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The Medicare price negotiation: a problem and an opportunity for the generics industry

This autumn, the U.S. Secretary of Health and Human Services (HHS) has finally begun negotiating prices for 10 Medicare Part D drugs as part of the provisions included in the 2022 Inflation Reduction Act (IRA). From our perspective, this is a much-overdue change to make the U.S. drug supply system more patient-centric. Changes are certainly intimidating, especially when working with tight margins as is often the case in the generics industry. Yet, we have the unique opportunity to create a win-win formula that stimulates drug discovery, keeps a steady drug supply, and creates a more financially sustainable generics industry.


The industry resistance to the pricing negotiation is justified


The Medicare drug pricing negotiation is the most significant action affecting pharmaceutical pricing over twenty years. The IRA provisions stipulate that the new prices of the selected drugs must decrease by at least 25%. This price change spells disaster for many generics manufacturers. Generic drugs usually launch at a bigger discount than branded options, and usually reach even lower prices over time.


We are in a race to the bottom pricing system, and this price negotiation has made it evident. This is nothing new, as the COVID-19 era, the inflation crisis, and current drug shortages have proven that we do not have a sustainable industry. Thus, the resistance to negotiation is understandable, as even seemingly small geopolitical issues (such as the Suez Canal blockage) can wreak havoc on the production and finances of small pharmaceutical producers.


As negotiations begin, it is time to reformulate how the U.S. generics industry approaches production, pricing, and delivery.


We have the best chance in decades to revamp the supply system


The negotiation process shows a shift in political will to discuss the manufacturing issues of the pharmaceutical industry. This is something that has not happened in 20 years. We have the pressure of a deadline to push changes that would take decades to happen otherwise.


“Although drug companies are attempting to block Medicare from being able to negotiate for better drug prices, we will not be deterred. The Biden-Harris Administration will continue working to ensure that Americans with Medicare have access to innovative, life-saving treatments at lower costs.”, said HHS Secretary Xavier Becerra.


Despite some of them having open cases against the negotiation, all ten manufacturers chosen for the first round of the negotiations have agreed to attend. Thus, we need to keep an eye on these talks and be more vocal about the need to protect the generics industry, especially at the regulatory level.


Changing the way the pharmaceutical industry approaches the production of generic formulations does not require reinventing the wheel. We already have an in-depth report by the Association for Accessible Medicines (AAM) on drug shortages with very interesting policy ideas. Thus, the industry needs to leverage the favorable political will and push for legislation in the upcoming years that encourages the use of new generics and biosimilars as well as offer lower prices for existing brand-name formulations.


Ideally, hospitals should be incentivized to purchase generic drug supplies at predictable, fixed-price multi-year contracts. This would be a game-changer for manufacturers that often have to make tough calls on what should be produced and when. The AAM also suggests amending the 340B program to exempt low-cost generics or adjust the ceiling price required, which would protect the slim margins we often see in the generics industry.


Finally, throughout the negotiation, it would be great to ensure that the resulting decisions do not contribute to drug shortages by discouraging applications of new generic formulations or blocking the approval of generic alternatives to brand-name drugs. This is the time, more than ever, in which we should be vocal about the regulations well before they go into effect. That being said, the political power of smaller producers might be limited. What is not limited is the power that every company has to change internally.


Changes are inevitably coming, so preparation is key


Instead of waiting around for the results in law†suits, effective regulations, and pricing agreements, pharmaceutical manufacturers need to prepare by building new income sources and creating more streamlined supply chains. A manufacturer that has depended on one or two popular products (which might be affected by pricing changes) needs to review its commercial planning. A producer working with tight margins needs to start going beyond borders to find reliable suppliers and laboratories that offer top quality at fair prices.


At the J. Molner Company, we know that these changes create more stable production because we have helped companies to do it before. We know that sturdier companies can exist because we have seen the benefits of capitalizing on what they own. We know that stable supply chains are possible, because we have helped others find top collaborators and mitigate disruptions.


The first round of negotiations is set to end on June 28, 2024, with the written offer for the maximum fair price being sent to the manufacturers before July 15, 2025. The suppliers must either accept or reject this pricing offer by July 31, 2024. This pricing negotiation is either a challenge or an opportunity for generic producers. Why should we wait for the chips to fall? Why not change the way we work now? Yes, it will be hard. Yes, it will require a lot of work. But if rain is coming (and this sure looks like a storm), maybe it is time to make an umbrella.


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