On August 29, 2023, CMS selected the first 10 high-expenditure, single source, Medicare Part D drugs subject to negotiation under the IRA’s Medicare Drug Price Negotiation Program (the “Negotiation Program” or “Program”). In that announcement, CMS also announced that four drugs “were determined to [qualify] for the small biotech exception,” and thus were not considered eligible for negotiation under the Program. CMS did not identify which drugs were granted the exception, nor did it disclose how many requests for the exception were made. Here, we provide details regarding this narrow exception to the Negotiation Program.

Qualifying for the Small Biotech Exception

The IRA exempts “small biotech drugs” from the Negotiation Program for the years 2026, 2027, and 2028. “Small biotech drugs” include Part D drugs:

1. with less than or equal to 1% of total Part D spend on all covered drugs for 2021, and
2. that account for greater than or equal to 80% of total Part D spend for all the applicable manufacturer’s drugs in 2021 for which the manufacturer had a Coverage Gap Discount Program (CGDP) agreement in effect under section 1860D-14A of the Social Security Act.

The exception does not, however, include:

1. new formulations of a drug (e.g., extended release), or
2. drugs acquired after 2021, if the acquiring manufacturer does not have a CGDP Agreement in place at the beginning of the next plan year.

The IRA requires that CMS treat as a single manufacturer all entities that, as of December 31, 2021, were treated as a single employer under subsection (a) or (b) of section 52 of the Internal Revenue Code (IRC) of 1986 with the entity that had the CGDP Agreement for the qualifying single source drug on that date. However, CMS notes that it does not have the information necessary to determine whether entities should be treated as single employers in order to qualify for the exception. Therefore, CMS requires that the manufacturer that is the sole holder of the new drug application (NDA) / biologics license application (BLA) for the qualifying single source drug submit materials requested under the small biotech exception.

Current Agency Guidance

On May 26, 2023, the Office of Management and Budget (OMB) released the final version of the Small Biotech Exception Information Collection Request (“ICR”), which addressed the information that CMS would collect to make the determination regarding the small biotech exception for initial price applicability year (IPAY) 2026 only. As a result of certain IRA requirements pertaining to IPAY 2026, the ICR only addressed the collection of information relevant to Total Expenditures under Part D. In its revised guidance for the Medicare Drug Price Negotiation Program, CMS further elaborated upon how it would consider such information when determining whether a manufacturer qualifies for the small biotech exception.

In the same guidance, CMS noted that: “[a] determination by CMS that a given qualifying single source drug qualifies for the Small Biotech Exception for initial price applicability year 2026 does not mean that this drug will continue to qualify for the Small Biotech Exception for future initial price applicability years.” This means that manufacturers granted the exception for CY 2026 will have to resubmit a request for the drug to be considered for the exception for initial price applicability years 2027 and 2028. CMS intends to provide additional guidance related to application for the small biotech exception for CYs 2027 and 2028. It remains to be seen how the number of manufacturers approved for the exception will change in the next two years.