Merck sues Biden administration over Medicare drug price negotiations

Global drugmaker Merck on Tuesday sued the Biden administration over Medicare's new powers to substantially reduce drug prices for seniors under the Inflation Reduction Act, the opening salvo in the pharmaceutical industry's efforts to weaken the program.

In a scathing complaint filed in federal court in Washington D.C., Merck excoriated the negotiation process as a "sham" and "tantamount to extortion."

The drugmaker accused the federal government of employing what the company described as an unconstitutional scheme to take private property for public use without just compensation in violation of the Fifth Amendment.

The Inflation Reduction Act, which became law last summer, was a major victory for President Joe Biden and Democrats in Congress, who have long pushed to empower Medicare to combat rising drug prices.

The pharmaceutical industry has fiercely opposed the law, arguing it will stifle new drug development.

Merck said the Department of Health and Human Services compels companies to enter into an agreement that effectively dictates the price of a drug at a 25% to 60% discount under threat of daily excise taxes that are several times higher than the medication's daily revenue.

Merck has asked a judge to block HHS from compelling the drugmaker to participate in the program.

"Under the IRA, the Government will requisition Merck's patented pharmaceutical products and transfer them to Medicare beneficiaries through forced sales," the company's legal team wrote in the complaint.

"Those forced sales—coerced by the threat of draconian penalties that the Government has admitted no manufacturer could ever rationally afford to pay—will deprive Merck of possession and title to its personal property," Merck's attorneys wrote.

Merck also argued in its lawsuit that Medicare's new powers to negotiate prices violate the company's free speech rights under the First Amendment. The drugmaker claimed the Inflation Reduction Act forces companies to participate in a "political deception" that presents the program as a negotiation for fair prices.

"Conscripting companies to legitimize government extortion is the sort of parroted orthodoxy that the First Amendment's compelled-speech doctrine forbids," Merck's attorneys wrote.

Under the Inflation Reduction Act, HHS will select 10 drugs to be drawn into a first round of price negotiations. Those drugs will be some that Medicare Part D spends the most money on and that have no generic competition.

Medicare Part D is the program that covers the cost of drugs that seniors typically pick up in pharmacies.

The Centers for Medicare and Medicaid Services will publish a list of which drugs were selected for the first cycle of negotiations on Sept. 1. The companies that make those drugs face an October deadline to sign agreements to participate in those negotiations.

Merck said its Type 2 diabetes drug Januvia will be subject to a negotiation agreement this year. The drugmaker booked $2.8 billion in revenue from that medication last year, according to financial filings.

Merck also anticipates its blockbuster cancer immunotherapy treatment Keytruda and its other diabetes drug Janumet will be subject to the program in subsequent negotiation cycles. The drugmaker booked $21 billion in sales from Keytruda in 2022 and $1.7 billion in sales from Janumet.

Keytruda represented 35% of Merck's total revenue last year.

CMS will send its initial price offer for the first round of price negotiations on Feb. 1, 2024, according to a timeline published by HHS. The drugmakers have 30 days to accept that price or submit a counteroffer, according to the department.

The negotiations end on Aug. 1, 2024, and CMS will publish a list of the reduced prices that September, according to the timeline. Those prices go into effect on Jan. 1, 2026, according to HHS.

The program will expand in subsequent years to Medicare Part B, which generally covers drugs and treatments that seniors cannot administer at home on their own.

CNBC has reached out to HHS and the White House for comment.