The pharmaceutical industry suffered a huge legislative defeat last year when Congress and President Joe Biden enacted a law aimed in part at lowering prescription drug costs for Medicare beneficiaries.
Now at least one drugmaker is fighting back in the courts and on Capitol Hill.
Merck & Co. filed a lawsuit in June alleging the Inflation Reduction Act’s drug price negotiation program for Medicare amounts to extortion and violates the U.S. Constitution.
The drugmaker is stepping up its advocacy in Washington, too. It spent $8.2 million on federal lobbying through September — the most it has spent in the first three quarters since 2012, according to data compiled by OpenSecrets, a nonpartisan watchdog that tracks money in politics.
That doesn’t include membership dues to the Pharmaceutical Research and Manufacturers of America, a trade group that has spent more than $25 million annually on federal lobbying each year since 2017, according to OpenSecrets. Merck paid $14.4 million in dues last year, records show.
The Biden administration in August announced that Merck’s drug Januvia, which treats type 2 diabetes, will be among the first medications subject to Medicare-negotiated prices starting in 2026. Merck has said it anticipates more of its drugs — including its top-seller Keytruda, a cancer treatment — will soon be targeted, too.
The company likely stands to lose millions of dollars in Medicare payments. The industry also worries that private insurers may use Medicare’s publicly available prices as leverage to negotiate better prices.
The law’s supporters say it’s a much-needed first step toward reining in what they call government-enabled drug monopolies.
“At a high level, Merck and other drug corporations are reeling after facing their biggest policy loss, maybe ever, at least in the last 20 years or so,” said Steven Knievel, a health policy researcher and advocate at Washington, D.C.-based Public Citizen, a pro-consumer nonprofit.
Merck says its ability to develop breakthrough cures and treatments requires investments of billions of dollars in multiple projects, knowing that only a fraction will succeed and win regulatory approval while the company fails to recoup its investment on the rest.
“It is therefore vital for Merck to be able to charge market prices for that tiny subset of drugs that not only succeed but achieve groundbreaking results,” Patrick T. Davish, associate vice president of global market access at Merck, said in a court filing. Because the law specifically targets those drugs, he said, “it will substantially hinder Merck and its peers as they undertake the expensive and arduous work of innovation.”
In a statement, Merck said “the industry and patients are already seeing the harmful effects” of the Inflation Reduction Act. “Numerous companies have already commented on how the IRA has affected or will affect their plans for timing of regulatory filings and whether to conduct certain sorts of post-approval research that once would have been conducted without question,” the statement said.
The fight comes as Biden is putting his push to lower drug prices at the center of his 2024 reelection campaign.
The problem: High drug costs
Prescription drug prices are much higher in the U.S. than in other democracies like Japan, Canada and France.
Because of the cost, some 2 million adults 65 and older did not get needed prescriptions in 2019 — a problem that was more acute among people with chronic diseases like diabetes, according to research by the U.S. Department of Health and Human Services.
The growing availability of generic drugs has generally helped slow growth in Medicare’s prescription drug costs per enrollee, according to the nonpartisan Congressional Budget Office. But CBO found that from 2009 to 2018, the average net price of a prescription for a brand-name drug — minus any rebates — more than doubled, to $353, in Medicare Part D, the program’s pharmaceutical benefit.
Market pressures haven’t brought down prices because the government provides pharmaceutical companies patents and exclusivity periods to ensure they recoup their investments without facing competition from generic drugs for an average of 12 to 14 years, according to Richard G. Frank, a former senior official in the Department of Health and Human Services during the Obama administration.
“During that time, drug companies use their market power to set prices well above the costs of production and distribution,” Frank, a professor emeritus of health economics at Harvard Medical School, and other experts wrote in a September court filing opposing Merck’s lawsuit.
This forces payers like Medicare to pay “exorbitant prices,” he wrote. “The law now gives consumers a negotiating agent that has enough clout to counter the pharmaceutical monopolist in establishing a price.”
How the new law could affect drug prices
The price of those specialty drugs is a key focus of the Inflation Reduction Act, which Democrats passed in 2022 along party lines against universal GOP opposition. The act also also raised taxes on big corporations, authorized hundreds of billions of dollars in spending and tax credits to fight climate change, and extended health insurance subsidies.
The law authorized the secretary of the Department of Health and Human Services to negotiate prices directly with manufacturers of a relatively small number of prescription drugs covered by Medicare that do not face generic or biosimilar competition.
Under the law, the drugs subject to price negotiation are selected from a list of medications for which Medicare spends the most money, starting with 10 drugs in 2026 and growing each subsequent year. The selected drugs treat diabetes, blood clots, heart failure, psoriasis, and blood cancers, among other conditions.
To be eligible, the drugs must have been on the market for at least seven years.
The law also places a $2,000 cap on annual out-of-pocket prescription drug costs for Medicare beneficiaries starting in 2025 and requires companies to pay rebates if prices rise faster than inflation.
Among the first drugs subject to negotiation is Merck’s diabetes pill Januvia, which was first approved by the Food and Drug Administration in 2006. At least one patent remains in effect. Januvia helps people with type 2 diabetes control high blood sugar.
“Januvia has been absolutely wonderful for me,” said Tom Peterson, a retired teacher and tech executive from Quakertown. Peterson, 75, started taking the drug about six years ago after previous medications stopped being as effective.
But Peterson found his Medicare Advantage plan’s out-of-pocket costs so expensive that he buys a generic alternative manufactured in Europe. He gets the generic — approved by European regulators last year — through a Canadian pharmacy called Planet Drugs Direct.
Peterson paid $207.99 for his most recent 90-day supply. Januvia costs about 50% more through his insurance, he said.
“I can afford whatever is prescribed for me,” said Peterson, who ran unsuccessfully for state representative as a Democrat in 2008. “But as a matter of principle, why is Januvia protected by patent in the United States only? Why is Merck going to court to quash generics at this stage?”
The industry often notes that insurance companies and benefit managers also play a role in setting prices.
Januvia has generated an estimated $47.5 billion in total earnings since 2007, according to an analysis by Frank, the Harvard professor, and colleagues at the Brookings Institution, who reviewed Merck’s reported sales data, as well as studies on average research and development costs to bring a drug to market.
That shows there’s still ample incentive to invest in such blockbuster drugs, Frank said, because they aren’t eligible for price negotiation until they’ve already been on the market for several years.
Merck said in a statement that more than 90% of prospective drugs “do not make it anywhere near FDA approval, let alone commercial success” and that sometimes a single failed drug candidate can result in billions in lost investment dollars.
The company also pointed to research from economists at the University of Chicago who estimated that the law would result in reduced research and development investment in new drugs of $232 billion over 20 years. That research — funded in part by the industry — also projected there will be 79 fewer drugs. By contrast, the nonpartisan Congressional Budget Office estimated the law will result in 13 fewer drugs coming to market over the next 30 years — a period in which it expects 1,300 drugs to be approved.
Merck, based in Rahway, New Jersey, employs 69,000 people worldwide and reported $59 billion in total revenues last year.
Almost 900,000 Medicare Part D beneficiaries took Januvia last year, according to government data. The program spent an average of $4,631 per person on the drug, up 32% from 2018, according to HHS. Part D enrollees who weren’t eligible for an income-based subsidy paid an average of $502 in annual out-of-pocket costs for Januvia last year, HHS says. Those eligible for subsidies paid an average of $20.
Price negotiations will “put downward pressure on both Part D premiums and out-of-pocket drug costs,” according to health policy research nonprofit KFF.
Drug price negotiations are projected to save Medicare $98.5 billion by 2031, according to the Congressional Budget Office.
If the manufacturer does not agree to the proposed price, it can either divest its interest in the drug, withdraw all of its drugs from the Medicare and Medicaid markets — not just those subject to negotiation — or face a tax of up to 95% on its product’s Medicare sales. Failure to comply with the process also can also result in fines.
Merck says in court filings that’s not a real choice, since withdrawing from Medicare and Medicaid would mean losing access to 130 million Americans — nearly half the U.S. prescription drug market. And the company insists that the “negotiation” is really a sham process by which the government “uses coercive sanctions to seize discounted goods” at whatever price it selects.
The company says the law violates the Fifth Amendment’s requirement that the government pay just compensation if it takes private property. The law also violates the First Amendment’s protection against compelled speech because manufacturers are required to enter agreements saying the government’s prices are “fair,” Merck says.
Merck’s lawsuit is one of several filed by drug manufacturers and industry groups. A federal judge in Ohio in September denied a business group’s request to prevent the drug pricing program from taking effect while litigation plays out, saying that participation in Medicare is voluntary and that there isn’t a constitutional right to do business with the government.
Even if the government prevails, the law’s impact on Januvia may be limited.
Merck’s key U.S. patent for Januvia actually expired this past January. But the company anticipates it will retain its market exclusivity until at least May 2026 “as a result of favorable court rulings and settlement agreements” related to another patent Merck owns.
That patent — covering “certain phosphate salt and polymorphic forms” of the drug’s active ingredient, sitagliptin — doesn’t expire until 2027.
Merck has settled lawsuits with 26 companies that have tried to bring generics to market. Under those agreements, the rivals can bring their generic versions to market “in May 2026 or earlier under certain circumstances,” according to Merck. That’s the same year Medicare’s lower prices are set to take effect.
If a rival company were to demonstrate meaningful generic competition — as determined by the government — around that time period, Januvia would be removed from the list of negotiated drugs in January 2028, according to guidance issued by the Centers for Medicare and Medicaid Services. By that point, the thinking goes, the drug’s price would drop as a result of market competition.
Lobbying by drug companies
Outside the courtroom, lobbyists for Merck and other drug companies are trying to influence how the Biden administration implements the Inflation Reduction Act, according to federal disclosures. Merck said in its 2022 annual report that the law’s long-term implications “remain uncertain” and that the company “is working to mitigate the potentially harmful effects that the law could have on innovation.”
Analysts say drugmakers are hoping to expand existing exemptions to the law.
Pascal Soriot, CEO of AstraZeneca, which has a big presence in Wilmington, pointed to a provision of the law that exempts some drugs that treat rare diseases. He suggested it was too narrow.
“We accept that governments need to manage costs,” Soriot told reporters in November, according to industry publication Endpoints News. “But for rare diseases, we need to make sure there’s enough incentive for companies to continue to invest.”
Congressional Republicans have expressed interest in repealing the law’s drug pricing program, among other provisions. That outcome seems possible if the GOP wins control of Congress and the White House in the 2024 elections.
In recent election cycles Merck’s political action committee has favored Republicans at the federal level. Its PAC gave about $300,000 to GOP committees in the 2022 elections, more than twice what it gave Democrats, according to OpenSecrets.
Merck has also lobbied Congress on legislation that would authorize billions of dollars in incentives to pharmaceutical companies to develop medications for “superbugs,” among other issues.
Despite the industry’s setback last year, it still has plenty of allies in Washington. Dan Ziegler, one of the 60-plus outside lobbyists who have counted Merck as a client this year, recently joined GOP House Speaker Mike Johnson’s office as policy director.