More than 400 million euro is expected to be shaved off the State's bill for medications over the next three years.
Health Minister James Reilly said the new deal was struck during intensive negotiations involving the Irish Pharmaceutical Healthcare Association (IPHA) and the Health Service Executive.
The scheme will result in significant reductions for patients in the cost of drugs, as well as lower the drugs bill to the State and ease financial pressure on the health service.
The IPHA said the new supply agreement will ensure new medicines are made available to Irish patients.
David Gallagher, outgoing president who led the negotiations, said: "Medicines are a key pillar of any advanced health system and medical innovation has extended life expectancy through reducing illness and death.
"Many patients are in need of new advanced medicines in areas such as Alzheimer's disease, arthritis, cancer, stroke prevention, multiple sclerosis and cystic fibrosis."
The State pays out some 2 billion euro on drugs each year - with Dr Reilly heavily criticised for health spending overruns.
And his former junior minister, Roisin Shortall, whose shock resignation rocked the coalition Government last week, attacked Dr Reilly for not managing the HSE budget, in particular his failure to introduce measures to cut drug costs and boost payments from health insurers.
The deficit in the HSE stood at 374 million euro at the end of last month. However health chiefs said the new deal, combined with the IPHA agreement reached earlier this year, will result in 16 million euro in drug savings this year and up to 116 million euro by 2013.
Under the scheme, the price of medicines marketed by IPHA companies which are off-patent prior to November will be reduced to 50% of their original price with a year. Elsewhere the price of up to 400 patent protected products which have been available on the HSE Community Drug Schemes prior to 2006 will be subject to a price review and are expected to drop an average 16%.