The generic drug market in the United States is a critical component of the healthcare system, providing cost-effective alternatives to brand-name medications and contributing to significant savings for both patients and the healthcare system. The Inflation Reduction Act (IRA)1 of 2022 introduces several provisions aimed at reducing drug prices and expanding access to medications. Among the potential consequences of the IRA, these provisions could have significant impacts on generic manufacturers.

Current Generic US Landscape

Generics account for approximately 90%2 of all prescriptions dispensed, although they represent a lower percentage (12%)3 of total drug spending due to their lower prices. The use of generic drugs has saved the US healthcare system nearly $338 billion in 2020 alone.2 Generics are major tools to control cost and increase access to drugs.

Generic drug manufacturers are experiencing increasing demand but also increasing pricing pressure from continued consolidation of buyers (wholesale buying consortia, PBMs and GPOs) that gain leverage to lower prices. They also face increasing competition from new companies within the US and abroad, further decreasing prices. These market pressures have resulted in many manufacturers electing not to launch generics even after an ANDA has been approved by the FDA. Lastly, as prices fall over time with increased competition, manufacturers are deciding to stop the manufacture of products that have become unprofitable. This can lead to insufficient market supply and drug shortages.4  

Generic manufacturers consider various factors prior to entering the market including market need, timing of regulatory submissions to ensure alignment with brand drug patent expirations, and the size of the financial opportunity (projected drug price and market share). Being first to market under the Hatch Waxman Act of 1984 provides a 180-day period of exclusivity5, during which time there is no competition, price remains elevated and market share is gained. When a single generic is on the market, the generic average manufacturer price (AMP) falls 39%. When 2 generics are on the market, the generic AMP falls to 54%. Generic prices continue to fall as the number of generic products on the market increases until 6 or more generics enter the market at which point the generic AMP falls by 95%.6

Branded drugs with high prices and high-volume sales prior to expiration attract a greater number of generic manufacturers. A threshold percentage of market share is needed to support revenue targets of the generic manufacturer.

Components of the IRA

The main objectives of the IRA are to lower cost and increase access to prescription drugs for Medicare beneficiaries and to reduce government costs. The main components of the IRA that allow CMS to execute on these objectives are7:

  • CMS Drug Price Negotiation: CMS is authorized to negotiate maximum fair prices (MFPs) for certain high-expenditure, single-source drugs, and biological products covered by Medicare. The process targets drugs without imminent generic or biosimilar competition.
  • Part D Redesign: Changes to the Part D benefit that will occur over 2 years beginning in 2024 and be fully implemented for the 2026 plan year. Changes include removing the enrollee 5% financial responsibility in the catastrophic phase, capping annual out-of-pocket (OOP) costs for beneficiaries for brand drugs at $2,000 annually, and eliminating the coverage gap and shifting more cost-sharing responsibility from Medicare to insurance plans and manufacturers. Products subject to MFPs will be exempt from manufacturer cost sharing in the Part D benefit.

Impact of the IRA on Generic Manufacturers

CMS will negotiate brand drug pricing with manufacturers for selected drugs and assign a maximum fair price (MFP). The reduction in brand drug price by CMS reduces the price the generic manufacture can set for their drug. Reduced price differentials can lead to lower revenue for generic manufacturers, potentially deterring investment in new products, (Figure 1).  If fewer generic products enter the market, there will be less competition and the full cost savings potential of generics may not be realized.

Under the IRA there may be less incentive for brand manufacturers to invest in additional indications for FDA approved drugs. CMS has the ability to negotiate drug prices for small molecules that have been on the market for 9 or more years, whereas FDA approval of a new indication generally occurs within 7-8 years prior to a generic launch. This limits the time to recoup investment cost for new indications. In reaction to the loss of revenue in the years post negotiation, brand manufacturers are likely to scale back clinical development programs since patent extensions for new indications will not delay CMS negotiations.8

Fewer new indications will reduce market share of branded products, making it financially challenging to develop and launch new generics. If fewer generics enter the market, price reductions may be limited.

CMS drug price negotiation reduces incentives for brand manufacturers to invest in small molecules due to the reduced value of patents. Small molecule drugs can be selected for negotiation 7 years post FDA approval, whereas biologics are afforded a longer runway on the market (11 years) before becoming eligible for negotiation. To navigate price pressures, brand manufacturers are likely to focus on research and development (R&D) for developing biologic drugs for complex conditions with higher price points and less competition, offering better returns on investment. Pharmaceutical manufacturers have been shifting development away from small molecules toward biologics for quite some time, and this trend may intensify under the IRA.9

As a result, fewer small molecule drugs may be developed over time, leading to fewer generics entering the market. Greater competition among generic manufacturers will lead to further consolidation within the industry. Ultimately, fewer generic companies chasing fewer generic development opportunities will erode the current cost savings realized from the industry today.

Currently, when a new generic comes to market, it takes a long time, approximately 3 years, before it is covered on over 50% of Medicare plans.2 Payers are incentivized to cover the reference brand product that delivers rebates.

Despite the assumption that CMS drug negotiation will lower brand drug prices, the IRA as it is currently written does not restrict payers from preferring highly rebated high-cost brands over lower cost brands and generics. In fact, payers have publicly stated they expect brand manufacturers to continue to offer rebates to maintain formulary preference over new to market generics. They will continue to be incentivized to prefer high-cost drugs that offer rebates over lower cost products, further reducing brand net prices.10 Payers may place generics and biosimilars on higher tiers with higher copayments, making them more expensive for patients.

The impact of IRA drug negotiations will not be limited to MFP negotiated drugs. A lower price on the selected drug will incentivize payers to negotiate lower prices for all related products in the same or similar therapeutic class. In addition, it is common for payers to align their commercial and Part D formularies. Payers have indicated that they will use published MFPs as a baseline for negotiations across their commercial business as well as Medicare to offset increased liabilities under Part D redesign.

The IRA will have far reaching effects on generics, both in development and pricing. All branded drugs in the same class as an MFP drug will have prices impacted by the IRA on both commercial and Medicare benefits. New generics within these therapeutic classes will need to launch at prices low enough to incentivize payers to cover them while still maintaining profitability.

Unintended Consequences

The IRA has a disproportionate effect on small molecules, which will be subject to CMS price negotiations after just 9 years on the market and have the largest effect on new generic entry. The IRA will impact a functioning generic market that is delivering significant cost savings with government price setting. This is occurring on the most successful brand products that represent the most significant revenue opportunities for the generic industry. Today, multiple generics entering the market drive prices lower. If fewer generics are incentivized to enter the market, cost savings realized by our healthcare system may be reduced.


  1. Text – H.R.5376 – 117th Congress (2021-2022): Inflation Reduction Act of 2022. (2022, August 16)., accessed on June 28, 2024.
  2. The U.S. Generic & biosimilar medicines savings report. September 2023. AAM-2023-Generic-Biosimilar-Medicines-Savings-Report-web.pdf (, accessed on June 28, 2024.
  3. Long, D. 2023-2024 Health Care and Pharmaceutical Marketplace Trends (April 2024) IQVIA.
  4. KPMG Generics 2030: Three strategies to curb the downward spiral. Generics 2030 (, accessed ono June 28, 2024.
  5. FDA. Hatch-Waxman Letters. February 3, 2022. Hatch-Waxman Letters | FDA, accessed on June 28, 2024.
  6. FDA. Generic Competition and Drug Prices: New Evidence Linking Greater Generic Competition and Lower Generic Drug Prices. December 2019. Accessed on June 28, 2024.
  7. Cubanski J. Explaining the Prescription Drug Provisions in the Inflation Reduction Act. KFF January 24, 2023., accessed on June 28, 2024.
  8. O’Brien JM, et al. How The IRA Could Delay Pharmaceutical Launches, Reduce Indications, And Chill Evidence Generation. Health Affairs, November 3, 2023. How The IRA Could Delay Pharmaceutical Launches, Reduce Indications, And Chill Evidence Generation | Health Affairs, accessed on June 28, 2024.
  9. Cohen, J.  Inflation Reduction Act Favors Biologics Over Small Molecules: In The Long Term, This Could Partly Undermine Bill’s Effort To Contain Costs. Forbes, January 15, 2023  Inflation Reduction Act Favors Biologics Over Small Molecules: In The Long Term, This Could Partly Undermine Bill’s Effort To Contain Costs (, accessed on June 28, 2024.
  10. Fein A. Surprise! Thanks to the IRA, Part D Plans Will Prefer High-List, High-Rebate Drugs. Drug Channels. Drug Channels: Surprise! Thanks to the IRA, Part D Plans Will Prefer High-List, High-Rebate Drugs, accessed on June 28, 2024