- Global Industry Analyst
Ireland, Institutional
ChangeThe views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
On August 16, US President Biden signed into law the Inflation Reduction Act (IRA) of 2022, a sweeping US$700 billion legislative package comprised of various health care, climate change, and taxation policy reforms. Among the new law’s most significant health care provisions are those relating to US drug pricing, which take effect beginning in 2023 and are broadly intended to deliver the benefits of 1) lowering prescription drug costs for Medicare beneficiaries; and 2) reducing health care spending by the federal government.
However, the potential impact on the biopharmaceutical industry is mixed — modest in the near term, but negative longer term. Let us take a closer look at the legislation, starting with some of the recent history behind it.
Background of US drug pricing reform
The specter of US drug pricing reform has been an overhang on the biopharmaceutical industry over the past seven years. Reining in drug costs has become a major political objective of the Democratic Party since 2015; the populist idea was also embraced by former President Trump.
Over the past seven years, there were several legislative and administrative attempts by both parties to regulate drug pricing, but nothing had succeeded until this year. Under the Biden administration, the Democrat-controlled Congress included drug pricing provisions in the 2021 “Build Back Better” (BBB) bill, aiming to pass the law via the budget reconciliation process.
Fast forward to the summer of 2022: The pace of congressional negotiations accelerated, culminating in a legislative breakthrough and August 2022 passage of the IRA, which incorporates the drug pricing provisions of the BBB.
Budgetary impact and major components of drug pricing legislation
The budgetary impact of the drug pricing legislation, according to projections by the US Congressional Budget Office, is a net reduction of the federal deficit by US$288 billion over 10 years (2022 – 2031).
The legislation includes the following components:
- Drug pricing negotiation: Reduce federal spending by US$100 billion, effective in 2026 (Figure 1)
- Inflation cap: Reduce spending by US$62 billion, increase revenue by US$38 billion, effective in 2023
- Medicare Part D redesign: Increase spending by US$25 billion, effective in 2024
- Repeal of the “rebate rule”: Reduce spending by US$122 billion, effective in 2027
- Miscellaneous: Increase spending by US$9 billion
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.
Expert
Related insights
Showing
of
Insights Posts
Biotech IPOs in 2025: Quantity, quality, and best practices
Continue reading
4
min
Article
2025-08-31
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
Biotech IPOs in 2025: Quantity, quality, and best practices
We explore today's biotech IPO market, highlighting recent market trends, key characteristics for successful biotech IPOs, and best practices to sustain momentum as a public biotechnology company.
4
min
Article
2025-08-31
Built to last? Identifying durable health care start-ups
Two members of our late-stage growth team share insights and results from their recent analysis of enterprise-value trajectories for private, non-biotech health care companies.
14
min
Article
2025-05-23
Private biotech: Immunology and inflammation’s third wave
Our experts discuss how I&I is building on industry progress to offer new treatment solutions and interesting opportunities for private biotech investors.
Article
2024-12-31
Investing at the biopharma frontier
Rebecca Sykes details groundbreaking innovations happening today in the biopharmaceutical industry. She explains key advancements and the investment landscape for therapies targeting diabetes, cancer, and Alzheimer's disease, three of the deadliest and most expensive diseases facing the world today.
Video
2024-11-30
Novel therapies changing the course of health care
Several new drug classes represent a growing investment opportunity set that could reshape the health care sector.
Article
2024-10-31
Thematic investing focus: a new era for medical innovation
Advances in science, tools and technologies are transforming the face of healthcare, revolutionising the diagnosis and treatment of complex diseases. How can thematic investors identify promising opportunities?
Article
2024-09-30
Private investing portfolio company interview with RayzeBio CEO Ken Song
Dr. Ken Song, President and CEO of RayzeBio, discusses the company’s innovative approach to radiopharmaceuticals and highlights how Wellington’s public and private investment expertise is distinctive in the health care space.
Video
2024-09-30
Biotech for the next decade: Private market innovations
We explore our latest research in private biotech innovation across immunomodulatory therapies, precision oncology, antibody drug conjugates, radiopharmaceuticals, genetic medicines, and a range of other novel treatment modalities.
Article
2024-07-31
Private biotech market: Innovation, valuations, and capital efficiency
Co-heads of biotech private investments I-hung Shih and Nilesh Kumar join host Thomas Mucha to explore today's private biotech market, highlighting the state of deal flow, valuations, and innovation.
Podcast
2024-03-31
Uncovering opportunities in health care
Our experts analyze the ways in which innovation, digitization, and pandemic recovery come together to brighten the outlook for the health care sector.
Article
2024-04-30
Private biotech: Innovation amid disruption
We explore the state of the private biotech market, highlight key areas of innovation, and share three themes we expect to continue.
Article
2024-04-30
URL References
Related Insights