President Trump signs an executive order supporting an end to the “pill penalty”

NOTHING ELSE MATTERS

In yesterday’s Executive Order, while referring to the Medicare Prescription Drug Negotiation Program, President Trump said:

“the program imposes price controls on small molecule prescription drugs, usually in tablet or capsule form, 4 years earlier than on large molecule biological products. Known as the ‘pill penalty,’ this discrepancy threatens to distort innovation by pushing investment towards expensive biological products, which are often indicated to treat rarer diseases, and away from small molecule prescription drugs, which are generally cheaper and treat larger patient populations.”

He also adds:

“The Secretary shall work with the Congress to modify the Medicare Drug Price Negotiation Program to align the treatment of small molecule prescription drugs with that of biological products, ending the distortion that undermines relative investment in small molecule prescription drugs, coupled with other reforms to prevent any increase in overall costs to Medicare and its beneficiaries.”

Let me explain.

Currently, the Medicare Drug Price Negotiation Program looks at small molecules and biologics differently. Selected small molecules have 9 years and selected biologics have 13 years before the negotiated price sets in.

Historically (i.e., pre-Medicare drug price negotiation), investors and innovators have expected around a 14-year period to be paid back for their innovation based on patent protection periods. So for biologics, the rules of the game haven’t changed too much. The same cannot be said for small molecules.

Evidence is building around “the consequences of the IRA limiting the effective patent life of small molecules” on future small molecule development. A policy brief from researchers at the University of Chicago estimates that over the next 20 years, the IRA “pill penalty” will result in 79 fewer small molecule drugs.

Sure, the Medicare Drug Price Negotiation Program could provide short-term savings (i.e., by imposing price controls during the patent period), but in doing so, could result in HIGHER long-term healthcare spending if investment is pushed toward biologics over small molecules.

Hear me out.

Point #1: Small molecule generics tend to be much cheaper than biosimilars.

Small molecules tend to be easy and relatively cheap to genericize and manufacture. Because of this, we have seen many small molecules drop in price to near pennies once competition enters the market. Research shows that small molecule generic competition enters the market very quickly after patent expiration.

Let’s contrast this with a biologic. Biosimilars are much more difficult and much more expensive to develop and commercialize. It takes longer for biosimilars to enter the market, and the cost of a biosimilar has remained in the thousands of dollars each year (not pennies). Biosimilars exist and have been effective at reducing pricing, but they are still relatively expensive to develop and manufacture. The cost of goods sold and the cost to develop are simply higher for biosimilars.

Point #2: Small molecule branded drugs tend to be cheaper and more cost-effective than biologics.

Recent research reported the median cost for a biologic was more than $90,000 per year, as compared to a median cost for a small molecule drug of $33,000 per year.
Despite being less expensive, research by Katherine Clifford and colleagues has shown that small molecule drugs and biologic drugs offer similar amounts of health gains. Thus, the cost-effectiveness of small molecule drugs tends to be more favorable than the cost-effectiveness of biologics. In a health system where efficiency is necessary, small molecules are extremely important.

I am not arguing against biologics by any means; rather, I am arguing for removing the “pill penalty” and adjusting the small molecule time clock to equate to the biologic time clock (i.e., 13 years before the negotiated price sets in).

Frequently asked questions.

FAQ #1: Why don’t we create parity between biologics and small molecules by moving the biologic time clock to equate to the small molecule time clock (i.e.,
9 years before the negotiated price sets in)?

The quick answer: because then both biologics and small molecules would be disincentivized.

The biologic time clock of 13 years is not that different from the expected patent period (i.e., ~14 years). If the biologic time clock became 9 years, then the rules of the game would be dramatically changed for biologics too. If the biologic time clock became 9 years to create parity with the small molecule time clock, instead of the Medicare Drug Price Negotiation Program distorting “innovation by pushing investment towards expensive biological products,” innovation could be distorted by pushing investments outside of prescription drugs to sectors with greater expected returns and less uncertainty.

Don’t take it from me. Take it from a recent publication from investors in which they explain, “with declining return to investment in the pharmaceutical sectors, investors can be expected to simply shift their capital to sectors where the returns are more compelling.”

FAQ #2: For the first 10 drugs negotiated, the Maximum Fair Price was relatively close to the net price prior to negotiation. Are you overreacting?

The quick answer: No—the impact extends far beyond the drugs selected.

We cannot only think about the financial impact for the specific drugs that are selected. We must think about the signals that are being sent to investors who are making decisions about new drugs in development and new indications to explore.

The impact is not only on the drugs that are selected. The impact is also on the development-stage drugs that are no longer advanced and the subsequent indications that are no longer pursued due to disincentives created by the Medicare Drug Price Negotiation Program.

Don’t take it from me. In that same recent publication from investors, they explain, “given the policy uncertainty and the monopsony power of Medicare, investors will assume the worst-case scenario” when they are making their decisions of what products to invest in or not. There is no “minimum fair price” set as part of this process. Therefore, without transparency or a known floor price, they describe a worst-case scenario of 0% US profit after the Medicare time clock for the Medicare population.

As the publication illustrates, this assumption is not only applied to the drugs that happen to be selected for negotiation that year—investor decision making can happen multiple years before that. Rather, this assumption could be applied for any drug that is eligible for negotiation and the impact of this assumption is most “pronounced for small-molecule assets in the earlier stages of development (e.g., preclinical or Phase 1) than those in the later stages”.

FAQ #3: Now what?

Because the Inflation Reduction Act was passed under a budget resolution, Congress will have to be the one to modify it, hence the language “The Secretary shall work with the Congress.”