Rx Price Controls Mean Hard Choices for Investors

 The Centers for Medicare & Medicaid Services just announced the first 10 drugs that will be subject to Medicare's new price controls. Under the terms of the law that gave Medicare this authority, more drugs will follow each year.

Giving government the power to dictate the price of medicines is unprecedented. Industry is already grappling with the effects this change will have on new drug development -- and it's clear that lawmakers need to enact at least one adjustment to eliminate a distortion they introduced in the development pipeline. 

The good news is that it's an easy fix.

In crafting the legislation, lawmakers saw the need to strike a balance between lower prices for the government and the preservation of incentives for the development of new medicines. If a newly approved drug is subject to price controls before its sales can generate a return, investors will stay away, bringing innovation to a halt. So, lawmakers knew that patented medicines would have to be exempt from price controls for a certain duration of time.

However, in a misguided move, lawmakers arbitrarily offered a lengthier exemption for large-molecule, "biologic" medicines. Specifically, the law affords biologics -- which are created using complex, living organisms -- a 13-year exemption from price controls. It subjects traditional, small-molecule drugs, which are created through the combination of chemical compounds, to price controls after just nine years. 

This distinction dramatically changes the investment calculus for life-science venture capital. 

Drugs that make it to the marketplace typically need years of sales growth before generating a positive return. The upfront cost of developing a medicine is enormous, of course, and even after a drug receives FDA approval, it typically takes the clinical community time to become familiar with its potential application. That’s in addition to ramping up manufacturing and negotiating with insurers to ensure coverage. It's not surprising, then, that around 50% of a drug's cumulative sales occur in years 10 to 13 of availability.

While lawmakers were right to worry that stripping biologics of revenue in those years would wipe out future development prospects, they didn't adequately consider the full effect of a shorter revenue window for small-molecule drugs. For the latter, sales in years 10 to 13 are no less important to recouping upfront investment and paying for all the failures along the way. 

This difference -- what investors are now calling the "small-molecule penalty" -- is motivating biotech investors to favor biologics over small-molecule therapies, even though the medical potential for the latter is brighter than ever.

Small molecule drugs currently make up 75% of all FDA-approved medications, including some modern blockbusters. Several of the first medicines subject to government price controls are small-molecule drugs that have had significant impacts on disease -- including one that helps lower blood-sugar levels for patients with type 2 diabetes and another that inhibits B-cell proliferation to slow the spread of blood cancers. 

It's fair to ask whether their developers would have proceeded with these medicines if they had known that their products would be among the first subject to price controls.

Drug developers can’t simply turn their small-molecule candidates into biologics to take advantage of the new law. The differing chemical properties lead to different therapeutic opportunities. 

For some conditions, the diminutive size and low-molecular weight of small-molecule drugs offers a huge advantage, as they can penetrate cells and reach therapeutic targets more readily. These properties have researchers optimistic about new treatments for brain cancer, Alzheimer's, obesity, osteoporosis, genetic disorders, and even aging itself. (Biologics, by contrast, are particularly good at treating autoimmune conditions like rheumatoid arthritis, multiple sclerosis, and Crohn's disease.)

The shorter revenue window for small-molecule drugs threatens to curtail development into these exciting prospective therapies. Indeed, some biotech firms began to close the door even before CMS made its announcement. In July, Vir Biotechnology shut down its entire small-molecule pipeline, which included plans for a potential cure for multi-respiratory hepatitis B.

Lawmakers shouldn't have put a financial thumb on the scale of the medical and scientific question of which avenues of treatment to develop. They can fix their error by amending the price-control timelines to give both small molecules and biologics a 13-year window to earn a return. That way, investors and developers alike can focus on bringing the best drugs forward, regardless of size. 

John Stanford is executive director of Incubate, a Washington-based coalition of life-science venture capitalists.

https://www.realclearhealth.com/blog/2023/09/21/rx_price_controls_mean_hard_choices_for_investors_981142.html