Food and Drug Administration has approved them for patient use, including a two-year “negotiation period.”
Also under the IRA, specified high-priced, large molecule drugs (biologics), which are usually administered as injections or intravenous in hospitals and physicians’ offices, has an exemption period — or effective patent life — of 13 years after FDA approval for patient use, including a two-year “negotiation period.”
This “pill penalty” discriminates against small molecule drugs that are easier for patients to use; may not require a physician appointment or hospital visit; and may have cost benefits to disadvantaged patients.
What is the economic effect of the “pill penalty” on research and development spending in the pharmaceutical industry? In late 2022, PhRMA, an industry association representing U.S. pharmaceutical manufacturers, commissioned a survey of its member companies on the effects they expect the IRA to have on their future R&D spending.
Survey respondents stated that IRA price setting provisions were expected to have a growing effect on R&D plans, with 78 percent reporting that they expect to cancel early pipeline projects; 63 percent said they expect to shift R&D investment focus away from small molecule medicines; 95 percent said they expect to develop fewer new uses for medicines because of the limited time available before being subject to government price setting; and 82 percent or more of companies with pipeline projects in cardiovascular, mental health, neurology, infectious disease, cancers and rare diseases expect what management characterizes as “substantial effects” on R&D decisions.
University of Chicago economists released a policy brief (the research supported partly by funding from Gilead Science Inc.) in August 2023 that “analyzes the impact of regulatory and legislative changes within the IRA on medical R&D and patient health with respect to small molecule drugs.”
These economists found that this reduction in effective patent life for pills (to nine years) results in an 8 percent reduction in overall pharmaceutical industry revenue and a 12.3 percent reduction in industry R&D spending. This R&D spending reduction translates to 79 fewer small molecule drugs or 188 indications, and 116 million patient life years lost over the next 20 years, including those populations with HIV or Hepatitis C.
In March 2024, Pfizer executives announced the company was revamping strategic priorities for its oncology business, focusing its drug portfolio more on antibody-drug conjugates and bispecific antibodies and much less on small molecule pharmaceuticals. The company’s change in business strategy is reportedly motivated in part by the disparity in how the IRA’s drug price negotiation provisions treat large-molecule vs. small molecule drugs.
Along with Pfizer, Genentech, Novartis and Eli Lily have publicly announced a decrease or closure of development of small molecule drug candidates in oncology.
According to an analysis by RA Capital, 50 percent of a drug’s revenue will be generated from years 10 through 14 of patent life. Therefore, the four-year difference between biologics and pills (under the IRA) could significantly reduce revenue for small molecule development, making pharmaceutical companies understandably wary of investing in R&D in small molecule pharmaceuticals.
Contrarily, by allowing the four extra years for large molecule drugs to recapture the $2.3 billion average cost of developing a drug and bringing it to market, this is where pharmaceutical manufacturers would decide to place their risk capital rather than developing a small molecule pharmaceutical.
On April 15, President Trump signed an executive order that included several proposed policy changes benefiting the pharmaceutical industry, including eliminating the small molecule “pill penalty.”
Analysts at Citi Research have questioned whether small molecule drugs would eventually benefit from the 13-year negotiation free period and noted that this change in policy (and others) will require follow-up congressional approval. This congressional approval, says analysts at William Blair, will need to be “budget neutral” if it is to be considered for inclusion in the coming congressional budget reconciliation bill negotiations.
Also, in the House of Representatives and the Senate, the “Ensuring Pathways to Innovative Cures Act,” a bipartisan, bicameral bill, has been introduced to eliminate the IRA “pill penalty.” Whichever option occurs — through budget reconciliation or stand-alone legislation— it appears likely the“pill penalty” will be eliminated and pharmaceutical neutrality for effective patent protection will become federal law.