The pill penalty could reduce incentives for post-approval research

The “pill penalty” within the Inflation Reduction Act could reduce the incentives for post-approval research which could lead to fewer subsequent indications.

CRASH COURSE

Even after a drug is initially approved, it is common for a drug manufacturer to conduct additional research. This is referred to as post-approval research. There are different types of post-approval research, but one type involves testing the drug in new populations and for different conditions from what it is already approved for. This can result in supplemental new drug applications and new indications. Around one third of drugs have additional indications.

Additional indications are great for society and the stakeholders within the healthcare system. For patients, an additional indication results in a new approved treatment option. For drug manufacturers, an additional indication results in a larger approved population eligible for their drug which can result in more revenue. For payers, an additional indication can increase the number of drugs approved for a condition, which can result in more competition which is good for price negotiation. And for society, additional indications usually have a shorter period of time that is under patent protection (i.e., when drug prices may be “high”) and thus a shorter time to generic/biosimilar entry (i.e., when drug prices should drop) as compared to initial indications.

Research from the National Pharmaceutical Council studied the timing of subsequent indications using a sample of drugs with the highest Medicare Part D spending in 2020. From this list, the top 30 small-molecule drugs with at least one subsequent indication were identified.    

The researchers found that, on average, a subsequent indication “received FDA approval 5.4 years after the initial indication was approved.” As the authors note, there are two important sub-groups that make up this average—the subsequent indications that were based on research that started before the initial approval (i.e., based on pre-approval research) and the subsequent indications that were based on research that started after the initial approval (i.e., based on post-approval research).

For the subsequent indications that were based on pre-approval research (which represented 45% of the subsequent indications), the average time to an approved subsequent indication was 2.9 years after the initial approval.

For the subsequent indications that were based on post-approval research (which represented the majority of the subsequent indications), the average time to an approved subsequent indication was 7.5 years after the initial approval.

SO WHAT

Post-approval research for subsequent indications is risky and resource-intensive. The potential reward to the manufacturer must justify the risks they are taking and the investments they are making.

If the average time to an approved subsequent indication based on post-approval research is 7.5 years after the initial approval and the expected patent period is 14 years after the initial approval, then the manufacturer might be expecting around 6-7 years of market-based pricing under patent protection to justify the additional risk and investment of post-approval research for a subsequent indication.

Let’s compare this to the time clocks created by the Medicare Drug Price Negotiation Program within the Inflation Reduction Act. Small-molecule drugs can be selected for negotiation seven years after their initial approval. The negotiated price for small-molecule drugs can take effect as early as nine years after initial approval.

Say a small-molecule drug is selected for Medicare Drug Price Negotiation and the Maximum Fair Price goes into effect nine years after its initial approval. If the manufacturer is expecting 6-7 years of market-based pricing (without government intervention or generic/biosimilar competition) for a subsequent indication, then they would need to receive approval for the subsequent indication 2-3 years after the initial approval.

However, the researchers from the National Pharmaceutical Council also reported that the average time to complete the post-approval clinical studies and FDA approval process is 4.4 years. If the manufacturer would need to receive a subsequent indication approval within 2-3 years of the initial approval for the potential reward to justify the risk and investment of the post-approval research, they wouldn’t have 4.4 years to complete the post-approval studies.

Looking at this a slightly different way, if the post-approval research was started on the day of the initial approval (i.e., the earliest possible start date for post-approval research), and the subsequent indication was approved 4.4 years after the initial approval, and the small-molecule drug was selected for Medicare Drug Price Negotiation with the Maximum Fair Price going into effect nine years after its initial approval, there would only be 4.6 years of pricing that was free from government intervention if the post-approval research started at the earliest possible start date.

(Note: I am using single point estimates for this illustrative example. In reality, there is variability around all of these values and that should be considered.)

The “pill penalty” within the Inflation Reduction Act could reduce the incentives for post-approval research for small-molecule drugs by shortening the time for market-based pricing. This could result in fewer subsequent indications, which could have negative implications for patients, manufacturers, payers, and society.

Moving the time to Medicare Drug Price Negotiation for small-molecule drugs to equate to the time to negotiation for biologics (11 years for selection, 13 years for price to take effect) might reduce these potential unintended consequences.

In this example, say a small-molecule drug is selected for Medicare Drug Price Negotiation and the negotiated price goes into effect 13 years after its initial approval. If the manufacturer is expecting 6-7 years of market-based pricing for a subsequent indication, they would need to receive approval for the subsequent indication 6-7 years after the initial approval. Given the average time for post-approval clinical studies and FDA approval is 4.4 years, there is time to complete the post-approval research within the available window.