Pharma giant Merck sued President Joe Biden's administration Tuesday, saying a new law that compels drugmakers to negotiate the prices of their biggest products is "tantamount to extortion." The legal battle could have long-term implications for pharmaceutical stocks.
Merck filed the complaint in U.S. District Court. It takes aim at elements of the Inflation Reduction Act — signed into law last year — that will allow Medicare to negotiate the prices of the 10 costliest drugs for seniors. Further, the list of drugs drawn into negotiations will grow in subsequent years.
One biopharma expert recently said the process will be akin to negotiating with the mob. And Merck seemingly doesn't disagree with that. Merck called the negotiation a "sham" that forces drugmakers to sell their patent-protected products at a 25% to 60% discount.
"This is not a 'negotiation'," Merck said in its complaint. "It is tantamount to extortion."
On today's stock market, Merck stock dipped 2.7% to close at 110.01. Investor's Business Daily's pharmaceutical stocks industry group also fell more than 1%.
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Merck claims the Medicare-focused elements of the new law violate the First and Fifth Amendments of the Constitution. The Fifth Amendment requires the government to pay "just compensation" if it takes "property" for public use, Merck said in its complaint.
"Yet, the singular purpose of this scheme is for Medicare to obtain prescription drugs without paying fair market value," the company's attorneys wrote. "The IRA wields the threat of crippling penalties to force manufacturers to transfer their patented pharmaceutical products to Medicare beneficiaries, for public use."
They also claim the IRA's mechanism for doing this "makes a mockery of the First Amendment." The "facade" of negotiations amounts to "political deception," according to the complaint.
Companies and investors in pharmaceutical stocks won't know which products Medicare will target in the first round of negotiations until Sept. 1. But Merck expects its diabetes blockbuster drug Januvia to be on the first list. It also expects another diabetes medication, Janumet, and cancer drug Keytruda to be roped into negotiations in later years.
Last year, Januvia and Janumet generated a combined $4.5 billion in sales. Keytruda, Merck's bread-and-butter cancer drug, brought in $20.9 billion in sales, accounting for 35% of total revenue.
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
