Big Pharma’s Battle With the Biden Administration Could Have Legs

Investors haven’t been taking pharma’s legal effort against President Biden’s drug pricing policy too seriously: When Merck became the first of several entities to sue the U.S. government this summer, its stock was among the worst large-cap laggards that day.

But as the industry unleashes a torrent of legal action in federal courts across the country—with Novartis NVS 0.92%increase; green up pointing triangle becoming the latest company to join the fray—investors should be paying closer attention as surprises could be in store.

While the eight lawsuits filed so far are all different, many of them invoke constitutional rights like the First Amendment’s freedom of speech, the Fifth Amendment’s takings clause and the Eighth Amendment’s excessive fines clause to argue that the law allowing Medicare to negotiate drug prices is unconstitutional. Rather than giving the Centers for Medicare and Medicaid Services the power to negotiate, the industry argues, the Inflation Reduction Act will effectively create price controls that force the industry to sell its drugs at unfair prices set by Medicare, or else pay excessive fines.

It could take years, but the legal crusade seems designed to eventually end up with the Supreme Court, experts say.

The lawsuits could also have an impact sooner. Drug companies and their allies are trying to stop the implementation of the law in its tracks, and any delay could be worth hundreds of millions of dollars for companies like Johnson & Johnson JNJ 1.31%increase; green up pointing triangle, Bristol-Myers BMY -0.02%decrease; red down pointing triangle, and Amgen AMGN 0.88%increase; green up pointing triangle, whose products have been selected for price negotiations. Bristol-Myers’s blood thinner Eliquis (shared with Pfizer PFE -0.91%decrease; red down pointing triangle), which was among the first 10 drugs selected for price negotiations, brought in $11.8 billion in revenues in 2022, or 26% of Bristol-Myers’s total sales.

For now, with most of the cases assigned to Democratic-appointed judges, all eyes are on the U.S. Chamber of Commerce lawsuit in Ohio, which has been assigned to Judge Michael Newman, a member of the conservative Federalist Society who was appointed by former President Donald Trump in 2020. The chamber is asking the judge to stop the program from moving forward and a decision could come as soon as this fall.

There is a high bar for obtaining an injunction because a plaintiff needs to show there would be irreparable harm if the process were to continue, said Carmel Shachar, assistant clinical professor at Harvard Law. “Often times the point of an injunction is to say, ‘If we let the status quo continue, there’s no coming back from this,’ ” she said. Allowing negotiations to start doesn’t necessarily cause irreparable harm, she noted. But as the process unfolds, especially once Medicare publishes the price for the 10 selected drugs next year, the chances of a judge putting a stop to the process could grow, says Chris Meekins, a Washington analyst at Raymond James.

More broadly, while legal experts say each of the individual lawsuits faces an uphill battle, the industry’s approach of throwing spaghetti against the wall does mean something could stick. While so far the only two cases assigned to Republican-appointed judges are the Ohio lawsuit and a lawsuit filed by AstraZeneca AZN -2.37%decrease; red down pointing triangle in Delaware, the most risky case from Biden’s perspective could be the lawsuit filed by the industry lobbying group Pharmaceutical Research and Manufacturers of America in the Western District of Texas. While a Democratic-appointed judge has been assigned to that case, an appeal there would land in the conservative-leaning fifth circuit. The chances of an industry win in that appellate court would be high, Meekins says.

Harvard’s Shachar ultimately thinks the law has a good chance of surviving, but she notes that in an era where courts have shown growing skepticism toward administrative agency action anything is possible. She says the industry argument that the government is unfairly taking their property, which is protected by patents, will be looked at seriously by some courts. Biden’s drug-pricing effort has put pressure on the pharmaceutical industry, with the NYSE Arca Pharmaceutical Index underperforming the S&P 500 by more than 10% so far this year. Any surprises in the legal realm could provide a boost to the industry.


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