Potential implications for the biopharma industry
It may take some time to assess the full implications of this new legislation for the biopharma industry, but the near-term impact — prior to 2026 — should be modest. Of the first three major components cited above, the industry mostly supports one (Medicare Part D redesign), seems willing to tolerate another (the inflation cap), and strongly opposes the third (drug price negotiation).
Not surprisingly, the most fiercely opposed provision is also the one with potentially the most impact on the industry: drug price negotiation, which will take effect starting in 2026 and expand in scope annually thereafter. By 2028, many of the fifty top-selling drugs under Medicare may experience price cuts ranging from 25% to 60%. (Read: This is not really price “negotiation.”) Other drugs may also be affected in the coming years if strong revenue growth puts them among the top-selling Medicare drugs.
This is a mid-to-longer-term negative for the biopharma industry. However, the multiyear impact on these companies’ earnings is difficult to calculate at this point, given uncertainties around the implementation by the HHS Secretary (who has considerable discretion), challenges to the law on constitutional grounds, and industry efforts to find loopholes in the law and to calibrate its research & development (R&D) pipeline in response to changes in financial incentives.
Final thoughts for health care investors
In addition to negatively affecting the net present value (NPV) of some very popular drugs, price negotiation will likely distort long-term incentives in pharmaceuticals R&D, favoring drugs for younger people over ones for the elderly, biologics over small molecules, and favoring orphan drugs with a single indication. It may also disincentivize biopharma companies from pursuing additional indications once a drug is already on the market, given the likelihood of price cuts.
Although smaller biotech firms with a single main drug are exempt from the price negotiation process for a few years, negotiation may still dim some firms’ attractiveness to large-cap pharma companies as potential M&A targets.