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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 4 minutes read

The Drug Pricing Landscape in 2023: Renewed Pressure for Pricing Reform

For over a decade, industry watchdogs, patient groups and various lawmakers have been calling for drug pricing reform—initially with little success. 2023, however, may be the year in which supporters of drug pricing reform finally see a return on their efforts. A number of different measures are gaining momentum, and the Biden-Harris Administration has made it clear that lowering drug costs in the U.S. is a top priority. Therefore, drug pricing reform will be another key factor for biopharma companies to consider when reviewing their pipelines. Some analysts have suggested that it may prompt an increase in M&A activity in the near future.

First, the Inflation Reduction Act (IRA) was signed in to law on August 16, 2022 (more on that here), which, among other things, empowers the Centers for Medicare & Medicaid Services (CMS) to negotiate the Medicare program’s purchase price of certain high-expenditure, single-source drugs—a move that could impact a sizeable portion of the retail prescription drug market.[1] Earlier this month, CMS took its first steps towards implementing this program, referred to as the Medicare Drug Price Negotiation Program (Price Negotiation Program), through the publication of its implementation plan on January 11, 2023.[2] CMS plans to publish the first 10 drugs selected for the Price Negotiation Program by September 1, 2023 and will announce the negotiated maximum fair prices for these drugs (effective starting 2026) by September 1, 2024.  

Multiple biopharma companies discussed these IRA measures during the recent JP Morgan Healthcare Conference in San Francisco, noting multiple, potential adverse impacts of the legislation. First, several analysts have noted that the IRA provisions may skew development decisions in favor of biologics over small molecules because the negotiated fair prices for small molecule drugs will be implemented 9 years after their first regulatory approval, whereas for large molecule therapeutics, such prices will be implemented after 13 years.[3] Similarly, these time frames may disincentivize companies to engage in life cycle management of their approved drugs (e.g., studies to use an existing, approved drug in a new patient population or indication), and instead incentivize manufacturers to progress multiple molecules with the same mechanism through development for separate indications. We expect that acquirors and in-licensors will need to revise their financial models to accommodate the potential impact of a future IRA price negotiation, and that this, in turn, will have an immediate adverse impact on deal economics.

Second, lawmakers are further increasing pressure on the Department of Health and Human Services (HHS) to exercise—for the first time in 40 years—its “march-in” authority in respect of biopharmaceutical products developed with federal funding. This authority permits a funding agency to require a patent holder or exclusive licensee to out-license a federally funded invention under certain circumstances in order to increase access to the invention. Lawmakers surmise that HHS exercising this authority would unlock a specific manufacturer’s patent monopoly, thereby lowering prices to consumers—and encourage other manufacturers to set more reasonable prices to avoid march-in.

Both Senator Elizabeth Warren and Representative Lloyd Doggett have been active in this space, repeatedly urging the Biden administration to use any and all mechanisms in its power to lower drug prices. Most recently, on January 10, 2023, a group of more than two dozen members of the House and Senate, led by Senator Warren,  Senator Angus King and Representative Doggett, wrote to HHS Secretary Becerra, seeking an update on a November 2021 petition to HHS to initiate march-in proceedings for Xtandi, a drug commonly-used to treat prostate cancer.[4] (For more background on HHS’s march-in authority, click here). 

Historically, HHS has specifically declined to exercise its march-in rights to control drug pricing, stating that Congress has the power, and is better suited than an executive agency, to enact drug-pricing reform In view of these prior statements, and Congress’s recent enactment of the IRA, it does seem unlikely that HHS will give any more deference to this Xtandi petition than it has in the past (see below for more on past petitions).  However, last week’s letter does continue to put pressure on HHS to justify why, in more than 40 years since its enactment, the march-in right has never been used, for any purpose.

Moreover, the letter comes at a time when the goodwill that was created in the pharmaceutical industry during the COVID-19 pandemic is evaporating over the expected increases in COVID-19 vaccine prices. Secretary Becerra has, however, stated that HHS will use whatever authority it has to help keep vaccine prices down. It is hard to imagine that the Government’s exercise of “whatever authority” it has would exclude the use of its march-in rights for vaccines and other biopharmaceutical products developed using Government funding. Given the high proportion of biopharmaceutical products originating in universities and research centers with support from HHS, if the march-in right is exercised, it could have an extraordinary impact on biopharma development.

So, with the current momentum surrounding pricing, what could be the end result? We’ve already heard much about how big pharma anticipates a pivot away from small molecule drugs programs and expanded labeling for existing drugs. More broadly, the Government’s use of its march-in authority could break down the investment in and process of novel drug development as we know it. Freshfields will continue to closely monitor the status of drug pricing measures, given their potential ripple effects on the types of transactions that biopharma companies enter into, and on the life sciences industry as a whole.


[1]  Medicare spending has accounted for as much as 30% of retail expenditures in years past, but generally appears to account for around 15% of annual expenditures in the most recent period we have data.

How The IRA Will Impact the Biopharma Industry 

Trends in Prescription Drug Spending

What The Inflation Reduction Act’s Reforms To Medicare Part D Mean For Prescription Drug Prices

[2] Medicare Drug Price Negotiation Program: Next Steps in Implementation for Initial Price Applicability Year 2026

[3] Drug Companies Favor Biotech Meds Over Pills, Citing New U.S. Law   

[4] Letter to HHS Secretary Becerra