Client Login

Sustainable Investment Profiles

A Corporate Ally in the Fight for Fair Drug Pricing?

While the Inflation Reduction Act (IRA) was rightly heralded as a landmark climate change bill, the legislation also included significant health care provisions. One such provision gave the U.S. Centers for Medicare and Medicaid Services (CMS) the unprecedented ability to negotiate prices for a limited number of high-cost drugs covered by Medicare. The first 10 drugs, it was recently announced, will be published by this September, with 50 more to follow over subsequent years. The drugs are widely expected to be chosen from a list of the 100 most expensive Medicare drugs, with some exceptions. New prices will phase in beginning in 2026.

Ramifications for the pharmaceutical industry could be significant. Various sources have identified a range of companies, including Merck, Johnson & Johnson, Bristol-Myers and Regeneron, that receive billions of dollars from Medicare for marquee drugs. In an analyst note from August 2022, Bank of America estimated that prices of the most expensive drugs chosen for negotiation might ultimately be reduced by 25%.

At least one of those companies may be well-prepared for price negotiations. Established in 1988, Regeneron and its co-founder, Leonard Shleifer, have since built a reputation for prioritizing fair drug pricing. On a panel discussion with other pharmaceutical leaders in late 2016, Shleifer put his views bluntly: “The real reason we’re not liked, in my opinion, is because we as an industry have used price increases to cover up the gaps in innovation.” In the same discussion, Shleifer reportedly told then-Pfizer CEO Ian Reed: “You’re not entitled to a fraction of GDP.”

In 2018, Regeneron backed up Shleifer’s comments by working with the Institute for Clinical and Economic Review (ICER), the leading drug pricing watchdog, to “responsibly price [its] innovative medicine in line with its clinical benefits.” In exchange for significantly lowering the price of cholestrol drug Praluent, Regeneron negotiated with Express Scripts to make it easier for patients to access the drug, along with guaranteeing exclusivity to Regeneron’s treatment. Steve Miller, CEO of Express Scripts, said of the pricing deal at the time: “We believe this can actually change the marketplace.”

Regeneron says its largest drug, Eylea, has not seen a price increase since its FDA approval in 2011, even though the company continues to spend on research and development for the drug. Another of the company’s top earners, Dupixent, is used to treat asmtha, excema, and other allergy-related conditions. Dupixent was priced based on consultation with ICER, as well as with payers and insurers. Similar to Praluent, industry watchers have expressed hope that the approach “could set a model for the pharmaceutical industry.”

Challenges with drug pricing have led some analysts to focus on the issue in investment research. Morningstar, for instance, incorporates ICER’s analysis into their pharma ratings, noting that drug pricing can increase ESG risks for companies. Based on Regeneron’s fair pricing approach, Morningstar’s analysis gives the company its highest score.

Along with drugs to treat macular (vision) degeneration, cancer, and arthritis, in response to the COVID-19 pandemic Regeneron developed a COVID treatment, REGEN-COV. That drug was approved by the FDA for emergency use in 2021, and subsequently recommended by the WHO.

Developing new drugs is expensive. A 2020 study published in the Journal of the American Medicine Association found a mean cost of nearly $1 billion to develop an FDA-approved therapeutic agent, with significantly higher costs in many cases. Other drugs never make it to market, sometimes despite high research costs. Despite the justifiable outcry over high drug prices, reconciling these massive investments with the need to make treatments affordable, both for individual patients and the health care system as a whole, is a difficult task.

We believe that Regeneron’s approach with Praluent and Dupixent strikes a sustainable balance between ensuring equitable access to life-changing treatments, and justifying the major investments made in drug research and development. The balance may serve the company well if it finds itself in negotiations with Medicare, as a result of the new provisions passed as part of the IRA. More importantly, fair pricing provides a major social benefit not only to the increased number of individuals with access to treatment, but to society as a whole, which is better able to bear the costs of caring for its members in need.