Policy Brief: The Potentially Larger Than Predicted Impact of the IRA on Small Molecule R&D and Patient Health | August 2023


This policy brief analyzes the impact of regulatory and legislative changes within the
Inflation Reduction Act (IRA) on medical R&D and patient health with respect to small molecule
drugs. Initial evidence potentially suggests that the cutbacks in R&D have been larger than
predicted by the CBO and we consider three potential explanations: the larger than anticipated
effects of a reduced effective patent life, unrecognized class-wide effects of the price-negotiations,
and discouraged generic entry.

First, the consequences of the IRA limiting the effective patent life of small molecules
through negotiations may be larger than recognized. We find that this cut in effective patent life
alone leads to up to 8% reduction in overall industry revenue and a 12.3% reduction in R&D. This
reduction in R&D would translate to 79 fewer small molecule drugs or 188 indications, and 116.0
million life years lost over the next 20 years. Many of the small molecule drugs helping vulnerable
populations, such as those with HIV or Hepatitis C, would be affected.

Second, the impact of the IRA on class-wide pricing was unrecognized. Not only will
prices of negotiated drugs need to be reduced, but competitors are likely to reduce their prices
owing to competitive pricing pressure of effective top-sellers being rebated. We find that the share
of Medicare spending on small molecule drugs affected by negotiated drugs ranges between be
35% to 86%.

Third, generic entry will be reduced for drugs with large Medicare market shares. We find
that 40% of FDA-defined drug classes have over 50% of their sales in Medicare. This market will
be especially impacted by the IRA and made less profitable for generics to enter. This is important
because reduced generic entry due to IRA Medicare negotiations would raise prices for non-Medicare populations.

We also discuss how the IRA’s rules on categories of drugs that are exempt from
negotiations distort R&D investments. The policy brief concludes that the overall industry effects
of the IRA on small molecule R&D and patient health could be much larger than predicted by the
CBO and similar bodies.

To read the full paper, click here.


Posted on

August 25, 2023

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