As I’m sure everyone has now heard, the Inflation Reduction Act (IRA) passed by Congress in 2022 included a provision for the direct negotiation of a set of brand prescription drugs by the Centers for Medicare & Medicaid Services (CMS). CMS will create a list of brand prescription drugs eligible for direct price negotiation, using a set of rules as laid out in the IRA, which allows for drug manufacturers to apply for exceptions and removal of their drug(s) from list consideration. As a part of this drug list development, CMS initially solicited comments on how to interpret and apply the IRA rules in January and released further guidance in April. (If this process is of interest, CMS has published several pieces of draft guidance, all linked here.)
Nothing in the Inflation Reduction Act requires a drug to come from a “small” manufacturer or be a “biotech” drug in order to qualify for the small biotech drug exemption.
One of these caught my interest, and here at PCMA, Team Research embarked on a major data collection effort with Team Regulatory to better understand the implications of the “small biotech drugs” exception in the IRA. Specifically, given the IRA definition, how many drugs on the Part D and Part B Medicare Dashboards might actually be eligible for this exception?
Let’s start with a quick explanation of the definition of a “small biotech drug.” According to the IRA, a drug can be exempt from negotiation for price applicability years 2026, 2027, and 2028 if it is 1) a qualifying single-source drug; 2) has Medicare Part B or Part D spending of less than 1% of program spending; and 3) where this Part B or Part D spending is 80% or greater of the “primary manufacturer’s” total spending under Part B and Part D. Oddly, nothing in the law requires a drug to come from a “small” manufacturer or be a “biotech” drug. Small drug manufacturers often partner with large manufacturers to market a drug after drug approval, which would mean that the manufacturer profiting from the “small biotech drug” is not necessarily the original “small” manufacturer. (CMS also defines “secondary manufacturers,” elsewhere, in order to minimize product splintering and second brand effects but does not apply “secondary manufacturer” parameters to the small biotech exception.) With this in mind, let’s get to the data.
Using the 2021 Medicare Parts B and D drug spending dashboards along with the U.S. Food and Drug Administration’s (FDA) Orange and Purple Books, we identified the applicable biologics license application (BLA) or new drug application (NDA) license holder (i.e., the manufacturer) for each drug and assessed whether they may potentially be “small biotech drugs” under the above explanation. We estimate that the 1% of program spending cap for Part D drugs would be drug spending below $2.2 to $2.5 billion per year for 2026 through 2028. Call me crazy, but that seems like a pretty big number. By contrast, the cap is only an estimated $360 million for Part B. (CMS spends a lot less on Part B drugs, so 1% of the total is just a smaller number.) Nevertheless, given the available public data (and all of the limitations that go with it), we have identified 14 Part D drugs and zero Part B drugs that could potentially be both eligible for the “small biotech drug” exclusion and inclusion on the direct negotiation list from 2026 through 2028.
Using public data, we have identified 14 Part D drugs that could potentially be eligible for the “small biotech drug” exclusion from the direct negotiation list from 2026 through 2028.
In the April guidance, CMS made changes to the process that will help clarify what drugs and their manufacturers will qualify for this exception to negotiation. However, after applying these updates, we still have concerns that some manufacturers may request exceptions for drugs that do not truly fit under the “small biotech” label. I will give two examples to illustrate this concern. First, while I normally refrain from “naming names” in this blog, I think it makes sense to call out Oxycontin and Purdue Pharma as a real “are we sure this is what Congress had in mind” moment. Oxycontin, of course, helped fuel the opioid epidemic. The reason it could qualify is that FDA has declined to approve any generic drug applications to better control the supply of this medication. It remains a “qualified single source drug,” and will be in perpetuity, but it should not benefit from a carve-out intended to help small companies for a short period of time.
Second, this data exercise has revealed at least one drug where an actual small biotech manufacturer holds the BLA but a larger manufacturer is receiving all or some of the revenue. If CMS assigns the spending to the smaller company, the drug is excludable. If it instead assigns the spending to the larger company, it would not be – and another drug by the same, larger manufacturer would also no longer qualify for the exemption. This would be the fairer reading of the statute’s intent, to us.
Only time will tell which drug manufacturers will apply for the exception, and only CMS will be able to decide if they are “small biotech drugs” as defined by law and guidance. For now, I’ll leave readers with a few open questions: Is a $2.5 billion drug really what Congress meant by small? Did they really have Oxycontin and similar drugs in mind? Is CMS prepared to go toe-to-toe with manufacturers over the “primary manufacturer” definition? And if not, what is CMS prepared to do about it?
