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The Inflation Reduction Act: A Big Issue for Small-Molecule Medicine · Making Medicine

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  You're listening to Making Medicine Stories from the Early Stage Life Sciences Ecosystem, a
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  podcast that explores the people and deals that have led to the medicines, devices,
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  and technologies that keep us healthy. Let's get into the show. Well,
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  thanks everyone for joining another conversation with Incubate. As part of our Incubate
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  Policy lab Our Inflation Reduction Act Working Group, we're continuing to try to bring
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  the latest and greatest information about how the twenty twenty two Inflation Reduction Act and
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  its drug pricing provisions are having impacts. You can also follow along where we're
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  seeing real time changes in incubates Investment Tracker available at Incubate Coalition dot org.
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  Continuing with our conversations with thought leaders, we once again are lucky to be
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  joined by Kirson Axelson, who is a policy advisor at DLA Piper. This
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  after her a pretty stellar career in biopharma over the last several decades. She's
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  a regular and Incubates Making Medicine podcast, as well as has participated in the
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  drafting of reports for Incubate Policy lab. She is also a visiting scholar at
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  the American Enterprise Institute AEI in Washington. Kirson, I think I'll skip over
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  the rest of your impressive bio. I think everyone knows that you're a thought
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  leader on what's going on in the biopharma community, and really looking forward to
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  our second conversation where we're going to dig a little deeper on the impacts and
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  implications for the Inflation Reduction Act. So with that, I'm happy to turn
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  it over. I'll be chiming in and encouraging Kirson to dig a little deeper
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  on a few places, and then we'll close out. But thanks to everyone,
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  from policymakers to those in industry to those in patient advocacy groups for joining
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  us to hear about this important conversation. Kirson, the floor is yours.
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  Thank you, John, thank you for having me here today. And what
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  I will do is take us through some of the ways the Inflation Reduction Act
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  will have a differential impact on small molecules relative to large molecules. So the
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  Inflation Reduction Act will not only affect different types of medicines based on the price
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  setting provisions in the law, but also there will be other effects, in
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  particular related to the redesign of the Medicare Part D benefit. So in the
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  next few minutes we'll all take us through some of these sort of more obvious
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  first order effects of the law, and also consider some of the indirect effects
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  of the law, including on the development of evidence and the likely implications for
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  formulary utilization management and net pricing. Of course, formulary utilization management and net
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  pricing directly affect of what a patient pays to get access to their medicines.
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  The Inflation Reduction Act is differentially punitive to small molecule medicines for the elderly and
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  the disabled. They will reduce the reward from investing to a more significant degree
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  relative to other types of drug assets. And when I say other types of
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  drug assets, I mean small molecules that aren't used for the elderly and disabled
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  to the same degree and large molecules in medicare, and of course large molecules
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  that are not used to the same degree with the elderly and disabled who typically
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  get their insurance, their drug coverage, and their insurance coverage through medicare.
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  There are few key ways in which the Act will differentially impact small molecules relative
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  to large molecules. First of all, the maximum fair price provision The provision
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  that will allow the federal government to set the price for drugs that been on
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  the market for a certain number of years takes effect earlier for small molecules relative
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  to large molecules. The scope and timing of the selection of drugs that will
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  have impact smunthfare price reduces revenues sooner and will affect more small molecules, in
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  part because there's just more small molecules out there today. Risk shifting in Medicare
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  Part D, which will reduce the federal subsidy for higher cost beneficiaries, increases
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  discount obligations and will for small molecule manufacturers primarily and will also result in more
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  utilization management quite likely of formularies in Medicare Part D, which is principally small
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  molecules. Face with the lower value of expected revenue, investors may consider other
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  opportunities that are not so heavily weighted towards small molecules. For the elderly and
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  disabled who received their coverage through Medicare, and importantly, small molecule drugs and
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  their biodynamics are needed to treat disease and conditions prevalent and the elderly, we
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  can't simply move investment to a world where there will be more just large molecules
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  used. Although there have been an increasing number of growth through medicines with large
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  molecule technology, small molecule technology is still critical to treating patients, particularly in
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  diseases such as cancer. And I know we're going to pull this apart,
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  but can you talk about we're talking about large molecules. Is it fair to
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  say that's the same as biologics and biosimilars. I know there are a lot
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  of terms that are getting thrown around a large molecule. Biologics and biosimilars are
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  large molecules. Large molecules are typic are made from complex live materials. They're
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  typically injectable or physician administered, so either through an infusion or self administered.
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  They are more complex to manufacture. Large molecules are one hundred percent unable to
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  cross the blood brain barrier, so they are less bioavailable in that way.
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  Small molecules, by contrast, are more able to cross the blood brain barrier,
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  but still about ninety five percent abled across the blood brain barrier. So
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  that is again that is critical to things such as cancer and certain neurological conditions.
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  When we think about the end of patent life or the end of exclusivity.
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  That's where a lot of the savings occurs and a lot of really tremendous
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  value occurs to the health system when a drug has been in use for certain
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  number of years and goes off patent. Almost one hundred percent of small molecules
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  face generic competition. Engenerics your dispense ninety seven percent of the time when they
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  are available as small molecules. So if you look at therapeutic categories such as
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  statins other cardiovascuar disease treatments, there are largely generic and we're seeing many of
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  the same cardiovascuar health benefits, which much with a much lower cost. By
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  contrasts, for large molecules and biologics, when they lose exclusivity of right to
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  market, that drug alone in biosimilar will enter the market. Typically, biosimilars
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  do not enter the market as quickly and the uptake have spens lower. All
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  of the market is still developing. However, large molecules are more costly and
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  take a longer time to develop and typically take our higher cost to manufacturer,
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  So small molecules easier to develop from a manufacturing and often from a testing capacity,
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  and then large molecules tend to be a bit more costly and time consuming
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  to take through the clinical development process to journal. And we've seen a lot
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  of effort to be sure over the last decade in Alzheimer's this multi trillion dollar
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  sword hanging over an aging population in the US and around the globe. Then
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  we've seen some very expensive failures. We've seen some drugs get approvals. When
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  you talk about that blood brain barrier. Just want to make sure I'm getting
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  this right. Small molecules small enough that they can find their way into tackling
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  diseases of the brain, but these large molecules, these biologics cannot. That's
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  right. Yes, and there are large molecules that are used in neurological condition,
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  but it's when they're different technologies and used for you need both. Basically,
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  you need both to be able to depending on what you're targeting in the
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  therapy to process. So we don't want a world where there's no incentives to
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  develop large molecules, and then we don't want a world where there's less incentives
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  to develop small molecules. And in fact, I think a major concern with
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  the inflation Reduction Act is it distorts the incentive develop a small molecule relative to
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  a large molecule, whereas really you want the incentive to develop these noticintes to
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  be largely based on unmet need and science, whereas now it's a bit more
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  skewed because of this somewhat arbitrary distinction in the law that sets the price sooner
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  for the small molecules relative to the large molecules. And when we think of
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  a small molecule is typically a pill, the kind of drug you to pick
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  up from the pharmacy and take yourself. Yeah, I like our graphics here
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  that you've put forward. We got the pills, and then we've got sort
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  of the infusion therapies that would be at a hospital or a clinic. One
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  interesting piece I picked up from some folks working on cutting edge is that sell
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  engene therapy is sort of the next generation. Some of them do go through
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  the same regulatory pathway as small molecule and so not only should we be thinking
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  of small molecule as the pills in our medicine cabinet, but also the most
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  cutting edge selling gene therapies also sometimes is that right I'm familiar with selling gene
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  therapies that are more sort of plasma and blood derived, but that is likely
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  correct if that's information you're hearing from a manufacturer, you know, I do
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  know that there are a number of small molecule medicines that are targeted cancer therapeutics.
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  There has been increasing development in this area, in part because I think
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  there's interest in creating therapeutics that were easier for a patient to take right I
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  think most people would rather take a pill than have to either self inject or
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  administer in the physicians off um. And I'm not saying that's going to go
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  away entirely. But again, if you're thinking about the expected returns to investing
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  in a new technology, the small technology investment has been reduced to a greater
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  degree than the large molecules technology investment, and will that will affect where investors
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  and companies place their bets on the next generation of medicines. And so you
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  know, when an investor is considering where they may place their bets, you
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  know, prior to the IRA, they had the choice of small molecules for
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  diseases of the elderly and the disabled, large molecules for that population and small
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  molecules and so um. Again, Now the small molecule investment may still be
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  an attractive one, but it is less so to a greater degree now than
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  it was before the IRA, relative to other types of therapeutics. You know.
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  Well, first I'm going to focus on the price setting provision of the
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  IRA, which allows mandates that the federal government through CMS, set a maximum
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  fair price for a select number drugs that have the biggest revenue in the Medicare
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  program. And this will start with the Medicare Part D program, which is
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  again the drugs you pick up at a pharmacy that's going to be almost entirely
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  small molecules. And then over time both the number of drugs expand and then
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  the price setting will start to go into Part and B, which are these
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  physicians administer drugs more large molecules starting in twenty twenty eight. So this provision
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  will affect the small molecules sooner normally will it affect them sooner. When the
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  price is set, it will be set after nine years on the market for
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  small molecules, and it will be set after thirteen years in the market for
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  large molecules. There are also different price ceilings for Part B, which are
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  mostly large molecule drugs compared to Part D, which are mostly small molecule drugs.
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  And in just a few moments, I'll take you through the expected magnitude
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  of the reduction in price based on a calculation of the anticipated price ceilings,
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  and then over time the prices will be further declined. After eleven years and
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  sixteen years, after twelve and sixteen years on the market, the prices continue
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  to come down. CMS has already out released information on the timeline for this
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  process has been seeking input primarily on how the information is collected. We will
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  know around the third quarter of this year when the ten negotiation eligible drugs are
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  going to be selected from Part D. I'm sorry that's the fourth quarter of
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  this year. The manufacturers will be asked to sign agreements and submit data about
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  their product, including the rebates expenses from R and D comparative value assessments,
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  and then we will know in September twenty twenty four which drugs will have the
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  prices set as well as those prices and those prices will be going into effect
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  in twenty twenty six. But I think importantly, even though the prices productions
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  don't go to effects until twenty twenty six, the decline and anticipated revenue will
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  be known. They'll be indicated by the end of this year. It'll be
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  known by twenty twenty four, which will affect decisions in later stage development.
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  Fault one indications for those small molecules which are selected from Part D for price
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  setting. To maybe say that bit another way to see A lot of times
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  incubate talks about the relay race. You know, a lot of the education
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  we've done with policymakers and stakeholders is the different roads or different points along the
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  way and different actors. You know, there's a role for NIH and academia.
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  They do very basic research, but they don't actually make drugs. You
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  know, a small biotech and venture capital get the wheels rolling, and then
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  there's an acquisition, usually by a large manufacturer who's the brand names we all
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  know, who can guide it through the end of the regulatory process and through
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  the very intense manufacturing standards that we feel comfortable achieving safety and efficacy. Is
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  it a way of your point at the end, was interesting that we'll have
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  an indication about the decline and revenues for so if we think about that relay
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  race in reverse, this person at the end chain is going to know fairly
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  soon we're far less profitable than we thought we're going to be. So they
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  may be buying less here, which means less funding earlier, which means less
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  commercialization and development of some innovation that happens in a lab somewhere. Is that
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  kind of how it could play out in reverse? Yes, I believe.
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  So there will be less reward from investing in later stage studies, and for
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  the drugs you are likely to be price controlled. Those later stage studies are
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  often on special populations that weren't included in the pivotal clinical trials, such as
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  veterans, such as people with comorbidities, new pediatric studies. You know,
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  would be imagine if you learned that your house was going to be seized under
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  eminent domain and the government was going to give you a certain price for it,
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  you would stop painting and repairing windows right because it's like, well,
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  I'm going to get the price that I'm going to get, and so it's
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  you know, once you know that the value of an asset is capped and
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  declining, can be much less likely to invest in further indications for that asset,
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  and we've seen in therapeutic areas such as HIV, such as anti effectives,
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  that there can be development well after they have been on the market for
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  a significant amount of time that expands the indications and expands the use of that
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  drug. I love that analogy that you just used. And to take it
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  one step further is you're a bought leader leading particularly on clinical trial diversity clinical
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  What can be done to make US based clinical trials and global clinical trials more
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  inclusive? Is it fair to say that totally separate from the Inflation Reduction Act?
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  Some of the supporters of these pricing provisions also want to see the house
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  painted and the windows done. I mean, there's also an effort to increase
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  the requirements in what could be a very positive way to make clinical trials.
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  But in your analogy of eminent domain in the house, not only are they
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  taking my house and telling me what they're going to pay for it, but
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  they also want me to fix the windows and paint. Is that fair?
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  I think it's fair to a degree. I mean, many of the guidance
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  and now the requirements to implement a diversity plant and clinical studies are for the
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  pre approvals of the pivotal clinical trials. But the inflation Reduction Act is likely
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  to affect clinical development in two ways. For these drugs that are already on
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  the market that are going to be the first to experience price controls, it's
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  likely to affect the later stage development. The cost has already been sunk to
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  bring these drugs to the market. For the drug us that are being considered
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  right now to see, this will have an effect in a number of ways,
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  and we've already heard this from companies. They're considering pursuing only one indication,
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  for example, and again, if they think they are likely to be
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  price controlled, they will be less likely to do follow on studies follow on
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  indications, and in so far as they don't include certain populations and their pivotal
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  clinical studies, some of those follow on studies may not get done, which
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  may or may not have been focused on elderly people with full morbid conditions and
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  the like who are not included in some of the early studies. Well,
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  we consider what drugs are likely to be affected, both in the Part D
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  price setting, which is mostly small molecules, and the Part B price setting,
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  which is mostly large molecules. Oncology, drugs for cancer are among the
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  likely top targets, followed by immunology and endocrine disorders, cardiovaster disease. Basically
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  by deciding to pick the largest drugs cms the way the Inflation Reduction Act is
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  designed as saying, pick the drugs that are most used and set those prices,
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  which is a great way to save money. It's a terrible way to
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  motivate investment in chronic disease or other drugs that are used by a lot of
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  people. It is a great way to motivate investment in small niche markets and
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  orphan diseases. So you know, in addition to this act differentially reducing revenue
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  from small molecules, it's also creating an incentive to really invest in more smaller
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  disease, smaller indications, which may be good for patients, it may be
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  good to science, but typically does yield higher costs specialized medicines. So now
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  let's consider the impact of this price ceiling. The current part D price on
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  average after rebates is around fifty three percent of the list or sticker price based
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  off for the formula and the law. The ceiling price for drugs that are
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  first price controlled, So that's nine years on the market, small molecules will
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  be fifty one percent of the list price. So you might say, well,
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  that's not so bad relative to the average discounted price and Medicare Part D,
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  and for some drugs it may end up being relatively close to the average
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  discounted price in Part D. But there's a couple other effects to consider.
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  First of all, that is the ceiling. There is no reason to not
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  bring the price down below that ceiling. When a drug is deeply discounted in
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  Medicare, that becomes the new ceiling. So if a company is already offering
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  discounts below what the price ceiling would be that is set in the law,
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  that will become the new price ceiling, and CMS could set a price below
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  that. In addition to that, plans may still want rebates for formulary replacement,
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  so that will drive the price down further. Or a company may say
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  it is no longer make sense for me to further discount to get that preferred
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  formulary position, and I'll take the lower formularity position and the revenue from this
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  drug that I can get, but I can't discount below what the government is
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  setting as my maximum price. So paradoxically, we could see drugs that have
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  price setting going on a lower formularity tier with drugs that have free pricing discounting
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  deeply and ending up being on a more affordable formulary tier. And then considering
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  this price setting for the large molecules, and this is an illustration for the
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  price reduction that is expected in Part B. That is a relatively less steep
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  decline relative to the current aspan sixty foot seven percent of the current ASP for
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  the Part B drugs, but again a significant price cut relative to the current
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  price. Considering this illustration, you know, small molecule now typically is on
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  the market for about fourteen years and then sees a really significant decline in revenue.
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  Because generics move in an artist fence at ninety seven percent of the time
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  that they are available. Typically the small molecule list price stays at the same
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  level or goes up when there is a generic, and again most of that
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  revenue is moved over to the generic. In the large molecule space, that
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  decline when there is a biosimilar entrant has not been as significant as that market
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  is still developing or may continue to just be not as significant. In the
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  post Onflation Reduction Act world, that decline and revenue is going to happen sooner
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  for the small molecule that is selected for Part D price setting. It will
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  happen after nine years, and the larger molecule will still experience a decline expected
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  revenue, but it will not be as significant for as soon as it would
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  be for the small molecule. I want to stay on this chart for a
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  second of It's okay because one, I think it's one of the first times
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  I've seen it model out. But I think there's some really important things to
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  call out. The first is that right now, from the investors perspective,
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  we see about fourteen years this as what we've gotten, and what we've gotten
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  seems to work really well. So you know, thirteen years from biologic that
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  stings a little bit, to be sure, maybe more than just a little
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  bit, but that delta from fourteen to nine. Another study that I just
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  came across showed from Jeffreys showed four small molecule drugs, fifty percent of the
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  revenue occurs in years nine to thirteen. And as I look at your graph,
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  as I think about what would I invest in, I know the pre
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  IRA stuff is no longer available to me. But I think one of the
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  key points of this session is nobody wants to invest in the dotted yellow line
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  where it's collapsing that early. So I you know, I commend you on
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  putting this slide together because it almost shows what an investor could think would yield
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  the best return, and that dotted yellow line look looks pretty damning. So
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  I just want to thank you on pulling that together and call out that pre
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  ira. We're used to this idea of about fourteen years between exclusivity and patents,
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  which I know we'll talk about in a future session, So thanks.
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  This is just great to see. Now. The peak sales years are often
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  right towards the end of patent life. You know, there can be some
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  degradation in those years because there's competitors that enter the market, but often,
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  you know, this is again model to show what maybe billion dollars peak sales
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  might look like. Cutting the small molecules off at nine years is far more
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  distorting relatives to what is occurring in the large molecules. You know, if
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  the intent of this law was to eliminate drugs that never experience a generic competitor,
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  they just keep adding on to their patents, or whatever is the perception
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  by policymakers. Then the thing to do would have been to either introduce competition
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  or cut the price after thirteen or fourteen years. Clearly, by reducing the
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  price of the small molecules earlier, that's not mimicking sort of natural erosion of
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  the market when a generic enters, It is cutting that off far sooner than
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  would be anticipated. So now shifting to another major provision of the law,
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  which is the redesign of the Medicare part de benefit, which will shift more
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  of the cost for people who use higher cost medicines to health plans and to
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  biopharma companies and reduce the federal subsidy. So I'm sure many of you have
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  seen a chart similar to this how the old benefit looked and the new benefit
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  looks. They're both complicated, but less complicated now there is no more coverage
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  gap. And importantly for this discussion, people who reach that high level of
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  spending, oh typically over eight thousand dollars of out of pocket spending today of
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  true out of pocket spending today, and those are people who are typically taking
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  drugs for immunologic conditions. Can they are now the federal government is subsidizing that
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  population by eighty percent in the Medicare Part D benefit that was implemented to keep
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  plans from designing formularies that discriminated against people who are very sick or used very
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  expensive medicines. Over time, as those expensive medicines, especially drugs that become
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  a larger and larger proportion of the therapeutic portfolio and the Medicare Part D benefit,
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  the government's liability for that subsidy has grown, and so logically the government
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  decided to reduce their liability for that population. However, in doing so,
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  that also puts a lot more risk on the Part D plan and also puts
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  more of a discounting obligation on the biofarm manufacturer. So I think something we
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  could potentially anticipate is more utilization management of those types of drugs in the future.
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  And that doesn't just mean copays and cost sharing, because there will be
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  an autopocket cat but that could mean step at its or prior authorizations or others
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  to use. Again, this is the Part D benefit. So those are
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  mostly small molecules, so we're going to see you continued impact on small molecules
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  more restrictive formulary designs anticipated for small molecule specialty drugs. And then this bigger
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  discounting obligation on the biofarm manufacturer who is now responsible for twenty percent of the
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  cost in a catastrophic covered zone. And so just kind of to wrap up
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  the points that we started with, I think we can anticipate less expected revenue
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  from small molecules that are focused on diseases of the elderly and disabled. We
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  will anticipate that this will affect investment both in drugs that are in the pre
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  launched phase as well as those that are on the market, and also can
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  anticipate greater greer formulary management, particularly for specialty drugs that are small molecules in
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  medicure. Person, thank you so much. We covered a lot of ground
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  there, and I want to come back to one of the pieces you close
• 26:59
  with. Because we've started there is now not enough discussion, but there's there's
• 27:04
  growing awareness in Congress. I feel like that the nine years for small molecule
• 27:11
  may have been an error. And when I've talked to some folks who are
• 27:18
  a part of writing the law, well, they point to exclusivity going from
• 27:22
  five years to nine years, and they say, well, what we increased
• 27:26
  exclusivity, it's not a bad thing. We won't see less investment. And
• 27:30
  we're trying to talk well from the investor perspective, we see the combination of
• 27:36
  patent and exclusivity is fourteen years. Something I know we'll talk about another date.
• 27:41
  But what you closed with it's something I don't think we're talking about as
• 27:45
  much. It would further disincentivize small molecule and that's all of these cost sharing
• 27:51
  mechanisms with part D redesign will primarily hit small molecules, So it's would you
• 27:57
  say, it's sort of a double whammy. Not only do they get this
• 28:00
  less protection, but as you sort of originally pointed out that I don't think
• 28:06
  many others have, the part D redesign can also potentially be a disincentive if
• 28:12
  your product's going to end up in Part D. Is that a fair summation
• 28:17
  of the two impacts. Yes, it's a further reduction in revenue. Now.
• 28:22
  The good thing for both patients and for expected revenue and expected returns from
• 28:26
  investment in small molecules that there is an out of pocket cap in Part D
• 28:32
  now, so that should help patients who had no adherence due to affordability.
• 28:37
  However, again the fact combination of the less subsidy in the catastrophic cover zone
• 28:42
  and the out of pocket cap, we can anticipate that health plans are going
• 28:45
  to become more restrictive in other ways for those higher cost drugs to avoid taking
• 28:51
  on that liability. So yeah, it is a double effect on small molecule
• 28:56
  drugs in particular specialty drugs. Yeah, and Incubate as definitely, we're excited
• 29:00
  to see those out of pocket caps come into place. There were several elements
• 29:04
  of the law that we fought strongly in support of patient smoothing, so you
• 29:10
  don't get hit with a large expense right when your plan year starts, usually
• 29:15
  in January. We want to see out of pocket caps get capped much more
• 29:21
  broadly so that insurance can really operate as insurance. But I'm so grateful for
• 29:26
  the education and awareness. I wouldn't be doing my job if I didn't spend
• 29:30
  a little advocacy into it. So I'll stress these are the views of Incubate,
• 29:33
  not necessarily Crecenter, DLA Piper, but Incubate will be leading the charge
• 29:38
  to amend the inflation Reduction Act based on findings like this, to increase that
• 29:45
  small molecule protection timeline from nine years up to thirteen years so it can have
• 29:53
  parity with large molecules. In we let science, not Washington, dictate where
• 30:00
  capital flows and investments are made. So with that you can count on hearing
• 30:03
  more about this from the Incubate Coalition to our policymaker audience. We're always happy
• 30:11
  to provide more resources, particularly on the therapeutic areas damaged most by this small
• 30:15
  molecule penalty. And as always I am tremendously grateful to a good friend to
• 30:22
  incubate and personally. Kirsen Axelson with DLA Piper, thank you for your time
• 30:26
  today. Thank you John. You've been listening to Making Medicine. To ensure
• 30:32
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