IRA Exemption is a False Promise to Small Biotechs
By Karen Kerrigan
The legislators who drafted the Inflation Reduction Act (IRA) apparently had some idea that their bill was going to hurt small biotech companies.
Passed last summer, the new law will impose price controls on some drugs purchased by Medicare starting in 2026. As everyone from the non-partisan Congressional Budget Office to economists at the University of Chicago predicted, this will reduce investment into 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.
Smaller companies, lacking cash reserves or multiple product lines to fall back on, are at greatest risk of being driven out of business by the IRA. 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 725-page legislation, the drafters included a few paragraphs that seem intended to help small biotechs by temporarily sparing them from the IRAs 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 IRA price controls until 2029.
The problem is that few companies will be able to 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. We've all benefited from this type of arrangement in recent years: BioNTech developed a breakthrough mRNA vaccine against Covid-19, then partnered with 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 multiple common drugs, a small biotech will fall below the 80% threshold and not qualify for the exemption.
Perversely, those IRA paragraphs 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 IRA is crushing them. This needs to change, and quickly.
Karen Kerrigan is president and CEO of the Small Business & Entrepreneurship Council. This article was first published in the Washington Times.
