New research suggests the Inflation Reduction Act is shifting biopharma investments and placing small molecules at risk

A new analysis by authors from the healthcare consultancy firm Vital Transformation highlights how the Inflation Reduction Act has reshaped investment priorities in biopharmaceutical innovation, leading to notable declines in funding for small molecules and raising concerns about potential long-term effects on treatments for Medicare-aged populations.

This month, the healthcare sector is closely monitoring the anticipated release of the list of 15 drugs slated for the Inflation Reduction Act’s (IRA) Medicare Drug Price Negotiation Program (DPNP). With a deadline set for February 1, 2025, the announcement has sparked widespread debate about which drugs will be included in the next round of Medicare price negotiations.

At the same time, a growing body of research continues to shed light on the potential unintended consequences of the IRA for various stakeholders, including patients, pharmaceutical companies, and investors. For investors, in particular, the evolving landscape introduces complexities in planning investments and prioritizing research. A recent analysis conducted by the National Pharmaceutical Council (NPC), for instance, has highlighted significant impacts on investments in post-approval clinical development.

Now new findings, published as a preprint* in MedRxiv, have examined the effects on early-stage investments in therapeutics targeting the Medicare-aged population. Challenging claims by the Congressional Budget Office (CBO) that the IRA poses minimal risks to pharmaceutical innovation, the authors point to significant changes in investor behavior, particularly a decline in funding for small molecule development.

The authors analyzed 1137 clinical trials conducted between 2018 and 2024, drawn from a longitudinal dataset of commercially sponsored trials by companies with market valuations under $2 billion. Focusing on 161 lead assets in Phase 1 or 2 clinical trials, the study reveals a 35% decline in clinical trial launches targeting the Medicare-aged population following the passage of the IRA. This decline disproportionately impacts small molecule investments, which dropped by 70%, while investments in large molecules remained resilient, increasing to ten times the amount allocated to small molecules by 2024. According to the authors, this discrepancy stems from the IRA's pricing mechanisms, which allow Medicare to negotiate drug prices starting in year 9 for small molecules and year 13 for large molecules, creating divergent financial incentives.

Key findings also emphasize the IRA's role in reshaping investment strategies, with early-stage investors increasingly avoiding indications with high Medicare exposure. For example, funding for Alzheimer’s disease, with 95% exposure to the Medicare-aged population, dropped from $189 million pre-IRA to $97 million post-IRA. Conversely, large molecules with lower Medicare exposure attracted significant investments, including three post-IRA allocations exceeding $1 billion.

The authors argue that these trends, “indicate significant negative impacts on the population the IRA legislation is allegedly designed to aid; namely, the Medicare-aged population requiring effective new therapies in areas of high unmet medical need.”

They also acknowledge the broader downturn in biopharmaceutical market investments as a potential limitation of their research, which complicates efforts to fully isolate the effects of the IRA from wider economic trends. Nonetheless, the significant decline in small molecule funding and the preference for large molecules with lower Medicare exposure align predictably with the financial incentives created by the IRA’s pricing provisions.

*Editor’s note: The article published in MedRxiv is a preprint and has not been peer-reviewed. It reports new medical research that has yet to be evaluated and so should not be used to guide clinical practice.