The Inflation Reduction Act, passed in August 2022, allows HHS to directly negotiate Medicare drug prices with pharmaceutical manufacturers. This will financially hurt manufacturers, who rely on high prices to offset the steep costs associated with developing novel therapies. Cancer drug manufacturers are especially vulnerable, as cancer drugs make up a substantial portion of overall Medicare drug spending.

In response, cancer drug manufacturers will have lower financial incentives to develop new cancer therapies, and cancer drug innovation will come to a halt.

Based on current spending data, only two Part D cancer drugs and four Part B cancer drugs will be eligible for negotiation in the initial applicability year, or the first year that negotiated prices will be used (2026 for Part D, 2028 for Part B). This finding holds across time, with only thirteen more drugs potentially eligible by 2032.

The drugs at risk of negotiation are manufactured by major pharmaceutical companies and represent a small fraction of their oncology portfolios. Since Medicare payments make up only a portion of the revenue these drugs generate, major oncology revenue losses from drug price negotiation will be limited, even under an aggressive negotiation scenario.

As a result, the financial incentives to develop new cancer drugs will remain. Rather than halting innovation entirely, manufacturers will instead refocus investments toward classes and indications that will be ineligible or less impacted by Medicare drug price negotiation in the future and make changes to market access strategies.

Initial negotiation-eligible cancer drugs

We applied the criteria outlined in the Inflation Reduction Act to CMS’ most recent Oncology Care Model Initiating Therapies List to determine which oncology drugs could be eligible for Medicare drug price negotiation in the initial applicability year. The first applicability year is 2026 for Part D or 2028 for Part B. To be eligible for negotiation, the criteria stipulate that a drug must:

• Be among the top 50 Part D drugs or top 50 Part B drugs in terms of Medicare spending
• Have been available on the market for greater than seven years (small molecules) or 11 years (biologics) at the time it is chosen for negotiation—September 1, 2023 for Part D or February 1, 2026 for Part B
• Have at least $200 million in Medicare spending
• Have no generic or biosimilar competition
• Be approved for at least one indication for which it did not receive orphan drug designation
• Not be a plasma-derived biological product
• Not be manufactured by a small biotech company

To make our determinations, we used Medicare drug spending data from 2020, the most recent year available.

Initial impact on cancer drug manufacturers

We used data from annual investor reports to model the impact of Medicare drug price negotiation on each affected manufacturer’s total oncology revenue for 2020. To model the effect of negotiations, we analyzed this impact under a conservative and aggressive negotiation scenario.

We set the conservative scenario to the maximum fair price allowed by the policy: 40-75% of the non-Federal average manufacturer price, depending on how long the drug has been on the market. We set the aggressive scenario to 20% below the maximum fair price.

Finally, we applied these discounted prices to revenue generated by Medicare spending on negotiation-eligible cancer drugs in 2020, leaving non-Medicare revenue for these drugs and revenue from other oncology drugs constant.

Future negotiation-eligible cancer drugs

While ten drugs will be negotiated in 2026, this number will rise to 120 by 2032. Over this time period, changes in drug prices and utilization will affect which drugs are eligible for negotiation in the future.

To account for this unpredictability, we expanded our analysis by:

• Including the top 150 Part D drugs and top 150 Part B drugs
• Ignoring the $200 million Medicare spending minimum

Taking a more comprehensive approach identified the largest possible number of cancer drugs that may be negotiated over the next decade.

Initial impact of Medicare drug price negotiation will be minimal

At first, only six cancer drugs will be eligible for negotiation

Of 214 Part D cancer drugs and 95 Part B cancer drugs currently on the market, only two Part D cancer drugs and four Part B cancer drugs will be eligible for Medicare drug price negotiation in the initial applicability year.

Just because these cancer drugs could be selected doesn’t mean HHS will select them for negotiation. In fact, the law indicates HHS will select drugs in order of Medicare expenditure, meaning only Ibrance, Keytruda, and Opdivo are likely to be selected initially.

It’s also worth noting that each of the Part B drugs listed above is expected to lose patent exclusivity by 2028. The entry (or expected entry) of a biosimilar could preclude HHS from selecting these drugs for negotiation.

Two manufacturers have a significant portion of oncology revenue at risk

Only four of the more than 75 cancer drug manufacturers with U.S. sales make cancer drugs that will initially be eligible for negotiation. These manufacturers are all top global pharmaceutical companies with oncology portfolios that span beyond the drugs at risk of negotiation, shown in the table below. As a result, these companies are well-positioned to weather a potential decrease in Medicare revenue due to negotiation. However, their ability to do so will depend on the impact of negotiation on their total oncology revenue.

To assess the impact of negotiation on these manufacturers’ total oncology revenue, we applied a conservative and aggressive negotiation scenario to their total 2020 oncology revenue. We found that for two of these manufacturers, only a small portion of their oncology revenue would be in jeopardy if their drugs were selected for negotiation. However, the other two manufacturers have greater than five percent of their oncology revenue at risk. While most cancer drug manufacturers won’t feel any effect from Medicare negotiation, these two will likely need to make significant strategic changes to minimize the impact to their oncology business.

Few cancer drugs will be eligible for negotiation in the next decade

Our analysis only yielded an additional four Part D cancer drugs and two Part B cancer drugs that could become eligible for negotiation by 2032. Similar to the analysis of initial year eligibility, nearly all of the affected manufacturers are top global pharmaceutical companies with broad oncology portfolios. Many of these drugs will also lose exclusivity before their earliest possible negotiation year, making it more likely that they become ineligible for price negotiation.

Another seven Part B cancer drugs could become eligible for negotiation if Medicare spending on them exceeds the threshold of $200 million (plus inflation). For three of these drugs (grayed out below), Medicare expenditures would need to more than double, making eligibility unlikely.

Some of these manufacturers may see a decrease in Medicare revenue, but the overall impact on their total oncology revenue is unlikely to halt their development of new oncology drugs in the future.

Pharmaceutical growth strategies will evolve in response to the Inflation Reduction Act

Instead of halting innovation, cancer drug manufacturers may reconsider their investment strategies to align with the incentives created in the Inflation Reduction Act, such as by:

• Refocusing pipelines
• Optimizing exclusivity strategy
• Altering label expansion strategy
• Reevaluating M&A strategy

Refocusing pipelines

To minimize the impacts of Medicare negotiation, cancer drug manufacturers may focus investments on rare indications or indications that skew toward younger (non-Medicare) populations. They may also prioritize biologics over small molecules, since biologics have more time to generate revenue before becoming eligible for negotiation, or on developing novel therapies over “me-too” drugs.

Optimizing exclusivity strategy

Cancer drug manufacturers may optimize their strategy around patent exclusivity to encourage generic or biosimilar competition. The market entry of these competitors would prevent their reference products from becoming eligible for negotiation.

Altering label expansion strategy

There is speculation that risk of Medicare drug price negotiation will reduce the number of cancer drugs that are expanded to new indications. While expanding a drug’s indications might put it at greater risk for negotiation, the potential revenue growth from treating more Medicare and non-Medicare patients may outweigh any decrease in Medicare revenue. In addition, with each new indication approval, a drug’s price can be renegotiated, giving the manufacturer the opportunity to make a stronger case for the drug’s value. Rather than limiting indication expansion, cancer drug manufacturers may decide to change the order of the indications they pursue to reach the largest possible patient populations before their drugs become eligible for negotiation.

Reevaluating M&A strategy

If manufacturers refocus pipelines to minimize risk of negotiation or diversify pipelines to limit the impact of one drug being selected negotiation, we could see M&A activity speed up. But if manufacturers become more wary of investing in potential “blockbusters,” the opposite could occur. This is something industry stakeholders should keep an eye on in the coming years.

In preparation for the Inflation Reduction Act to take effect, cancer drug manufacturers will be required to dedicate significant resources toward assessing the new market landscape and evaluating potential paths forward. Their decisions will play out over years as they adjust investments accordingly.

While oncology-related innovation will continue, Medicare drug price negotiation will have widespread impacts across the industry. Here’s how oncology stakeholders can prepare.

Life sciences companies

• When investing in a new drug candidate, evaluate the potential for negotiation eligibility and the factors HHS will assess during a future drug price negotiation—for example, whether the federal government financially supported the drug’s discovery or development and whether the drug will address an unmet medical need.
• Explore licensing agreements with generic and biosimilar manufacturers to generate new revenue streams and prevent drugs from being negotiated in the future.
• Consider leveraging real-world evidence to make a stronger case for your cancer drug’s comparative effectiveness and better control the value narrative.

Providers

• Estimate how patient demand will increase as selected Part B cancer drugs become more affordable and identify and reduce any roadblocks to patient access.
• Forecast how Medicare drug price negotiation will influence cancer drug reimbursement and infusion center revenue. Then work with payers in your market to determine how these changes will impact your performance under risk-based contracts.

Health plans

• Revisit cancer drug reimbursement policies and expect manufacturers to use more aggressive negotiation tactics in order to offset losses in the Medicare market.

Pharmacies

• Understand that while lower prices may reduce revenue per order, pharmacies need to prepare for more orders as prescriptions for oral cancer drugs become more affordable.