Measuring the damage: IRA’s impact on small molecule drug development

By: Steven Potts

While out raising funds this year for several promising oncology programs, I have noticed strong shifts in investor sentiment away from funding small molecule drug development for widespread diseases and especially diseases of the aging population. I wanted to gather more quantitative data to gauge how appetites for funding small molecule innovation have changed over the nine months since the Inflation Reduction Act – with its Medicare “negotiation” of small molecules at nine-years post launch – became the law of the land. So I launched a survey, and the data is fascinating. But the implications are sobering for patients. ‍

Bottom line: Investment in small molecule drug development is shrinking quickly. The vast majority of venture investors responding to my survey have moved away from funding small molecule programs for Medicare patient populations as a result of the IRA.

The timing of the IRA’s real-world impact has a parallel in how cancer patient clinical trial data reads out. In cancer drug development, when a couple of patients have exciting responses to a new molecule, we show these hope-kindling responses as case studies. Then we run a small Phase 1b trial to get an idea of responder percentages and other tumor metrics. Next, larger, more statistically controlled trials give an even clearer picture of whether the drug merits further development (90% of the time it doesn’t; cancer is a brutal enemy and new weapons are tough to find). But early on, we have an idea of how this will play out, and over time, the picture becomes clearer.

With the IRA, biotech leaders voiced unease as the law was considered by Congress, and initial survey results are confirming this concern. We have seen discouraging case studies of the damage – promising small molecule cancer programs getting shelved or de-prioritized. I saw my own case study play out this way while cancer drug fundraising on what I call “Shark Tank for nerds.” We are now seeing real-world evidence of the IRA’s impact. This data isn’t yet coming from large pharma companies or venture firms; it’s from grassroots biotech drug development.

Sadly, we will probably have larger, more comprehensive data sets over the next few years showing far fewer new small molecule drugs for diseases of aging. But we shouldn’t wait – early data can be used NOW to argue for legislative changes before we realize in a few years that "patients simply didn't get new molecules." I appreciate AZ Senators' interest in re-examining this issue, and I hope that they can work with leaders from biopharma hotbeds like MA, CA, DE, NJ, NY, PA and CT to understand the urgency of fixing the IRA to protect US biotech innovation and the patients we serve.

Without a near-term legislative IRA fix that extends small molecule exclusivity from nine years to the 13 years enjoyed by biologic medicines, the full Phase 3 dataset on this government-created innovation limit is going to unfold over the next decade. Policymakers may wonder why there are a paltry number of newly developed pills for diseases suffered by Medicare patients (e.g., cancer, Alzheimer’s, diabetes, or autoimmune disorders).

The law is clearly imposing limitations on small molecule R&D. My data matches with what the team at BioCentury found in a study completed in February 2023 also showing damage to small molecule drug development by IRA.

Their data similarly suggest that “A move to biologics is in the plans or under review for more than half of respondents.” BioCentury had a more comprehensive survey than the deliberately minimal questions I asked in my survey – with the majority of respondents agreeing with these statements for all classes of drugs:

• Starting in small indications will fall out of favor

• Pipeline-in-a-product will become a thing of the past

• One orphan indication per drug will become the default

Their survey is well worth the read, and like my results, is another “Phase 1b study” that forecasts the deleterious effects of the IRA on biotech drug development, especially for small molecules.

Here are the anecdotes and personal comments from my survey – the last one would make me laugh if the whole topic wasn’t so serious for patients – this investor must have heard one of my company pitches!

Ask any pharma executive. Their appetite for small molecule M&A has been dramatically affected. Bar is much higher for a small molecule to get into our portfolio now.

The IRA will result in reduced innovation and a 20-30 percent per year drop in drug approvals.  Large and small molecule development are affected; follow on indication investments will be deprioritized.  Pricing to Medicare for the period before price fixing will be higher per patient.
 
I have seen first-hand how Pharma companies are less interested now in small molecules and it makes me furious. The IRA disincentivizes development of small molecules, which are cheaper to manufacture, easier for patients to take, less expensive for patients, and which deserve the same protections as biologics. The IRA disincentivizes saving money on drugs and hospital expenses by doing this. The results are already changing development patterns for the worse.

Lower investment in small molecules due to their faster depreciation (at only nine years post-launch).

We are deprioritizing small molecule programs for precision oncology where NPVs are <$1B.

Three impacts already from IRA: 1. Significantly reduced forecasts. 2. Deprioritizing drug programs will hurt patients. 3. Fully understanding legislation has consumed resources (both time and capital) that were destined to support drug development.

There is more hesitation from VCs to fund small molecule innovation. Within the VC and pharma communities, there is a fear that this act will catalyze a waterfall effect that will stifle future innovation; e.g., it will continue to grow in scope.

A very anti-biotech administration on all fronts.

The IRA also disincentives developing second indications for orphan drugs.

Massive uncertainty with respect to investment and whether in oncology we have to seek approvals in large patient numbers (first-line indications), never getting to smaller indication or later lines of therapy.

Negative impact on innovation.

As a result of the political headwind for the pharma industry, large pharma companies seem to have tightened their investment belts as it pertains to acquisition of clinical-stage drugs from biotech companies. This is of great importance to the development of new drugs because biotech companies have become "feeders" of the clinical-stage portfolio of large pharma companies with increasing frequency in the past. The increased reluctance of large pharma to invest has had a similarly negative knock-on effect on venture capital investment in biotechs. The convergence of these negative investment factors has forced the biotech community at large to increasingly dip into their savings to fund their ongoing programs. It is tempting to speculate that the increasingly difficult financial situation of many biotechs may have contributed to the collapse of Silicon Valley Bank (which counted many biotechs among their clients) and the ensuing strain on the overall financial system. But more importantly for patients, fewer new drugs will be developed in the long term as a result of the IRA.

Awareness of the issue. The law factors into our investment decision, but no outright NO's made due to IRA (yet).

I am working with a friend on a drug, and we are swaying away from developing it as an oral therapeutic because of IRA.

I have seen top notch VCs shifting to investments toward large-molecule development and a trend to only fund safer, less innovative “me too” small molecule programs. This trend combined with the biotech market downturn for both public and private equity funding is creating a loss of small molecule innovation. Pharmas will encourage accelerated drug development timelines to maximize the back end of the market potential when drug sales typically “take-off.”  The short runway before price controls (9 years) will make it difficult to develop new first-in-class small molecules. Pharma will need to partner with companies or acquire assets earlier, but these companies that are built for robust clinical drug development and marketing still remain focused on finding assets with clinical proof-of-concept data. The IRA will greatly impede small molecule innovation and drug development in an era in which technology has enabled new heights in drug design breakthroughs. In conclusion, the IRA is detrimental to US and overall global innovation.

We are only in biologics. I am not sure if biologic therapeutic advances or IRA economic benefits to biologics (or both) are driving funding.

IRA has not affected my business. Macroeconomic factors have had the most negative impact.

Loss of exclusivity triggers for biologics have disincentivized our work in rare indications as a route to registration, and have discouraged funding of that route.

Our revenue modeling suggests less revenues for small molecule-based therapies, thus less incentive to invest into small molecule therapies.

The ripple effect is impacting both drug developers and pharmaceutical manufacturers of small molecules. And it must be highlighted that biologicals cannot be given orally as pills, only injected which is the least preferred way people take drugs.

VCs are not funding large population small molecule programs now.

Our strategy: 1. Different back up molecules to preserve the single orphan status that prevents IRA eligibility. 2. Making an alternative formula of the same molecule for a commercially attractive indication but one where development costs are low. But this is double the development cost and the risk.

Slowed time to go-no-go decision on investment.

More challenging to raise VC funding for small molecules now.

It could be used as a polite excuse not to prioritize a deal.