Big pharma is taking a swing at derailing a new federal program that will allow Medicare to negotiate the prices of certain prescription drugs, which is expected to save the federal government $25 billion a year by 2031.
In a lawsuit filed in federal court on Tuesday, the drugmaker Merck (ticker: MRK) said that the Medicare price-negotiation program is unconstitutional, and asked the courts to overturn it.
“This is not ‘negotiation,’” Merck wrote in the civil complaint filed with the U.S. District Court for the District of Columbia. “It is tantamount to extortion. And it violates the Constitution.”
The complaint names as defendants the U.S. Department of Health & Human Services, its secretary Xavier Becerra, the Centers for Medicare and Medicaid Services, and its administrator, Chiquita Brooks-LaSure.
“We’ll vigorously defend the President’s drug price negotiation law, which is already lowering health care costs for seniors and people with disabilities,” Becerra said in a statement. “The law is on our side.”
In a seperate statement, White House press secretary Karine Jean-Pierre said that the pharmaceutical industry had worked for years to block Medicare drug price negotiations. “We are confident we will succeed in the courts: there is nothing in the Constitution that prevents Medicare from negotiating lower drug prices,” Jean-Pierre said.
Merck and its attorneys will have a hard time convincing the courts to overturn the law, according to Robin Feldman, a professor of law at UC Law. “If the state can decide what it is willing to spend on a pencil or a desk, why not for prescription drugs?” Feldman wrote in an email to Barron’s.
Still, Feldman said that she expects the case to go to the Supreme Court. “Key issues in this area of law are undecided,” she wrote.
Investors have been wary of big pharma so far this year, in part due to concern that negotiations with Medicare over prices will hurt profitability. The S&P 500 Pharmaceuticals Industry Index has fallen 4.1% this year, while the broader
S&P 500
is up 11%. The Tuesday filing is a step in what could be a broader campaign by drugmakers to show investors that the drug price negotiations aren’t a fait accompli.
“The move from MRK will likely not be the last we hear on this topic,” wrote Jared Holz, a healthcare equity strategist at Mizuho, in a Tuesday email to investors. “Investors will warm up to the idea of owning Pharma names if there is some degree of optimism any of the government objectives may be walked back or modified.”
In its complaint, Merck argues that aspects of the price negotiations violate the First and Fifth Amendments. Merck says that the law violates Fifth Amendment ban on private property being “taken for public use, without just compensation.”
“The singular purpose of this scheme is for Medicare to obtain prescription drugs without paying fair market value,” Merck claims.
The company also says that the law violates prohibitions against compelled speech stemming from the First Amendment, by forcing companies to say they have agreed to the negotiated prices. Merck says that the prices would in fact be set unilaterally by the government.
“This lawsuit is a desperate attempt by the industry to beat back popular legislation that would curtail Big Pharma’s ability to price gouge Medicare and secure monopoly profits,” said Robert Weissman, president of the consumer advocacy group Public Citizen, in a Tuesday statement.
The drug-price negotiation program, which President Joe Biden signed into law last summer as part of the broader Inflation Reduction Act, will allow Medicare to negotiate the prices of certain drugs beginning in 2026. Medicare is the largest buyer of prescription drugs in the U. S: In 2019, it spent $145 billion buying prescription drugs through its Part D program, which pays for most prescriptions; and $37 billion on drugs through its Part B program, which pays for drugs administered by doctors, according to the Kaiser Family Foundation.
Medicare has been explicitly barred from negotiating over prices with drug companies since 2003. The Department of Veterans Affairs, which isn’t barred from negotiating, pays about half as much for many drugs.
Pharmaceutical companies have been highly critical of the legislation, saying it will discourage drug development. Last month,
Novartis
CEO Vas Narasimhan, who is currently chair of the drug industry lobbying group PhRMA, told Barron’s that the IRA is the industry’s “number one policy issue” in Washington. Narasimhan told Barron’s at the time that Novartis had recently dropped some early-stage cancer drugs from its pipeline because the price negotiations would make them no longer worthwhile.
Much of the early criticism of the negotiations has been over a provision that delays negotiations longer for the more complex drugs known as biologics than for the pills known as small molecules. While some small molecules will be eligible for Medicare price negotiations after nine years, biologics won’t be eligible for 13 years.
“It could have the impact to discourage people from small molecule development,”
Gilead Sciences
(GILD) CEO Daniel O’Day told Barron’s in January.
Merck’s lawsuit asks the court for an injunction to stop implementation of the law, says that the court should deems aspects of the law unconstitutional, and that the court should keep the federal agencies from enforcing the law’s unconstitutional aspects.
“Because this statute unlawfully impairs our core purpose of engaging in innovative research that saves and improves lives, Merck intends to litigate this matter all the way to the U.S. Supreme Court if necessary,” the company said in a statement on Tuesday.
CMS said earlier this year that it will announce the 10 first Medicare Part D drugs to be subject to negotiated prices in September. The prices for those drugs will be announced in 2024, and go into effect in 2026.
Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com
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