US-policy-made challenges for the bio-pharma sector

The Inflation Reduction Act (IRA), signed into law in 2022, included the DPNP (Medicare Drug Price Negotiation Program) and features that are called the “pill penalty,” which means allowing small-molecule drugs to have price controls after nine years on the market, in contrast to biological drugs that have price control only after 13 years. IRA and its Medicare Drug Price Negotiation Program (DPNP) are already affecting life sciences investment decisions, especially for small-molecule programmes. There is some limited hope that Congress will end the so-called “pill penalty,” as there are active legislative proposals and political pressure to fix it, but as of today, no repeal has passed.

The programme is in operation, and CMS (Centres for Medicare & Medicaid Services) is running rounds of negotiations. CMS has published guidance, completed rounds of selections, and begun negotiations; negotiated prices from early rounds will take effect in 2027, and CMS is planning additional rounds (including Part B drugs).
The IRA gives biologics a longer statutory period before they become eligible for negotiation; this difference is the “pill penalty” in practice. Because small-molecule drugs make up a large share of prescriptions and often depend on predictable pricing over a commercial run, investors worry that earlier negotiation exposure lowers expected returns on small-molecule programmes — shifting preference towards biologics, platform plays, or indications less exposed to Medicare Part D spend.

Industry and investors signal: the “pill penalty” is changing behaviour. Many investors see the shorter pre-negotiation protection for small molecules as a disincentive to fund small-molecule development or they prioritise larger indications.

The European industry will also be affected, as the IRA may change investor risk/return expectations. Because the IRA reduces future U.S. price tails for selected drugs, investors are pricing greater downside for programmes likely to sell into Medicare Part D/B. That makes some small-molecule or commodity-type plays (and early, higher-risk single-asset start-ups) relatively less attractive by comparison.

Impactful uncertainty
It may also shift deal-making and licensing terms. US pricing uncertainty may push sponsors to renegotiate licensing milestones, royalties, and upfronts; some US partners may demand different commercial protections. US companies and investors may be more cautious in cross-border licensing, which affects European biotech exits and partnerships.

It may also affect commercial strategies like price alignment and geographic tactics. Global pharma firms are reconsidering how they price products across regions to avoid creating arbitrage or political backlash. Some companies have signalled price increases in Europe or paused investments because of cross-border pricing pressure and U.S. policy rhetoric.

So, who in Europe could be most exposed? These are companies whose commercial value depends heavily on large U.S. Part D/Part B sales (e.g., top-selling small-molecule or specialty drugs). It may affect early-stage single-asset biotechs that need blockbuster pricing assumptions to justify valuations. It may also affect firms relying on U.S. licensing deals or U.S. commercialisation partners (because deal terms may be harder to negotiate).

Another development that is an obstacle to innovators concerns the Orange Book listing. On 21 May 2025, the Federal Trade Commission (FTC) issued its third round of warning letters against pharmaceutical manufacturers for allegedly improper listing of patents in the Food and Drug Administration’s (FDA) Orange Book, applying pressure on branded pharmaceutical companies. While most companies whose patents have been challenged have not delisted them, believing they are properly listed, some have complied with the FTC’s requests. In response to the FTC campaign, the FDA has promised to provide updated guidance on complying with the Orange Book. FTC officials hope that the removal of purportedly improper listings will make it easier for generic competitors to enter the market. In any event, it seems that device components and drug-device combination patents do not justify Orange Book listing. There are some uncertainties about what is listable when it comes to patents covering a drug component. The Teva vs. Amarin case and FTC policy are ambiguous: do they allow OB listing only of patents that expressly state the API in the claims, or of any patent that “claims” (i.e., covers or reads on) the API? A practical rule of thumb is that patents must claim the active ingredient to be listable; any broader “reads-on” position remains weak. In any case, we think that these FTC challenges weaken the Hatch-Waxman system and favour earlier generic entry onto the U.S. market.

Pharma facing pricing 9/11
Further, the current administration plans to implement a “Most Favoured Nation” (MFN) policy. The policy would tie Medicare drug prices to the lowest prices paid by other countries. Albeit MFN/global benchmarking and price alignment pressures are active policy directions, exact impacts are not yet fixed. According to scenario analyses, drug prices in the US could fall an estimated 30% to 80%, or they could rise substantially abroad. U.S. Medicare would only pay what the lowest comparable country pays for a given drug. This could lower U.S. drug spending. There is pushback from the industry. Pharma companies argue it disincentivises innovation, especially for small molecules and rare-disease drugs. It could also cause global repercussions, as it could encourage companies to raise prices abroad to avoid lowering the U.S. benchmark.

Tax on innovation
Last, but not least, the current administration discusses a new Trump-Lutnick patent tax. Howard Lutnick and his Commerce Department team are discussing a tax of between 1% and 5% of overall patent value annually, a shift that could dramatically increase costs for certain patent holders while making the US an international anomaly among major patent systems. The report led to market drops, particularly in the biotech sector. It is completely unclear how the patent value shall be calculated at all, and whether it would concern all US patents or all patents of a patentee based in the USA. In any case, it would dramatically increase fees to shore up revenue to pay for the government’s budget deficit. More than 30 conservative organisations sent a letter to Commerce Secretary Howard Lutnick on Tuesday rejecting the Trump administration‘s reported plan to impose a new patent tax.

As with most of these developments, it is not entirely clear how they will ultimately be implemented. It seems, however, clear that this administration puts enormous pressure and challenges on the innovative pharma and biotech industry and favours early generic entry.

We have seen the same political will – to favour generic entry – in the initial proposal of the EU Pharmaceutical Regulation. Albeit the EU Commission alleges that “the aim of the pharma package is to better meet patient needs, boost Europe’s competitiveness and support innovation,” it is clear that the initial proposal favoured earlier generic entry. In their Draft Pharmaceutical Regulation, the EU Commission has, for example, proposed to considerably shorten the so-called ‘data protection period’ – the time during which the innovators have exclusive rights to their data from pre-clinical tests and clinical trials. Once this period ends, other companies are allowed to access the data to produce generics. Moreover, other measures – like the SPC manufacturing waiver, the pre-grant opposition period for SPCs, the new proposal for compulsory licences – are all in favour of generic entry. After considerable pushback from industry, it seems that some of the hardships for innovators have been eased. It still remains to be seen how and when the EU Pharma Package will be implemented.

Worst scenario for the US
Hopefully, European pharma and biotech companies will be able to manage these challenges and perhaps even derive some benefit from those changes that the U.S. administration plans to implement. While European pharma and biotech will feel the impact, these measures will hit the United States the hardest. The U.S. is not only being overtaken by China but could also lag behind  Europe if European companies act decisively.

This article from Dr Ute Kilger, Partner, Boehmert & Boehmert, was originally published in European Biotechnology Magazine Autumn 2025.