Biden’s Inflation Reduction Act to hurt Big Pharma
Last month, President Joe Biden signed a bill that will allow the government to negotiate medicine prices itself, potentially costing companies like Pfizer or AstraZeneca up to $288 billion in lost sales over a decade.
Tackling stratospheric drug prices goes down well with most Americans. Between 2009 and 2018, the cost of brand-name prescription drugs more than doubled, according to the Congressional Budget Office. America also pays above the odds, when compared to international peers, with prices averaging 2.5 times against those seen in 32 other nations, according to a RAND Corporation report.
The Act will limit price increases and allow Medicare, government-funded health insurance for over-65s, to negotiate prices directly with drugmakers. The new rules will initially apply to 10 remedies from 2026 and be gradually expanded.
Although the government has yet to reveal the names of affected drugs, they are expected to include treatments for diseases like cancer and arthritis, which are responsible for high spending and have no cheaper generic alternatives.
Despite drug company protests, the hit won’t cripple the industry. Biden’s forecast reduction in Medicare drug costs over a decade would imply on average some $29 billion of lost annual sales. That’s equivalent to 12% of the combined 2026 pre-tax profit of 10 of the top drugmakers, as per Refinitiv forecasts. Over the last six years the sector has on average generated a 10% annual return on research investment, above its 8% cost of capital, according to Berenberg.
Drugmakers are already plotting how to recoup those losses. Trying to raise prices further may backfire, so they may now switch R&D investments in chasing blockbuster drugs. In this scenario, there are risks for both patients and shareholders.
Companies may, as AstraZeneca’s Pascal Soriot suggests, focus more on conditions that affect vast numbers of patients to ensure decent returns, neglecting those conditions with fewer sufferers, like rarer diseases or neurological disorders.
Hot sectors like oncology will attract even more capital. Global oncology spending on research and development is already expected to soar to $300 billion each year by 2026, up from $185 billion in 2021.
The more drugmakers pile into the same sectors, the less power they will have to set prices when several similar drugs hit the market. That may ultimately lead to lower returns.