Congress must fix the IRA’s small molecule penalty

In opposing a fix to the 2022 Inflation Reduction Act, a leading voice in the effort to move the U.S. biopharmaceutical system toward European-style price controls cited “complicated details” in his reasoning for changing the law, adding that “getting it straight is critically important.”

I couldn’t agree more.

But the reality — and the solution — isn’t that complicated.

The U.S. leads the world in developing new drugs. To be sure, access issues certainly exist across the U.S. health care system. But leading the world in developing new drugs is a good thing. It’s good for the economy, providing high-paying STEM jobs and valuable exports. It’s even better for Americans who need cutting edge treatments or, say, a highly effective vaccine for a pandemic.

So it’s useful to ask: Why is the U.S. the best at this?

The country has brilliant scientists conducting research in labs across the country — at world-class universities, small companies, and iconic R&D manufacturers. But so do a dozen other countries. That rules out “American ingenuity” as the sole answer.

The U.S.’s technology transfer processes and intellectual property protections are also reasons for the country’s dominance in new drug development. A strong IP system, which is enshrined in the Constitution, fuels American entrepreneurship and is recognized around the world as setting a high bar for protecting innovators. But some wealthy countries across Europe, the Middle East, and Asia also have IP protections, so that doesn’t tell the full story either.

The drug review process in the United States is recognized worldwide as the gold standard, creating predictability and ensuring that medicines made in the U.S. are safe and effective. But that alone can’t do it either.

I believe that the answer lies in the combination of these factors that have created an entrepreneurial atmosphere and policy environment that encouraged $50 billion to be invested by venture capital into the U.S. life sciences sector in 2021 — though that is down to $35 billion in 2022. In the U.S., investors are willing to jump in far earlier, taking bigger risks and seeking bigger rewards, benefiting patients with new medicines every year.

For nearly a century, those new drugs came in the form of products based on small molecules — think aspirin or statins or the other common denizens of many medicine cabinets. Toward the end of the 20th century, however, new technologies made it possible to develop an entirely new class of medicines, biologics, which are medicines often infused at a hospital or clinic. Biologics are not made of chemicals synthesized in a lab but are pieces of living things or created by them. Even more recently, cell and gene therapies, along with platform technologies like mRNA (the base for many Covid-19 vaccines), have been developed.

Before the Inflation Reduction Act, all of these products received roughly the same amount of time to recoup the investment made in developing them: 14-plus years. That timeline is a combination of both patents and exclusivities that lure in investment. At the end of that period, generic and biosimilar competition is meant to drive down prices, at which point investors and innovators are already redeploying profits in the next generation of medicines.

But the IRA is changing the calculus in a meaningful — and harmful — way. The law offers a bigger reward for the development of biologics than it does for the development of small molecules. More specifically, it spares biologics from price controls for 13 years, versus nine years for small molecule drugs. High-school economics insists that, over time, capital will be allocated in the direction of the biggest risk-adjusted reward. Put another way, it makes more sense to invest in a mutual fund that yields 13% return than one that yields a 9% return.

It is possible that steering more investment into biologics was the goal of the legislation. But I, as the director of a coalition of life science venture capitalists — along with most others in the investment and scientific communities — doubt that.

Small molecule drugs offer enormous benefits, both to patients and the health system, especially when they become inexpensive generics. But these are not just the pills of yesterday. Small molecule drugs, some of which can cross the blood-brain barrier, offer hope for neurological diseases like Alzheimer’s and brain cancer, which was highlighted in the President Biden’s Moonshot effort.

I believe that some in Congress made the same fundamental error as the aforementioned IRA critic in believing that the law contains “more generous incentives for small-molecule medicines.” In other words, they believe that because the IRA increases market exclusivity for small molecules from five years to nine years, it would be well received by investors in the early-stage life sciences.

But that isn’t the whole picture, because market exclusivity doesn’t exist in a vacuum. As I mentioned earlier, those five years of exclusivity were in conjunction with patent protections that, on average, give drug manufacturers 14 years to recoup their investment and make a profit.

The profit is critical since fewer than one in 10 drug development programs ever yields a marketed product, meaning the winners must be big enough to pay for at least nine losers. One study showed that a full 50% of recouping the investment in all drugs happens in years nine through 13 — a reminder that the early years of drug approval rarely yield financial windfalls.

Under the IRA, the price-setting mechanism begins at nine years for eligible small molecule drugs, regardless of patents or exclusivity. So not only did these risky drug programs not gain four years, they lost four years that are essential for recapturing their investment.

This cycle of investment, profit, and reinvestment is — maybe soon it will be “was” — the not-so-secret sauce to America’s leadership in making medicines. The country has the capital to invest, a combination of exclusivity and patents that offer similar rewards regardless of the type of medicine, and smart scientists-turned-entrepreneurs who have brought thousands of drugs to the people who need them.

Now, observers are sounding the alarm that the IRA moves investment away from small-molecule drugs because it arbitrarily prioritizes biologics over them.

The solution is simple.

Amend the IRA in a bipartisan way to give small molecule drugs the same 13-year protection before price controls set in as has been given to biologics. That way, science — not lawmakers — attract capital and bring the next generation of medicines forward.

John Stanford is the executive director of Incubate, a coalition of life science venture capitalists based in Washington, D.C.