Is the IRA’s ‘Pill Penalty’ Shifting Capital Away from Small Molecule Drug Development?

In a recent discussion, John Stanford, executive director at Incubate, reacted to the Centers for Medicare & Medicaid Services’ (CMS) decision to expand Medicare drug price negotiations to include Part B medicines for the first time. The third round of selected drugs broadens the scope of the Inflation Reduction Act (IRA)’s pricing provisions beyond Part D retail prescriptions to physician-administered therapies, such as infused drugs typically reimbursed under Part B.

According to Stanford, the expansion represents a significant shift because it introduces new stakeholders—particularly physicians—into the policy’s financial impact. Part B drugs are commonly administered in clinical settings, where providers purchase and are reimbursed for medications under a bundled payment structure. He suggested that reimbursement changes tied to negotiated prices could create financial pressure for physician practices, although the precise operational effects remain unclear.

The second major concern raised relates to what Stanford described as structural disincentives for small-molecule drug development, often referred to by critics as the “pill penalty.” Under current law, small-molecule drugs become eligible for price negotiation sooner than biologics. Stanford argued that several drugs included in the latest selection round would not have qualified if the eligibility timelines were aligned.

Citing a recent survey conducted by Incubate, who represents the patient, corporate, and investment communities, he stated that 80% of investors report decreased interest in funding small-molecule development due to the policy framework. Stanfrod also contended that this dynamic may dampen capital allocation toward certain therapeutic modalities and could have broader implications for Us competitiveness in biopharmaceutical innovation.

While supporters of Medicare negotiation cite cost savings for beneficiaries and the federal government, critics argue the policy may influence research and development priorities. The long-term effects on provider economics, drug pipelines, and global competitiveness remain areas of active debate as implementation progresses.

Stanford also comments on the potential policy adjustment that could balance cost containment goals with continued life sciences innovation and investor confidence, and much more.

A transcript of his conversation with PC can be found below.

PC: You’ve said the IRA’s pill penalty creates uneven timelines for small molecules versus biologics. What effects does it have on research and investment decisions?

Stanford: The pill penalty has become one of our real crusades at Incubate, because it's impacting investment so much. Right now, small-molecule drugs—or pills—are only getting nine years post-FDA approval before becoming eligible for price controls. Biologic drugs, meanwhile, receive 13 years of exemption before being eligible for these price controls.

In short, a nine-year period is just not enough for a reasonable return on a successful product, as the cancelations and discontinuations we've been tracking already show. When I talk to policymakers about this and members of Congress, they feel like this four-year difference is minor, or that nine years is still a lot. It’s critically important that people understand that that four years is one of the most important periods in a drug’s commercial lifecycle, accounting for up to 50% of cumulative sales.

You're asking someone, in our case, do you want to invest in this drug that, if everything goes right, you can get 50% less in sales? Well, I can say, from the investor perspective, that's not what we're looking for. Sixty-seven percent, so two-thirds of biotech CEOs, have said the pill penalty has already chilled capital; as I mentioned earlier, in our surveys, eight out of 10, nine out of 10 VCs are saying, “I am not interested in small molecules,” only because of this penalty.

This is honestly, from an academic standpoint, a perfect test of does policy really matter, and it is changing behavior for investors. Nothing else is. Innovation in small molecules looks great. Return on pills looks great.

Patients want pills. We see this in the GLP-1 space. Everything should actually be flowing money towards pills, because payers are also quicker to reward pills. Yet the money is going exactly in the opposite to biologics, and the only difference is the pill penalty, which is why we are fighting desperately for a fix here.

Seventy percent of small molecule funding has gone down since the IRA was introduced. We are fighting for the EPIC Act, which for those who don't follow it, it's the Ensuring Pathways to Innovative Cures Act. That would give small molecules the same 13 years as biologics, and solve this problem, and let science—not bizarre Washington policy—decide what we invest in.