Impacts of the U.S. IRA on licenses and collaborations

Hogan Lovells

Hogan Lovells

This is an article in our 2023 series, “Life Sciences Transactional Insights”, which aims to provide key practical takeaways for our transactional colleagues by anticipating the needs of their regulatory, intellectual property, and business stakeholders.

The Inflation Reduction Act of 2022 (IRA) includes a number of provisions relevant for drug pricing and reimbursement, including the Drug Price Negotiation Program (Price Negotiation Program), which seeks to lower the prices of certain Medicare high spend drugs by subjecting them to a “maximum fair price” (MFP). The net effect of this new Price Negotiation Program is that with certain exceptions, a commercially successful product may face price controls prior to entry of any generics or biosimilars for such product.

Our team has previously outlined these provisions here and here. As biopharmaceutical companies assess the impact of the Price Negotiation Program on their business strategy, they have primarily focused their attention on pipeline valuation and product development. Companies and their collaboration partners would be wise to take into account the impact that the Price Negotiation Program may have on their existing agreements, and to draft future agreements in a manner that equips them to mitigate the IRA’s impact on their product portfolio. Below, we highlight a number of transactional considerations licensors and licensees should take into account in view of the potential application of the MFP.

Product development rights

The IRA incentivizes a pivot away from the traditional strategy of developing a single lead molecule for multiple indications, and instead favors developing backup molecules or fixed-dose combinations for each new indication, as a drug developer may be able to treat each separate molecule and fixed-dose combination as a distinct product for purposes of determining the product’s eligibility for the Price Negotiation Program. As a result, the inclusion of backup compounds and fixed-dose combination products in collaborations can increase the overall value of the collaboration to both licensors and licensees by mitigating the risks that the Price Negotiation Program would apply to further developed indications. Licensees seeking to in-license specific compounds or products across multiple indications should consider, where appropriate, including backup molecules and fixed-dose combinations within the scope of their licensed rights. And for their part, licensors that are amenable to expanding the scope of the license beyond a specific compound or product will want to not only encourage development of such backup molecules and fixed-dose combinations, but also include appropriate financial terms to compensate them for the increased value generated through the availability of these additional products.

Commercial launch strategy

A product’s commercial launch strategy will always play a critical role in determining that product’s success. Given that the Price Negotiation Program clock starts with FDA’s approval of a product’s first indication, a product’s commercial launch strategy has taken on even greater importance. The product must be ready for a strong launch in the U.S. on day one after the first FDA approval in order to maximize the product’s time on the market before it becomes subject to the MFP. Accordingly, a licensor should consider seeking stronger launch commitments beyond the customary obligation to use commercially reasonable efforts to commercialize the product. For example, licensors may want to include commitments around when launch will occur as well as the amount and types of resources to be applied as of the launch date and for a period of time thereafter. While licensees are similarly incentivized to conduct a strong launch to maximize their own profits, licensors may want to propose specific service level commitments or bonuses associated with satisfying metrics that correlate to a successful launch. While licensees will still otherwise retain flexibility over their commercialization strategy, where the license is global, licensees may want to consider launching initially outside the U.S. to optimize marketing, manufacturing and distribution channels to help advance a smooth and strong U.S. launch.

Diligence commitments

Sophisticated parties recognize the benefits of defining what constitutes “commercially reasonable efforts” (CRE) in an agreement. In a post-IRA world, those efforts should reflect the impact of the IRA on the parties’ development and commercialization obligations. While profitability is generally included as a factor in the definition, licensees may want to expressly note that the MFP is a specific factor to be taken into account as part of the definition, and that their obligation to use CRE to commercialize a product may decrease once the product becomes subject to an MFP. As discussed above, licensors will want to avoid the use of CRE or any other qualifiers that would weaken the licensee’s obligation to launch promptly in the US after approval. And, depending upon the scope of the license, licensors should consider requiring licensees to use CRE to develop backup molecules or fixed-dose combinations for additional indications instead of the same molecule used to achieve the initial approval, potentially tying bonuses or economic remedies to the commercialization of (or the failure to commercialize) such additional indications.

Royalty adjustments

Financial terms, and in particular, royalty obligations, are rigorously negotiated, though it is common for parties to use the expiry of the last patent or regulatory exclusivity as a step-down (or termination) point for their royalty obligations. With the MFP likely rivaling the financial impact of a product’s loss of exclusivity, these customary benchmarks may no longer make sense. Licensees may prefer to treat implementation of the MFP as akin to a loss of exclusivity, with a corresponding royalty rate step-down or royalty termination. While licensors may be reluctant to agree to such treatment of the MFP, they may be amenable to treating the MFP the same as a compulsory license, with royalties still payable but subject to a different and mutually agreed upon royalty rate, with an appropriate dispute resolution mechanism to address any disagreements. The parties should also consider modifying the definition of net sales to avoid double-counting the MFP in royalty calculations and to address treatment of potentially multiple fixed-dose combination products. In all events, forward-looking parties should take into account the potential impact of the MFP in the financial modeling and payment structures underlying their agreements.

Out-licensing considerations

Biopharmaceutical manufacturers that have traditionally developed and commercialized products themselves may want to start analyzing the benefits of out-licensing specific indications or formulations of their products to minimize the risk of having all forms of a product in all indications treated as a single product for purposes of determining eligibility for the Price Negotiation Program. Companies may also want to reevaluate their positions on appropriate licensing arrangements between branded companies and generics to take advantage of exemptions from the MFP for products for which a generic or biosimilar is commercially available. Further information and analysis are needed in order to determine whether and to what extent any of these out-licensing strategies may be effective in mitigating the MFP-associated risk, but as long as the strategies are potentially viable, companies would benefit from taking a flexible position regarding licensing opportunities.

Next steps

While many uncertainties remain in its implementation, it is clear that the IRA will significantly impact biopharmaceutical companies’ development and commercialization strategies and resulting collaborations. By building in mechanisms to enable the parties to appropriately manage the impact of the MFP, lawyers and other professionals structuring license and collaboration agreements can promote the long-term success of those collaborations.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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