An inflection point comes for Pharmaceutical Companies

Rita McGrath
6 min readJan 29, 2024

The Inflation Reduction Act for the first time allowed Medicare and Medicaid to negotiate with drugmakers for pharmaceutical prices. It also contained a much less discussed provision regarding patent protections. The law sets different exemption times for “small molecule” drugs that can be taken in pill form and “large molecule” ones that have to be injected or infused. This has the potential to change the structure of incentives for the Pharma industry and not necessarily in a way that benefits patients.

The byzantine US market and pharmaceutical prices

It has been quite a while since George Merck in 1950 declared “We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we remember it, the larger they have been.” Today’s pharmaceutical companies bear little resemblance to the chemicals-based organizations on which the sector was originally founded. But the way in which drugmakers make money can be extremely convoluted to understand, particularly the way they make money in the United States, the world’s richest market.

In a normal market, providers offer a product or service and price it for the value it believes it represents to the customer. A customer either agrees or not and eventually in a successful transaction, prices are set that both sides can live with. Branded pharmaceuticals are a whole ‘nother thing. As I pointed out in an article on insulin, it is astonishing that a 100 year old product has seen prices rise steadily, to the point at which one study found that obtaining the life-saving drug was an extreme financial burden to the 14% of Americans who need it to stay alive.

Part of the reason this is possible is that drug companies are granted patents on treatments, essentially a temporary monopoly to let them recoup their R&D investments. Those temporary monopolies are very sweet, prompting lots of strategies to extend them through a variety of practices that have come under heavy criticism.

Drug pricing in America is the product of decades of convoluted dealmaking, beginning with the manufacturers, who argue that they need high prices to pay for the R&D that…

--

--

Rita McGrath

Columbia Business School Professor. Thinkers50 top 10 & #1 in strategy. Bestselling author of The End of Competitive Advantage & Seeing Around Corners.