Royalty Reductions Are Becoming More Expansive

The established triggers are approaching ubiquity. In the trailing 12 months, generic entry appeared in 100% of royalty-bearing deals (up from 63%), third-party IP payments in 95% (up from 77%), and patent expiration in 95% (up from 67%). Loss of regulatory exclusivity, still the least common reduction trigger we track, climbed from 15% to 26%. The direction is consistent across the board: licensees are negotiating for more ways to decrease royalties, and licensors are conceding such reductions in more deals.¹

The biggest shift is in the “Other” category — driven largely by government pricing. Reductions tied to “other” events rose from 44% to 74% of deals, the largest increase we observed. In recent deals, this category increasingly captures government-pricing, reimbursement, or similar policy-driven events that can compress a product’s realized net price independent of either party’s performance. Two US pricing developments are especially relevant: Medicare price negotiation under the Inflation Reduction Act (IRA) and most-favored-nation (MFN) pricing activity.

• IRA: The IRA authorizes CMS (Centers for Medicare & Medicaid Services) to negotiate a “maximum fair price” for selected high-spend, single-source Medicare Part B and Part D drugs once they have been approved or licensed for the applicable statutory period, which is generally seven years for small molecule drugs and 11 years for biologics. Negotiated prices for the first selected drugs take effect in 2026, with additional cycles following.²
• MFN: A May 2025 White House executive order established the Trump administration’s position that it will seek to move US drug prices closer to the lower prices paid in other developed countries. CMS has since issued three implementing vehicles: the voluntary GENEROUS (GENErating cost Reductions for U.S. Medicaid) Model for Medicaid drugs (enrollment opened January 1, 2026), and the proposed GLOBE (Global Benchmark for Efficient Drug Pricing) Model (Medicare Part B) and GUARD (Guarding U.S. Medicare Against Rising Drug Costs) Model (Medicare Part D), published on December 23, 2025, as mandatory MFN payment models for certain categories of drugs, with final rules currently pending Office of Management and Budget (OMB) review as of late June 2026. If finalized as proposed, GLOBE and GUARD would impose mandatory rebates on a randomly selected 25% sample of Medicare beneficiaries, with proposed effective dates of October 1, 2026, and January 1, 2027, respectively. Unlike the IRA, which operates through the Medicare Drug Price Negotiation Program and excludes drugs already subject to negotiation, these MFN vehicles reach Medicaid drugs and non-negotiation-eligible Medicare drugs. But the policy is still developing: its practical effect will depend on future agency action, manufacturer participation, and potential legal challenges.³

Because these regimes and policy initiatives can reduce, or are intended to reduce, a product’s realized US price independent of the parties’ conduct, licensees increasingly are seeking royalty reductions that engage when a government-mandated or government-influenced price takes effect. Licensors, in turn, are endeavoring to narrow these triggers — defining the qualifying event precisely, tying any reduction to a demonstrable revenue impact, and adding floors or caps so a policy initiative does not silently erode back-end economics.

What This Means for Dealmakers

For licensors, more of the downside risk of policy-driven price erosion is migrating to the number of permitted reductions. The protection is in the drafting: how the qualifying event is defined, how the reduction is measured, whether the reduction is tied to actual net sales impact, and whether a floor applies. For licensees, government-pricing reductions are becoming a standard ask, but their breadth and mechanics remain negotiable. The central question is no longer only whether the agreement includes traditional reductions for generic entry, patent expiration, or third-party IP payments. It is increasingly whether the agreement also accounts for price erosion caused by government-mandated or government-influenced pricing regimes. With IRA cycles expanding and MFN-related policy activity continuing, we expect these triggers to keep gaining ground in the deals we see.