As tariff threats and FDA staff cuts thrust the biopharma world into uncharted waters, President Donald Trump is offering the industry some reprieve by ordering the elimination of the so-called "pill penalty" baked into 2022’s Inflation Reduction Act.
In an executive order inked Tuesday, Trump laid out a plethora of proposed policy changes for the pharmaceutical industry, chief among them the call to rework the IRA provision that gives small-molecule drugs just nine years before Medicare price negotiations can set in, versus 13 for biologics.
The IRA, which was signed into law by President Joe Biden in August 2022, notably allows for negotiations over the cost of high-priced drugs covered by Medicare.
In 2023, the Center for Medicare and Medicaid Services (CMS) unveiled the first 10 Medicare Part D drugs subject to negotiated prices starting Jan. 1, 2026. And in January, CMS revealed the next 15 drugs that will be up for negotiations under the program, including Novo Nordisk’s popular GLP-1 meds Ozempic and Wegovy.
The IRA’s so-called pill penalty has long been a point of contention for the industry, which has argued that it poses a serious threat to the revenue potential of new, non-biologic drugs.
It seems the industry won over the President with this argument. In his EO, Trump wrote that the pill penalty "threatens to distort innovation by pushing investment towards expensive biological products, which are often indicated to treat rarer diseases, and away from small molecule prescription drugs, which are generally cheaper and treat larger patient populations.”
Melanie Whittington, who leads the Leerink Partners-affiliated Center for Pharmacoeconomics (CPE), largely agreed with the President. In a new report on the executive order, she flagged a recent policy brief from the University of Chicago that estimates the IRA’s pill penalty will lead to 79 fewer small molecule drugs in the U.S. over the next 20 years.
While the current price negotiation program could provide savings in the short term, it could also lead to higher long-term healthcare spending overall by funneling investments toward biologics instead of small molecules, Whittington added.
Still, others, such as Sen. Ron Wyden, D-Oregon, who serves as the ranking member of the Senate Finance Committee, accused Trump of being “all bark and no bite” on prescription drug costs.
“This executive order is rife with goodies that Big Pharma has been begging for, primarily by weakening Medicare negotiation, which is going to mean higher prices for American seniors and families while the drug companies get a windfall to the tune of $10 billion,” the Senator said in a statement.
In her own statement, Merith Basey, executive director of Patients for Affordable Drugs, agreed that the proposed elimination of the pill penalty is “a clear giveaway to Big Pharma.”
Amid a period of growing uncertainty for the biopharma industry—and U.S. healthcare more broadly—created by the second Trump administration, analysts are mostly optimistic about the executive order.
Naturally, however, Trump’s decree isn’t set in stone: Analysts at Citi Research noted that any potential changes to the status quo will need Congressional support, though the team did suggest the order is “likely the beginning of many bread crumb concessions to biopharma ahead of any potential tariffs.”
The Citi team also questioned whether small molecule drugs could eventually benefit from the 13-year negotiation-free period enjoyed by biologics, or vice versa. Alternately, both classes could receive entirely new timelines before potential price negotiations set in, the analysts speculated.
Analysts over at William Blair declared that “many” of the initiatives outlined by Trump on Tuesday are “beneficial to the biopharma industry,” singling out the proposed elimination of the IRA’s pill penalty as the prime example. Still, the team caveated that it wonders “how such a change could be approved, given it would need to be budget neutral.”
The pill penalty doesn’t just affect small molecules under their common definition, according to the William Blair team. Instead, the difference in price negotiation timelines hinges on whether a drug in question is approved by the FDA’s Center for Biologics Evaluation and Research (CBER) or its Center for Drug Evaluation and Research (CDER), with the latter division also overseeing peptides and RNA-based therapies, the analysts explained.
The pill penalty elimination, if carried through, would likely be a boon for any drugmaker developing small molecules, peptides or RNA-based treatments in large Medicare populations like those for cardiovascular and central nervous system diseases, the William Blair team said.
They flagged a number of companies, such as Alnylam, Apellis, Bristol Myers Squibb and Tarsus, as being likely to “directly benefit” from the potential removal of the pill penalty.
Aside from its focus on the small molecule-biologic divide under IRA, Trump’s executive order seeks to “improve the transparency of the Medicare Drug Price Negotiation Program,” which the industry has rallied around as another common criticism of the Inflation Reduction Act.
While the move “sounds positive,” it “may not mean much” in the end, the William Blair team caveated.
Trump’s executive order also includes calls to crack down on pharma middlemen; to prevent price gouging by manufacturers; to streamline the prescription drug import process and to accelerate the approval route for generic and biosimilar drugs.
While uncertainties remain around the executive order and the potential implementation of its proposals, the development likely represents a glimmer of hope for many in the U.S. life sciences realm after weeks of confusion spurred on by tariff threats and mass layoffs across the country’s federal healthcare apparatus.
Pharmaceuticals were notably exempted from the reciprocal tariffs Trump unveiled earlier this month, though sector-specific duties for drugmakers are still likely to arrive “in the next month or two,” U.S. Commerce Secretary Howard Lutnick said Sunday on ABC News’ “This Week.”
Meanwhile, the commerce department recently kicked off an investigation into the national security implications of pharma imports, the Trump administration said Monday. The probe is considered a stepping stone to eventual pharmaceutical-specific duties.
The Section 232 investigation, as it’s known, empowers the president to impose trade restrictions, such as tariffs, if a national security threat is uncovered. The process will target both finished generic and branded drugs plus medical countermeasures for potential health emergencies and drug ingredients and starting materials.