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Impact of the price negotiation on U.S pharmaceutical and biotechnology firms: Evidence from the 2022 Inflation Reduction Act

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  • Fu, Yuling
  • Ran, Yu

Abstract

This study examines how the Inflation Reduction Act (IRA) of 2022, a landmark policy introducing Medicare’s first direct drug price negotiations, has affected firm performance and innovation investment in the U.S. pharmaceutical and biotechnology sectors, with particular attention to the mediating role of profitability. Using quarterly Compustat data from 2015–2025 and a difference-in-differences with two-way fixed effect design, the empirical results reveal a significant negative impact of the IRA on return on equity (ROE) and R&D intensity. Mediation analysis further shows that the decline in R&D intensity operates through reductions in free cash flow and gross margins, indicating that cash flow and profitability pressures directly translate into weaker innovation spending. These findings provide empirical evidence that the IRA reduces both firms’ financial performance and R&D investment and further demonstrates that the policy operates through cash flow and profitability channels, thereby clarifying the mechanisms linking price regulation to weaker innovation capacity.

Suggested Citation

  • Fu, Yuling & Ran, Yu, 2025. "Impact of the price negotiation on U.S pharmaceutical and biotechnology firms: Evidence from the 2022 Inflation Reduction Act," Finance Research Letters, Elsevier, vol. 86(PD).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pd:s1544612325018549
    DOI: 10.1016/j.frl.2025.108600
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