OPINION:
The legislators who drafted the Inflation Reduction Act apparently had some idea that their bill was going to hurt small biotech companies.
Passed in the summer, the new law will impose price controls on some drugs purchased by Medicare starting in 2026. As everyone from the nonpartisan Congressional Budget Office to economists at the University of Chicago predicted, this will reduce investment in drug research and, as a result, cut the number of new medicines coming to market.
Patients hoping for new cures will pay the harshest price. Caught in the middle are drug companies, forced to make difficult decisions and reallocate investment funds now that the government has fundamentally changed the incentives.
The biggest pharmaceutical companies have the most resources to help withstand the federal battering ram. Smaller companies, lacking cash reserves or multiple product lines to fall back on, are at the greatest risk of being driven out of business by this new federal law. But it’s actually small biotech companies, many of them startups, that drive essential innovation and competition, accounting for more than half of new medicines.
Deep in the hundreds of pages of legislation, the drafters included a few paragraphs that seem intended to help small biotechs by temporarily sparing them from the act’s most draconian measures. Specifically, if a small biotech drug brings in more than 80% of the company’s Medicare revenue and accounts for less than 1% of Medicare Part B or Part D spending, then that drug is exempt from the new price controls until 2029.
The exemption suggests some wishes by lawmakers not to drive biotechnology companies out of business. Yet it is so narrow as to seem like an afterthought, providing almost no help at all.
The problem is that few companies will meet the criteria for exemption. A business receiving 80% of its Medicare revenue from a single drug is, by definition, narrowly focused. But such companies, deeply invested in a single lifesaving cure, typically don’t have the capacity to scale up.
For that, they partner with bigger organizations. It’s common for a small biotech company to develop a novel drug, then strike a deal with a large drugmaker with the capacity for mass production and wide distribution.
We’ve all benefited from this type of arrangement in recent years: BioNTech developed a breakthrough mRNA vaccine against COVID-19, then partnered with the much larger Pfizer to manufacture the shot and get it to clinics and hospitals all over the country.
But by joining in this kind of often-essential partnership with a maker of common drugs, a small biotech will fall below the 80% threshold and not qualify for the exemption.
Perversely, those criteria disincentivize a company like BioNTech from partnering with a massive company like Pfizer and also discourage developing a second drug that could reduce the percentage of Medicare income brought in from the first one. Instead, the supposedly helpful exemption pressures small biotechs to develop their own manufacturing and distribution capabilities, encouraging them to risk resources on non-core activities when they would be better off focused on research and development.
At the same time, with the 1% rule, the exemption essentially punishes success. If a small biotech’s new drug becomes so in demand as to exceed that percentage of Medicare drug spending, the company will find itself slapped with price controls.
Small biotechs are developing future cures for cancer, Alzheimer’s disease, diabetes, HIV and the next pandemic. For the future of global health, we need them to keep going. But far from helping these companies survive and thrive, the Inflation Reduction Act is crushing them. This needs to change quickly.
• Karen Kerrigan is president and CEO of the Small Business & Entrepreneurship Council.
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