Drug development is inherently a risky business, but this will compound that risk further… to the point where now, we can’t even be sure that the commercial success of a product will necessarily lead to a profit

Chris Viehbacher, CEO of Biogen


America, the world’s most lucrative pharma market worth some USD 630 billion in sales, has long proved an outlier when it comes to healthcare spending. In recent years, the nation’s health expenditure has typically surpassed four trillion dollars per annum: tantamount to a full 17 percent of GDP. At the same time US prescription drugs have tended to cost up to three times that of equivalent developed economies, while American patients have all too often found themselves burdened by onerous out-of-pocket medical expenses.

It was therefore a watershed moment in the history of American pharma when, in August 2022, Congress successfully passed the Inflation Reduction Act (IRA), containing provisions to regulate drug prices in a bid to reign in this sort of out-of-control spending. As a consequence of the new legislation, Medicare, the government-funded health insurer for over-65s, will for the first time be empowered to negotiate directly with drugmakers, who shall also be required to pay a rebate should the price of their products ever outstrip inflation.

“For far too long, Medicare has been forced to contend with Big Pharma with one hand tied behind its back… the entry of this bill shall fundamentally redefine the federal government’s relationship with industry and finally allow it to leverage its purchasing power,” enthuses Senate Finance Committee Chair Ron Wyden, noting that the Congressional Budget Office estimates that price-capping measures possess the potential to slash as much as USD 96bn from the federal deficit by 2031.

According to the fine print of the legislation, the government, starting from 2026, will be authorized to select 10 drugs to renegotiate from among the 50 costliest ones for Medicare. Then in 2027 and 2028, negotiated prices will come into effect for 15 more drugs respectively, with an additional 20 to be added in each subsequent year.

This has been music to the ears for consumer associations such as Patients for Affordable Drugs that have long argued that multinational drug developers have been gaming the system with overlapping patents – the so-called ‘patent thicket’ – designed to ensure monopoly pricing on blockbuster medicines without delivering any corresponding increase in clinical value for patients.


Price Constraints

For the pharma industry, however, this has come as a swingeing blow. They argue that officials shall be not so much be negotiating the price as imposing it. “The correct terminology for this is price controls, not negotiation, because companies that don’t wish to accept the proposed price will face the prospect of either incurring severe financial penalties or having to withdraw all their medicines from public-health programmes altogether,” explains Richard Gonzalez, CEO of AbbVie. “It’s frankly negotiation with a gun to your head,” agrees Pfizer CEO Albert Bourla, who is anticipating price cuts of 25 to 75 per cent or more in drugs selected for price negotiation.

Meanwhile many commentators, while conceding some form of price regulation was necessary and inevitable, consider the proposed corrective action to be far too extreme. For example, some bemoan the perceived arbitrariness and lack of fairness in the proscribed decision-making process. “The community that we represent are strongly advocating that whatever comes out of the Medicare Drug Price Negotiation Program needs to be scientifically-based and scientifically rigorous, on top of just delivering savings to the system,” affirms Rob Abbott, CEO of the Professional Society for Health Economics and Outcomes Research (ISPOR).

Ironically, given the ensuing outcry within professional industry circles, the terms of the bill might have been significantly harsher: for in its original manifestation, the Biden Administration had been pushing for the inflation curb to apply not merely to Medicare, but also private insurance plans on the commercial market.


A Pyrrhic Victory

While popular among citizens and offering short-term relief to the public purse, many believe the legislation to be fundamentally flawed and likely to generate perverse outcomes in the long run. “Our assessment is very much that this is a rushed job that prioritizes political gain at the expense of what would be ultimately best for patients,” warns Stephen Ubl, CEO of the Pharmaceutical Researchers and Manufacturers of America (PhRMA).

For instance, he believes one unintended consequence might be the disincentivizing of innovation. Under the terms of the IRA, biologics are granted 13 years of pricing freedom post-approved, whereas chemistry-based, synthetic small-molecules are only permitted nine.

Whereas in the past, drug developers have generally tended to start by introducing a therapy to small patient populations, like those with rare conditions or late-stage diseases, who have few alternatives, before broadening out availability, the distorted pricing timeframes may well cloud that calculation.

“Drugmakers will hitherto be compelled to stop and consider whether it is actually worth their while proceeding with a launch if the medicines are going be selected for price setting so soon in their lifecycle,” says Ubl, pointing out that some pharma companies might instead choose to delay until they can launch for the largest disease area and thus maximize returns.

Chris Viehbacher, CEO of Biogen very much concurs. “Drug development is inherently a risky business, but this will compound that risk further… to the point where now, we can’t even be sure that the commercial success of a product will necessarily lead to a profit,” he opines.

Meanwhile Eli Lilly’s Head of R&D, Daniel Skovronsky, bemoans the lack of consistency applied to different types of therapy. “Researchers should be able follow the science to find the best medicine for patients irrespective of whether it’s a large or small molecule and policymakers certainly shouldn’t be undermining that pursuit by creating separate systems to develop each category of medicine,” he argues.

Little wonder therefore that at least eight lawsuits have been filed against the IRA by some of the world’s top drugmakers including, among others, AstraZeneca, Johnson & Johnson, BMS, Merck, Novartis and Novo Nordisk as they proceed with a ‘hit-it-from-all-sides’ approach in a last-ditch attempt to derail the implementation of the controversial legislation.


‘Big Health’

Meanwhile PhRMA is keen to shine a spotlight on the pernicious rent seeking behaviours of American healthcare’s shadowy intermediaries whom the industry association believe is the real root cause behind the country’s skyrocketing medical bills.

“While drug developers get unfairly scapegoated in the court of public opinion for driving up medical expenses, it is actually these middlemen who are determining what patients pay for their healthcare: accepting discounts on therapies, and then charging patients based on the full price through deductibles and coinsurance,” argues Ubl.

In his view, these intermediaries — ranging from insurers and chemists to drug distributors and especially pharmacy-benefit managers (PBMs) — enjoy a stranglehold over the American health system’s finances despite neither making drugs nor typically treating patients. “The real culprit is not Big Pharma, but what one might call Big Health, and this is where true reform efforts should be directed,” he thinks.

Indeed, according to the Economist Intelligence Unit’s calculations, the combined revenue of the nine biggest intermediaries equated to nearly 45 percent of America’s health-care bill in 2022 with four pharmacy giants generating 60 percent of America’s drug-dispensing revenues, and a whopping 92 percent of all drugs flowing through three wholesalers!

However, as debate rages over where to lay the blame for the USA’s drug affordability crisis, Katie Payne, senior vice president for strategic communications for the Pharmaceutical Care Management Association (PCMA) sets out a strong defence of the country’s pharmacy benefit manager industry. “Pharmacy benefit companies enable better health outcomes by equipping clinicians and patients with data and information, improving adherence to doctor-prescribed treatment programs, and providing employers with options and pharmacy benefit expertise to build quality prescription drug coverage plans that work for them and their workforce. We are part of the solution not the problem,” she insists.