Why CDMOs Are Leaving Small Molecules Behind

By Louis Garguilo, Chief Editor, Outsourced Pharma

It’s a rare moment when a CDMO’s market restructuring leads to thoughts about national health policy.

But as I wrote this recent ediorial about Lonza’s decision to focus heavily on biologics, it brought back to my mind an ill-conceived government policy that may have contributed to the company’s restructuring.

No, I’m not referring to tariffs.

It’s the Biden Bill Penalty.

That penalty was part of the (cynically) named Inflation Reduction Act (IRA) signed into law in Congress in August 2022. It grants the Centers for Medicare & Medicaid Services (CMS) the authority to set drug prices on small molecule drugs earlier than on biologics.

It was heralded as a landmark step toward lowering prescription drug prices specifically for Medicare patients.

I haven’t stopped scratching my head over how our powerful Pharma industry – and healthcare and patient-advocacy groups – let former president Biden work with Congress to devalue oral-dose medicines in this wayward attempt to bolster biologics and lower drug prices  through more government intervention.

The Drug Reduction Act?

Do drug prices need to be lowered in the U.S? We all would say yes, but those prices are a function of a labrynth healthcare system we can’t go into here.

What we can be reminded of is that buried in the IRA was a clause with consequences that spread to our focus here on outsourcing.

 The U.S. government granted itself the authority to negotiate drug prices nine years after approval for small molecule drugs, but allowed thirteen years for biologics.

The market-altering, negative impacts seem obvious, and should have been vociferously opposed.

Additionally, the IRA includes provisions to delay the selection of certain biologics for negotiation if a biosimilar is likely to enter the market within two years, based on "clear and convincing evidence." 

This delay does not apply to future competition for small-molecule drugs, creating yet more of a government-derived imbalance in market dynamics.

By the way, these are not volunteered negotiations. Drug companies “negotiate” or their drugs can be removed from the Medicare- and Medicaid-covered lists.

I did report at the time of an outcry among biopharma industry leaders, and some patient advocates, regarding potential impacts on drug innovation. These forced “negotiations,” they said, would not help patients nor lower prices. (see: Impacts Of The Inflation Reduction Act (IRA))

Apparently, it wasn’t enough. 

Moving To Biologics Organically

Some might protest Lonza’s (and in fact other CDMOs’) decision to focus on the wide swath of biologics development, and in Lonza’s case abandon some small molecule services, has little to do with the pill penalty.

Industry momentum was organically shifting to biologics, and the rise of these innovative approaches to treating patients continues.

And as I pondered in that earlier editorial, this in fact may have simply reflected one organization’s strategic decisions based on it core competencies, unique assets, and corporate strategy.

Still, it is worth considering that at the time of the IRA, as mentioned above, that many executives from drug developers did protest that if passed the pill penalty would affect their decsisions to move small molecule programs forward.

And if they did, they would now need to raise prices they went to market with in order to make up for their outsized R&D costs and generate revenue/profits faster than they would prior to the law.

Executives such as Alexander Hardy, CEO of Genentech, expressed concerns about the shortened timelines. He said the IRA's 9- and 13-year negotiation timelines will force companies to operate within a “very, very short amount of time.”

Others spoke more forcibly. 

I also recall some analyses were publicized suggesting the IRA's provisions could lead to a decrease in the development of hundreds of small-molecule therapies over the next decades.  

These projections are certainly hard to make, but they are concerning when considering conditions where innovative small molecules are particularly effective, such as neurological disorders.

Back To Lonza And The Market

Today Lonza, and in fact a growing group of CDMOs, are focusing on all-things biologics, and less (or no) things small molecule.

Again, this reflects a decades-in-the-making innovation breakout and organic market movements specific to biologics, including cell and gene therapies, ADCs, mAbs.

Accordingly, CDMOs have been adjusting to this, and working as quickly as possible to assist in getting these solutions through development and the clinic, and creating commercial processes and products for patients.

But do we today say so what if the pill penalty artificially further induces this trend by negatively impacting the small molecule market? 

On the surface, that may seem like a modest, even arbitrary distinction. In practice, it amounts to a disincentive so large that it could reshape development pipelines and outsourcing strategies for decades.

Today we are focused on the potential impacts of potential Trump-instigated tariffs. But what we should also press the current president and the current Congress on should be to end the pill penatly.

The implications of these government policies echo into a broader – and frankly troubling – narrative: how misguided government action to nudge markets in directions they were already heading, and in doing so, distort the natural balance of innovation, investment, and ultimately, patient care.

It is hard not to view the decisions of start-up drug sponsors or Big Pharma to steer away from small molecule manufacturing as, if even in some small part, a strategic response to market signals the IRA has sent.

Small molecules that now come with compressed timelines and increased pricing risk will see reduced investment. And when sponsors scale back, CDMOs follow suit.

Our entire development and manufacturing ecosystem, from drug companies to outsourcing partners, must factor in the artificial devaluation of small molecule therapies just as the industry was naturally adjusting to biologics.

So put tariffs aside for the moment. Congress and the president should end the pill penalty. One avenue of approach I've saved for last. 

In February, a bipartisan, bicameral legislation (H.R. 1492; Ensuring Pathways to Innovative Cures (EPIC) Act) to fix the IRA’s small-molecule pill-penalty to ensure continued R&D investments into small molecule medicines.

Here’s our second chance to kill the pill bill.