The Biden administration’s recent announcement of lower prices for the ten most expensive drugs covered by Medicare is likely to have significant implications for research and development, as investors are uncertain about the future of drug prices.

The Department of Health and Human Services on Thursday announced the first round of negotiated drug prices covered by Medicare, the first phase of implementing the key health provision of President Joe Biden’s Inflation Reduction Act of 2022. Inflation Reduction Act

HHS estimates that the first round of price negotiations for the 10 drugs covered by Medicare Part D would have saved $6 billion if those drugs had been sold at the new prices in 2023. The new so-called maximum fair prices, effective January 2026, were 38 to 79 percent lower than previous list prices. These new prices will take effect in January 2026.

Patient advocates and investors in small biotechnology companies have offered the strongest resistance to this particular pillar of Biden’s efforts to lower drug prices.

“There is evidence everywhere of the chilling effect that the Inflation Control Act is already having on the development of important medicines,” John Czwartacki, chairman of Survivors for Solutions, told the Washington Examiner“And yet a ruling class ignores the facts and proceeds without caution, endangering current and future Americans who are unfortunate enough to get sick. In other words, everyone.”

Czwartacki, who was diagnosed with multiple sclerosis 30 years ago, is a vocal critic of the Inflation Reduction Act’s prescription drug bargaining policy. He says government-mandated price caps for profitable drugs would discourage drug companies from investing money in experimental drugs.

Although it is difficult to estimate the cost of foregone research, a University of Chicago study estimated that the drug price negotiation program could reduce research and development investments by $663 billion by 2039, resulting in up to 135 new drugs not making it to market.

John Stanford, executive director of the biomedical lobby group Incubate, told the Washington Examiner that work on no fewer than 26 novel drugs in development has been halted since the passage of the Inflation Reduction Act in 202222.

Other experts question whether the savings are really that great given the overall cost of prescription drugs and health care in general.

Michael Cannon, director of health policy studies at the Cato Institute, told the Washington Examiner that the total savings for the program from this round of negotiations amount to less than 1% of Medicare’s total budget, which was nearly $1.01 trillion for 2023, according to the Congressional Budget Office.

“This is a welcome step, but only a small step in the right direction, and one that highlights just how terrible the government’s price negotiations in general and the Medicare program in particular really are,” Cannon said.

Cannon said it was “indisputable” that research and development spending would fall as a result of the price cuts. But he said that despite the loss of new drugs, the government could spend the funds on projects that would have a greater impact in other areas of society.

Stanford said the greatest impact would be felt on the most innovative research, meaning fewer groundbreaking products would come to market.

“I think the supporters of the Inflation Control Act have to say that they think it is better for the system to afford the drugs we have now than to develop new drugs,” Stanford told the Washington Examiner“That’s a perfectly valid opinion, but you can’t have everything and eat everything at the same time.”

Most new drugs for rare diseases or those that use innovative treatment technologies are developed in small biomedical companies backed by venture capital. Typically, these small companies have only one or two drugs in their portfolio, which, if successful in the early stages, are acquired by larger companies such as Merck, Johnson & Johnson and others.

While larger pharmaceutical companies can absorb profit losses on some of their products and make up for losses on other drugs in their portfolio, small biotechnology companies where breakthrough innovations take place do not have this cushion.

But larger pharmaceutical companies are also interested in innovations.

A spokesman for Novo Nordisk told Washington Examiner The Danish giant has “concerns about the impact of the law on patients and future drug development.”

“Since our founding, Novo Nordisk has been committed to developing innovative medicines, putting patient access, affordability and improved health outcomes above profit,” the Novo spokesperson said. “While we are still evaluating the impact of the (Inflation Reduction Act), we remain committed to our long-standing commitment to driving change to defeat diabetes and other serious chronic diseases.”

Stanford said investors in biomedical companies would wait until the next round of drug price negotiations next year to assess the true long-term impact of the policy program.

The next drug program could include the new class of obesity and weight loss drugs called GLP-1 drugs, which include Novo’s Ozempic and Wegovy and Eli Lilly’s Mounjaro and Zepbound.

“Next year, when a GLP-1 potentially comes to market, that’s when the real fireworks will happen,” Stanford said.

In July, Biden and Senator Bernie Sanders (I-VT) co-authored an opinion piece pointing out that Democrats in Congress are working on legislation to expand the drug price negotiation program from a maximum of 20 drugs per year to 50 drugs by 2028, as required by the Inflation Reduction Act.

The announcement of the drug prices comes against the backdrop of rising healthcare costs remaining a key issue in the 2024 election cycle.

Larry Levitt of the health policy research firm KFF said in a press release that Vice President Kamala Harris would use the announcement as a “major political victory over the pharmaceutical industry in the election campaign” and would give the Harris camp concrete numbers to campaign on.

“There are ways that price negotiations under Medicare could have failed. The government might not have been able to achieve price savings compared to the current system. Companies could have walked away from the negotiating table and pulled their drugs. Those things didn’t happen,” Levitt said.

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Pharmaceutical companies that do not participate in the drug price negotiation program must either remove their drugs from the Medicare and Medicaid markets entirely or face a 95% excise tax.

Several pharmaceutical companies, including Merck, Johnson & Johnson and Novo Nordisk, have filed suit against HHS challenging the constitutionality of the Inflation Control Act. So far, none of the lawsuits have been successful in the lower courts.