Early Lessons from IRA Influence on Deal-Making & Business Strategy

Over two years since the introduction of the Inflation Reduction Act (“IRA”)¹ and the swift implementation of the Centers for Medicare and Medicaid Services’ (“CMS’”) drug price negotiation program,² the life sciences industry is acclimating to novel economic conditions. Stakeholders are revising their corporate and regulatory strategies as they grapple with the unpredictable financial implications of the IRA’s negotiation program.

Since March 2023,³ CMS issued additional guidance regarding the negotiation program⁴ and revealed the inaugural list of drugs (“Selected Drugs“) chosen for negotiation alongside the Maximum Fair Prices (“MFPs“). These MFPs will be accessible to specific categories of Medicare purchasers from 2026. The agency is expected to soon announce the second cohort of Selected Drugs subject to MFPs from 2027.

This article offers an update on the potential financial impact of CMS’s MFPs for the Selected Drugs, the IRA’s emerging effects on dealmaking, corporate and regulatory strategies, and the IRA’s future given ongoing litigation and the potential influence of the new Trump administration.

I. Maximum Fair Prices for First Cohort of Selected Drugs

CMS revealed the list of MFPs on August 15, 2024, for the first cohort of Selected Drugs, with these MFPs set to be effective from January 1, 2026.⁵ These MFPs represent reductions from the 2023 list price of the Selected Drugs ranging from 38% to 79%.

Table 1: Negotiated MFPs for Selected Drugs

II. List Price Versus Net Price: Varied Impacts of the IRA’s Negotiation Program MFPs on Medicare and Broader Market Segments

Direct Impact of the MFP

CMS estimates a $6 billion saving in relation to the Selected Drugs for 2026;⁶ however, new analysis suggests these estimates could be overstated, especially as many Selected Drugs are nearing the end of their life cycle and face potential competition.⁷ Furthermore, the analysis indicates potential adverse impacts for pharmaceutical and biotech companies with Selected Drugs.⁸ A comparison of MFPs versus list price has considerable limitations as the list price doesn’t account for the existing net price of a drug, including pre-existing “rebates.”⁹ Rebates are price concessions offered by drug manufacturers to health plan entities, pharmacy benefit managers (“PBMs”), and other intermediaries. Given that list prices don’t consider rebates or other price concessions, the actual economic impact on manufacturers can’t be simply estimated by evaluating the percentage discount of the MFP relative to list price detailed in Table 1.¹⁰

Drugs with smaller pre-negotiation rebates are likely to experience a greater impact from the MFP, and drugs with larger pre-negotiation rebates may be less impacted.¹¹ This indicates that certain therapeutic classes could be more affected by inclusion under the IRA than others, depending on existing market-based rebates within those classes. For instance, previous CMS analysis suggests that cardiovascular drugs carry higher rebate percentages on average,¹² implying these product manufacturers could be less economically impacted by the MFP than manufacturers of drug classes with lower average rebates.

All these factors indicate that parties should consider many existing market-based factors when planning life-cycles and negotiating economic provisions in licensing transactions, in anticipation of IRA negotiation impacts on individual drugs.

Potential “Spill-over” Impacts

The true impact of the IRA negotiation program on a drug’s price is likely far wider than a direct comparison of MFP versus list price suggests. The IRA’s MFP only legally applies to Medicare-defined beneficiaries, but its effects are likely to have significant “spill-over” into the private commercial market. This spill-over will likely lead to shifts in the market-based incentives for PBMs and other healthcare stakeholders. For instance, for Part D products, PBMs may increase competition for formulary spots due to the likely lower rebates on many IRA-selected products, putting pressure on other products, including non-selected therapeutic competitors and various products subject to commercial market coverage. Early analysis reveals potential consequences in the Medicare market,¹⁶ but commercial market spill-over is inevitable, with many anticipating repercussions for the entire US health care system.¹⁷

III. Dealmaking Trends

In response to the IRA’s negotiation program, economic adjustment provisions for licensed products that become Selected Drugs have become increasingly prevalent. These provisions often take the form of royalty reductions.¹⁸ When drafting IRA economic adjustment provisions, considering the following points can help reduce the potential for future disagreements:

Timing of Adjustments

Agreements should specify when the economic adjustment for a licensed product that becomes a Selected Drug will take effect. Most parties agree to apply the royalty reduction only during the period when the MFP is in effect, which commences two years post-selection (the “Price Applicability Period”). However, some parties may choose to apply the reduction from the date of selection, potentially anticipating “spill-over” pricing impacts before the actual MFP implementation. In the latter approach, the royalty adjustment must be fixed or set in some manner ex-ante and can’t be calculated off an as-of-yet-known MFP.

Scope of Reduction

Agreements should also specify (1) the territorial scope of the economic adjustment and (2) the categories of sales of the licensed product that are eligible for the reduction (e.g., sales to Medicare purchasers only or all sales). Most agreements apply the royalty reduction to U.S. territory sales only, though some licensees have negotiated reductions to apply to global sales.

Regarding the categories of eligible sales, finalized deal terms show significant variability. Some license agreements limit the reduction solely to sales associated with Medicare utilization while others apply the reduction to all net sales within the United States. The latter approach appears to be more common, perhaps due to complexity in distinguishing between Medicare from non-Medicare sales.

IV. Regulatory and Corporate Strategy

The IRA is broadly impacting regulatory and corporate strategy for biotechnology and pharmaceutical firms of all sizes. One of the many impacts already observed is that companies have or are planning to review and adjust their economic projections for pipeline assets, particularly for drugs with the potential to become Selected Drugs.²¹ Some executives have stated they expect to cancel programs or investment in planned new indications as a result of the IRA’s impact.²² Consequently, some companies have pruned their pipelines, discontinuing programs that are no longer economically justifiable for future investment in light of expected IRA impacts.²³

V. Ongoing Litigation Challenges and the Incoming Trump Administration

Litigation

Manufacturers and industry allies have filed numerous challenges to the IRA’s negotiation program, utilizing various legal approaches. These complaints have included First Amendment (compelled speech) claims, Fifth Amendment (due process and takings) claims, separation of powers claims, non-delegation, and Administrative Procedure Act claims, among others. To date, these challenges have had limited success, with most being dismissed on procedural or jurisdictional grounds, without meaningful consideration of the merits of underlying claims.

However, the 5^th Circuit provided a glimmer of hope in the industry’s challenges to the IRA. It ruled on September 20, 2024, and reversed a district court’s dismissal of the case for lack of subject-matter jurisdiction.³⁰ The court held that the industry group plaintiffs had shown sufficient economic and procedural injuries to have standing to bring their claims based on (1) the economic harm they would suffer due to the IRA’s negotiation program and (2) the lack of notice-and-comment procedures in the implementation of the IRA’s negotiation program.³¹ The case has been remanded to the district court for consideration of the merits of many of the original claims, including the due process and procedural injury claims.

Political Landscape and Potential Amendments

As we transition into the second Trump administration, with Republican majorities in both houses of Congress, changes to the IRA itself may be possible. Incoming President Trump has not clarified his plans for the program, but Republicans in Congress have expressed their disapproval.³² Commentators have noted that a complete repeal of the IRA (or even the drug price negotiation portion of the IRA) is unlikely;³³ however, a Republican Congress may pave the way for amendments to the law.

Several provisions of the IRA’s negotiation program have been discussed by commentators as potential candidates for amendment under the new Congress.

VI. Final Takeaways

Although significant uncertainty remains regarding the ultimate impact of the IRA’s drug price negotiation program on the pharmaceutical and biotech industries following the publication of the first ten Selected Drugs and their MFPs, there are some key learnings:

1. Impact of MFPs. The MFPs represent substantial reductions from list prices. However, the actual economic impact varies due to differences between list and net prices, among other factors, and recent analysis suggests that drugs with lower pre-negotiation rebates could be more affected.
2. Economic Adjustment Provisions. In response to the IRA, economic adjustment provisions, such as royalty reductions, are increasingly common in licensing transactions. Important considerations include the timing of such adjustments, the scope of the reduction, the type of royalty reduction (fixed versus variable), and the precise calculation method for variable adjustments.
3. Corporate and Regulatory Strategy. Pharmaceutical and biotech companies are responding to incentives introduced by the IRA, including by trimming their existing pipelines and reducing investment in follow-on indications.
4. Ongoing Political and Legal Challenges. The IRA continues to face legal challenges from industry stakeholders and advocacy groups, as well as political opposition from certain lawmakers in Congress. These efforts in the courts and Congress may influence the future of the drug price negotiation program, though a full repeal is unlikely. With the transition to a new Congress and the Trump administration, changes to certain provisions and CMS guidance are possible, potentially altering the program’s implementation and impact.
5. The Landscape is Evolving in Real-Time. As the legal landscape around the IRA changes and the true economic impacts of the drug price negotiation program become better understood, pharmaceutical companies and other stakeholders will continue to adjust their strategies accordingly. This shifting environment means that there is no one-size-fits-all approach to responding to the negotiation program. As the law continues to develop, parties should pay close attention to how the IRA may impact their business.