Executive Summary
- What’s new: The U.S. administration’s most-favored-nation (MFN) drug pricing initiative intends to align U.S. drug prices with those in comparable developed nations through executive orders, voluntary manufacturer agreements and proposed Medicare and Medicaid pilots. This has important implications for companies with ex-U.S. licensing arrangements.
- Why it matters: The MFN framework raises new strategic considerations for life sciences companies that intend to sell drugs in the U.S., but also have existing or prospective ex-U.S. licensing arrangements, because MFN proposals tie U.S. prices to the lowest price offered in economically comparable markets.1
- What to do next: Affected companies should monitor rulemaking progress and related legal challenges to MFN proposals, review existing licensing agreements with counsel and consider whether renegotiation or restructuring of commercial relationships may be warranted.
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The current U.S. administration’s most-favored-nation (MFN) drug pricing initiative raises numerous legal questions for life sciences companies that intend to sell drugs in the U.S. and abroad. While the legal foundation of the MFN framework remains contested and its ultimate implementation uncertain, there are already practical implications for members of the life sciences industry with existing or prospective ex-U.S. licensing arrangements with countries that have been identified as economically comparable to the U.S., especially when the licensing arrangements allow for commercialization activities that are separate and apart from those in the U.S.
The Traditional Ex-US Licensing Model
Life sciences companies that do not have a global foothold often rely on licensing arrangements to monetize commercialization rights outside the U.S., especially for Europe because European Medicines Agency approval often closely follows approval by the U.S. Food and Drug Administration. For small and midsized biotechnology companies in particular, the ability to monetize regional rights is often more cost-effective than building expensive international commercial infrastructure independently, and out-licensing has served as a critical financing mechanism, providing upfront cash flow to sustain operations, fund clinical development programs and support research and commercialization activities.
Midsized drug developers have historically focused their spending on the U.S. market — which is the source of 70% of a drug’s value on average — while out-licensing rights in the European Union, Japan and other regions. The consideration payable under those licensing arrangements is then often used to fund domestic commercial launches or other research and development. According to IQVIA’s Pharma Deals analysis, licensing deal flow remained robust in H1 2025, with the aggregate potential total deal value of all licensing deals reaching $92.9 billion. And EY estimates that about 56% of licensing deals originate in the U.S., with 17% of those companies licensing development rights in the EU. Meanwhile, 17% of all licensing deals involve Asian companies, with 5% of those deals involving Asian life sciences companies licensing EU development rights.
Under out-licensing arrangements where European or other ex-U.S. rights are granted to a drug, the licensee often assumes responsibility for regulatory submissions, health technology assessment (HTA) negotiations and pricing discussions with national or regional authorities. In Europe, most patients are covered by public health systems that closely control pricing by limiting access to the market and negotiating directly with life sciences manufacturers. In this way, the European pricing framework starkly contrasts with the U.S. market, where pharmaceutical manufacturers negotiate prices separately with multiple private insurers, pharmacy benefit managers and hospital systems. This difference has not historically been problematic for licensing deals, and companies benefitted from having local partners that understood the unique dynamics of the market.
The MFN Pricing Proposal
On May 12, 2025, President Trump signed an executive order, “Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients,” directing federal agencies to take steps to align U.S. drug prices with those in comparable developed nations. The policy’s stated aim is to ensure that the United States does not subsidize global research and development costs or allow manufacturers to offer lower prices in other countries. To date, seventeen major pharmaceutical companies have entered into voluntary agreements with the administration pursuant to this executive order.
The Centers for Medicare and Medicaid Services (CMS) have advanced the regulatory implementation of MFN through proposed pilot programs, including the GUARD Model (Guarding U.S. Medicare Against Rising Drug Costs) for Medicare Part D, the GLOBE Model (Global Benchmark for Efficient Drug Pricing) for Medicare Part B and the GENEROUS Model (“GENErating cost Reductions fOr U.S. Medicaid”) for Medicaid. Under the proposed GUARD Model, CMS would benchmark U.S. drug prices against those in economically comparable countries, including most EU member states, the U.K., Japan, Canada and Australia, and require life sciences companies to pay Medicare rebates if prices of their products exceed international benchmarks.
The GUARD Model, which impacts drugs reimbursed under Medicare Part D, would require extensive administrative processes before implementation, including finalization of the proposed rule following review of public comments, identification of covered drugs and establishment of operational systems. All these activities could extend the implementation timeline well beyond mid-2027, when CMS claims the model may be implemented. Additionally, the administration’s legal authority to implement MFN pricing remains uncertain and legally contestable. The pharmaceutical industry, through organizations such as the Pharmaceutical Research and Manufacturers of America (PhRMA) and the Biotechnology Innovation Organization (BIO), has voiced substantial legal and policy objections to the proposed regulatory framework. These objections span statutory interpretation, constitutional law, administrative law and economic impact, and industry observers expect that any final rule would face immediate and robust legal challenge.
Furthermore, on April 2, 2026, the White House announced the results of a Section 232 tariff investigation for pharmaceutical companies, potentially imposing a 100% tariff on certain manufacturers that have not agreed to pricing concessions, including the MFN framework. (For more information, see our June 1, 2026, alert “Deadline Approaching for Companies Seeking Onshoring Deals to Reduce Section 232 Pharmaceutical Tariffs.”) This, combined with the GLOBE, GUARD and GENEROUS pilot programs, has made the specter of a formal MFN policy more concrete.
A May 2026 “Savings From Most-Favored-Nation (MFN) Drug Pricing Policy” report from the White House Council of Economic Advisers provides an even clearer picture of the administration’s goals for voluntary MFN agreements with manufacturers. The report describes a multi-pillar framework for voluntary MFN agreements that includes: (i) making existing drugs available to state Medicaid programs at MFN prices; (ii) discounted prices for drugs offered in the direct-to-consumer channel, TrumpRx.gov; (iii) Medicare coverage expansion for anti-obesity GLP-1 medications; and (iv) prospective MFN agreements, under which manufacturers would commit to launching all future drug products at prices comparable to those in reference countries across all U.S. market segments. Estimates predict the prospective MFN provision would generate up to $529 billion in domestic savings over the next 10 years, whereas MFN arrangements for existing drugs is estimated to save $64.3 billion.
MFN’s Impact on Cross-Border Licensing Arrangements
In the current environment, business arrangements under which a company that intends to commercialize a product in the U.S. by transferring pricing decision authority to an ex-U.S. partner may require rethinking. In this scenario, licensors typically cede authority over ex-U.S. pricing decisions as part of licensing arrangements in which the other party will be responsible for commercialization in other territories.
For example, a licensee that only has rights to distribute in the EU and has discretion over pricing may determine that its best commercial strategy is a “normal” EU pricing approach with no adjustment to accommodate the changing U.S. regulatory environment. But a “normal” EU pricing strategy is likely to yield much lower prices than what might be available on the U.S. market. If the MFN proposals become a reality, lack of control over EU pricing decisions could result in much lower pricing in the U.S. because the current MFN proposals tie the U.S. price to the lowest price offered for the same drug in an economically comparable market.
As a result, and with approximately 70% of a drug’s value derived from the U.S. market on average, many companies may now be unwilling to risk that revenue stream by putting ex-U.S. pricing decisions solely in the hands of a third-party licensee. Consequently, where the ability to generate revenue from ex-U.S. markets through licensing partnerships was once considered a huge commercial benefit, companies that previously planned to out-license rights are now reconsidering these deals entirely.
In cases where the licensing arrangements were inked before the administration announced its MFN pricing proposals, the situation is much more difficult to resolve and may lead to conflict. The Biotechnology Innovation Organization noted in public comments on the proposed CMS models that many licensing agreements were executed years or even decades before MFN policies were contemplated. For companies that have already entered into licensing agreements with partners outside the U.S., the proposed MFN framework may cause a significant misalignment in economic incentives.
Some companies are seeking to renegotiate consideration, pricing constraints (to the extent permitted under law) and rights related to marketing and launch sequencing to preserve flexibility to avoid MFN implications in the face of regulatory uncertainty. Others may seek to “buy back” the rights that were granted in the license, but this may come at a premium if the licensee entered at an earlier stage and the drug has successfully progressed through developmental or regulatory hurdles.
Licensors often cede control over ex-U.S. pricing due to both commercial and regulatory imperatives; vertical price coordination is highly regulated in some regions, and life sciences companies are highly attuned to the demands of competition and antitrust authorities. In this arrangement, a licensor might lack visibility into their partners’ price negotiations.
Vertical coordination between companies with respect to pricing of goods and services in general, and drugs in particular, is a matter of interest for regulators in many jurisdictions. Licensors and licensees alike should consider the extent to which applicable antitrust and competition law limits the ability of the licensor to participate in, or have visibility into, the pricing activities undertaken by the licensee.
These considerations are important when interpreting the pricing terms in license agreements, because courts and tribunals may be reluctant to read contractual terms in a way that would put those terms at odds with applicable regulations. This introduces an independent concern because, in many jurisdictions, parties may not be able to contract around certain regulations, even if companies purport to do so.
Preparing for Potential Disputes
Given the significant sums at stake in the pricing of a promising new drug, companies in licensing relationships that split the U.S. rights from the rights in the EU and other economically comparable countries should consider the possibility that the impact of MFN policies on the licensor’s global pricing strategy may lead to disputes, and prepare accordingly.
Because of the prevalence of companies that commercialize their products in the U.S., along with market considerations in the life sciences field, many licensing arrangements are subject to U.S. law and must be resolved in a U.S. forum, but this is by no means universal. Additionally, many modern international agreements in the pharmaceutical industry include agreements to arbitrate disputes rather than submit them to the courts of any country.
Experienced international litigation and arbitration counsel can assist affected companies in the review of their licensing agreements to understand how courts or arbitrators in the relevant jurisdictions are likely to interpret their agreements, including provisions affecting pricing and commercialization and any provisions that require the parties to take into account changed circumstances. The applicable law and forum can have a significant impact on the outcome of potential disputes.
Conclusion
To properly prepare to address these issues as they arise, companies will want to stay abreast of the regulatory landscape and the rulemaking progress. Monitoring development of the U.S. administration’s rulemaking efforts and any related legal challenges is essential to more accurately assess the risk life sciences companies face in their pricing decisions and relationships. Also, this monitoring will allow companies to look ahead to how their counterparties may behave in the future as the landscape shifts beneath them.
Life sciences companies with new drugs in the pipeline and plans for worldwide commercialization now have decisions to make about their global distribution strategies in light of the potential impact of MFN pricing regulations in the U.S. Life sciences companies that are ready to take a drug to market may even stop making their drugs broadly available in certain countries outside the U.S. to avoid MFN pricing. Where the timing is right and it is commercially viable to do so, taking a wait-and-see approach may be preferable, watching as rulemaking continues, potential challenges materialize and U.S. policies evolve when the administration changes in 2029.
While the ultimate regulatory outcome of the proposed MFN pricing scheme in the U.S. remains uncertain, for some life sciences companies, exposure to MFN-related risks creates new strategic considerations. For parties who suddenly find themselves navigating a new, uncertain pricing scheme, renegotiation or restructuring of commercial relationships may be warranted (though these restructurings, if unsuccessful, may then generate disputes). The interplay between U.S. drug pricing policy and international licensing practices will require close coordination between regulatory, commercial and dispute resolution counsel.
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1 The focus of most MFN policies is comparing U.S. prices to those in countries that are members of the Organisation for Economic Co-operation and Development (OECD). OECD membership is predominantly European countries as well as the European Union, but also includes Australia and countries in larger Asian markets such as South Korea and Japan.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.