Pushback Against IRA’s Controversial ‘Pill Penalty’ Faces Stiff Budgetary Headwinds

As President-elect Donald Trump’s administration takes shape, the future of the Inflation Reduction Act’s drug price negotiation program has come into question. The Biden administration announced prices for the first 10 drugs subject to negotiations in August, on the second anniversary of President Joe Biden’s signing the IRA into law, but since its inception, the biopharma industry has pushed back against the law.

One aspect of the IRA that has proven particularly controversial is the so-called “pill penalty.” This refers to a provision in the law allowing small molecule medicines to be eligible for selection nine years after FDA approval, four years before large molecule medicines can be subject to negotiations. Critics argue that this disparity could harm investment in small molecule drug development.

“What the shorter price negotiation period will affect in the short term is post-market development, with companies less likely to develop a second or a third indication for a small molecule, particularly relative to a large molecule, because that might not be a profitable investment,” Kirsten Axelsen, senior advisor at Charles Rivers Associates, told BioSpace. “In the longer term, I think we’re going to see more of a shift towards large molecule drug development.”

The Ensuring Pathways to Innovative Cures (EPIC) Act has been proposed to provide parity for the two drug classes, extending small molecules’ negotiation protection periods to the 13 years currently enjoyed by biologics. In addition, The Orphan Cures Act aims to expand orphan drug exemption and The MINI Act seeks an extension to 13 years specifically for genetically targeted medicines such as siRNA therapies that are currently grouped with small molecule medicines. All three bills have received bipartisan support.

“I do feel that Congress wants to provide relief with regard to orphan drugs, and with regards to small molecule drugs and the timeframe that they qualify to be reviewed,” policy analyst Ethan Siegal, founder of The Washington Exchange, said on a Guggenheim call last month about the incoming Trump administration. “So I do think those two items could hitch a ride on the tax budget reconciliation bill.”

Ian Spatz, national advisor at Manatt Health, was not as confident. While the IRA’s drug price negotiation program will undoubtedly be a key part of Biden’s legacy—and this has led to expectations that it will become a major target for the incoming administration, given that President-elect Donald Trump spent his first year in office last go round repealing the actions of his predecessor, President Barack Obama—Spatz suggested that eliminating the “pill penalty” might be beyond the reach of the Trump administration.

This is due to the savings in federal spending made possible through the IRA. Any significant changes to the law could result in the Congressional Budget Office highlighting the budgetary cost, with Congress required to find sufficient savings to offset the revisions, Spatz concluded.

Capitol Street, a healthcare consulting firm, also noted these same budgetary restrictions may rule out the EPIC Act in the short term but could make the orphan drug change more “palatable,” with this also having bipartisan support and being significantly less costly.

Beyond these budget concerns are arguments against an extension of small molecules’ period of exclusivity. Sean Tu, professor of law at West Virginia University, told BioSpace he agrees with the push for parity between small molecules and biologics but argued that the law should give all new medicines nine years, not 13, before a negotiated price comes into effect.

“We want to incentivize innovation,” Tu said, “but after that innovation ends or after the market exclusivity period ends, we want cheaper alternatives.”

At the heart of the debate over the price negotiation period are the incentives that have been provided to biologics, under the assumption that development times are longer and more costly. Tu is an author of recent research suggesting that biologics do not need this extra protection. Compared to small molecules, biologics were found to achieve greater success in clinical trials and possess a higher median time to biosimilar competition (20.3 years to 12.6 years). Biologics also brought in higher median revenues each year following FDA approval.

Axelsen agreed that “there is no good reason” for the extension to provide an advantage to biologics, with this measure being carried over from the assumption that the development periods for these drugs would take longer and be more costly than small molecule medicines. But she pushed back against Tu’s argument that both small molecules and biologics should have only nine years of protection against price negotiations. She suggested that while such a change could save money for the federal government in the short term, it would also reduce incentives for drug development.

Both PhRMA and BIO, industry lobbies for the pharma and biotech industries, have been vocal in their opposition to the “pill penalty.” PhRMA has been critical of the shorter timelines for small molecules, echoing Axelsen’s assessment that it could lead to reduced post-marketing studies, and calling on Congress to “prioritize reforms to fix the ‘pill penalty.’” BIO also put its support behind the EPIC Act and raising the small molecule exemption to 13 years, referring to this as a “top priority” for the organization.

If left unchanged, the IRA could reduce the expected revenue of selected small molecule drugs in the U.S. market by 8%, with an implied drop in R&D investment of $232.1 billion over 20 years and 177 fewer small molecule medicines developed, according to an analysis by University of Chicago policy researchers. Axelsen also stated that the dominant form of drugs selected under the IRA will be small molecules, as Medicare Part D involves drugs that tend to be dispensed from pharmacies.

“There is a valid concern that the price negotiation period is not enough time for small molecule manufacturers to recoup R&D costs,” Joel White, president of the Council for Affordable Health Coverage, wrote in an email to BioSpace. “We are already seeing biotech companies shifting investment away from small-molecule drugs.”.

One example of a larger company taking such action is Pfizer, which announced plans to favor biologics within its oncology pipeline due to the influence of the IRA. This shift could accelerate an existing trend across the industry in the steady movement towards a greater proportion of the global R&D pipeline being composed of biologics.

In the short term, the IRA’s impact will not be seen on the drugs selected for price negotiation until 2026. For Axelsen, this means policymakers could take a wait-and-see approach, but she noted that with the issue being a top priority for investors, drug developers and certain politicians, the pressure to address the “pill penalty” will remain at a high level.