When the Inflation Reduction Act (IRA) was passed in 2022, it included a well-intentioned exemption for orphan drugs from Medicare price negotiation. However, the scope and interpretation of that exemption have proven too narrow, and the (unintended) consequences are being felt across the biotech industry.
Over the years, RareMoon has encountered these unfortunate consequences, hearing from clients and prospective clients who have decided not to pursue an orphan drug path.
In a DIA 2025 Annual Global Meeting session entitled “Unintended Consequences: Effects of Inflation Reduction Act on the Future of Pharmaceutical Innovation,” experts, including Julie Paterson from the National Pharmaceutical Council and Richard Xie of RA Capital Management, discussed the consequences and how investors are responding (and not).
How the IRA is Directly Affecting Rare Disease Innovation
Under the current IRA implementation, orphan drugs are exempt from Medicare price negotiation only if they are approved for a single rare disease or condition. If a drug receives approval for an additional rare disease indication, it becomes subject to maximum fair price (MFP) negotiation by the Centers for Medicare & Medicaid Services (CMS). While some payers and patients may view this as acceptable on the surface, the reality is far more complex, creating a significant trickle-down effect that discourages sponsors from pursuing additional rare disease indications – a consequence that helps no one.
A portion of innovation in the rare disease space has come from efforts to repurpose existing drugs or explore compounds with broad mechanisms of action that can address multiple rare conditions. Many small and emerging biopharma companies were founded on this premise – identifying therapeutic candidates with the potential to target shared biological pathways across rare disease populations. By leveraging known safety profiles or mechanistic relevance, these companies aim to expand into multiple orphan indications efficiently, often starting with the most urgently unmet needs. Currently, under the current IRA framework, this approach is at risk, as expanding to a second rare indication could trigger the loss of price negotiation exemptions. This not only puts the approach at risk, but also the foundation of many small biopharma companies aiming to advance therapies in underserved populations.
The Data Speaks for Itself
Paterson from the National Pharmaceutical Council shared that while the number of first orphan drug designations has remained stable, second orphan indications have declined by 40%. Their research has revealed that developers are deprioritizing smaller populations and ultra-rare follow-ons in favor of launching broader, more commercially viable indications first, leaving rare disease patients behind.
According to RA Capital, a 7-year post-FDA-approval exemption for small molecules (9 years for negotiated pricing to take effect) vs. an 11-year post-FDA-approval exemption for biologics (13 years until negotiated pricing takes effect) has also triggered a steep drop in investment in small-molecule drug development. Early-stage programs struggle to secure funding, with investors labeling many small molecules as “uninvestable.” Further noting:
- Investors are unwilling to commit capital to preclinical programs when the pricing outcomes a decade later are uncertain.
- The total capital pool for healthcare investment is shrinking, with funds diverted into other health technologies or outside the sector.
- Revenue projections have dropped by up to 50% post-IRA, forcing developers to accelerate timelines or abandon secondary indications altogether.
Will Legislative Reform Offer Relief?
Industry stakeholders are pushing back, and there’s growing momentum to amend the law. The orphan drug exemption is currently under legislative review, and there’s cautious optimism that change may come soon.
Proposed legislative aims to address the IRA’s unintended consequences on orphan drug development with amendments allowing exemptions beyond a single indication and aligning negotiation timelines with existing exclusivity. The bipartisan EPIC Act would extend small-molecule protection to 13 years, matching biologics. Together, these efforts aim to restore innovation incentives and ensure continued investment in rare disease treatments.
At RareMoon, we’re keeping a close eye on proposed legislative amendments to the IRA, particularly those that impact orphan drug development and small molecule innovation. As regulatory landscapes shift, we remain committed to guiding our clients through uncertainty with clarity, strategy, and unwavering focus on advancing treatments for rare disease communities.
