The IRA Is Already Curtailing Small Molecule Drug Development. Here’s How to Reverse That.

Pictured: Gavel hitting pill bottles with abstract money background/Taylor Tieden for BioSpace

Last month, Pfizer announced plans to pivot away from small molecule treatments in its oncology pipeline in favor of biologics. The pharmaceutical giant joins a growing list of companies shuttering small molecule programs.

These therapies haven’t lost their relevance in medicine; in fact, the scientific potential for small molecule discovery has never been brighter. But as anyone in the life sciences industry will tell you, many promising small molecules have lost significant investment appeal as a result of lopsided incentives favoring biologics in 2022’s Inflation Reduction Act.

The bill’s unprecedented price caps for certain drugs in Medicare will take effect on January 1, 2026. The pharma industry is watching very closely to see how the IRA process plays out. But what has been crystal clear to venture investors from the start is that after FDA approval, small molecule drugs are eligible for price negotiations four years sooner than biologics—and thus will potentially miss out on substantial sales revenue.

Prior to the IRA, small molecules and biologics would each have on average 14 years to recoup the investments that brought them to market through patent protections and market exclusivities before competitive generics and biosimilars would enter the market. The law now gives small molecules just nine years post-FDA approval before Medicare’s price controls can kick in, whereas biologics are exempted from price controls for 13 years.

Typically, some 50% of a drug’s cumulative sales in its first 13 years on the market occur in years 10-13. Thus, the effect of the “small molecule penalty” on a prospective treatment’s financial viability to a venture investor is considerable.

Last August, four of the first 10 drugs the Centers for Medicare & Medicaid Services selected for price negotiations—Jardiance, Farxiga, Imbruvica and Entresto—were small molecule medications that would not have been eligible for price controls had they been biologics. Investors made their decisions to develop these drugs and others more than a decade ago. Would they have gone forward with projects whose success was then unknown if they had anticipated the impending price reduction?

Consequences of the Small Molecule Penalty

There is good reason for concern about the development of future small molecule drugs, as borne out by Pfizer’s move and other examples.

Vir Biotechnology has discontinued its innate immunity small molecule pipeline, including a prospective cure for hepatitis B. Genentech has discussed plans to delay launching small molecule oncology drugs until receiving an indication for a larger patient population. Protagonist Therapeutics announced plans to cut a small molecule treatment for ulcerative colitis in its 2023 Q4 earnings report.

All told, biologics received nearly 50% more in venture capital financing in 2023 than small molecules.

Of course, not all prospective small molecule treatments will struggle. Negotiated prices apply only to Medicare, so investments in therapies for diseases with younger patient populations won’t be as skewed toward biologics.

One testament to this is a new small molecule drug to treat multiple sclerosis—a disease typically diagnosed between the ages of 20 and 50. It’s currently advancing through preclinical research. Other neurological diseases that tend to present symptoms at ages younger than 65, such as Huntington’s and Parkinson’s, also have promising prospective small molecule treatments in development.

Unfortunately for the senior population, the small molecule penalty will be top of mind for investors considering funding potential treatments for diseases such as Alzheimer’s and certain cancers.

How to Avoid Squandering Small Molecules’ Potential

While biopharma investment may be shifting, the science of small molecule research is blossoming across many therapeutic areas. In recent years, such treatments have demonstrated potential therapeutic value for everything from multiple myeloma to cardiomyopathies, heart failure to glaucoma—even aging itself. In fact, recent research suggests small molecule therapies could soon target “undruggable” proteins once thought impossible to reach. Small molecule drugs can also breach the blood-brain barrier, key to Alzheimer’s and other neurological disease research.

If the law is left unchanged, it will take years to fully understand the impact of the small molecule penalty. That’s because small molecule drugs currently going through trials and nearing approval will continue to roll out in the coming years, due largely to investment decisions made well before the IRA became law. This residual flow will allow proponents of more and faster price controls to argue that the consequences of the small molecule penalty are minimal. It’s likely to take a decade before we fully feel the absence of innovative, potentially life-saving treatments that never got off the ground.

Thankfully, a bipartisan trio of lawmakers is working to undo the small molecule penalty. The Ensuring Pathways to Innovative Cures (EPIC) Act would give small molecule drugs the same 13 years of exemption from Medicare price negotiations that biologics receive, equalizing investment incentives for both classes at a manageable level.

The EPIC Act would ensure that, whether small molecule or biologic, the most promising candidates will receive the same enthusiasm from investors. Lawmakers should move quickly to pass the bill.

John Stanford is the executive director of Incubate, a Washington-based coalition of life sciences venture capitalists.

Back to news