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Chee Siong Teh
Major pharmaceutical companies ended the week in green even as Medicare unveiled the first ten drugs targeted for the initial round of pricing negotiations on Tuesday, a move that could weaken their long-held bargaining power in the federal health insurance program.
Blockbuster therapies from Bristol Myers (NYSE:BMY), Pfizer (NYSE:PFE), Eli Lilly (LLY), AbbVie (NYSE:ABBV), Johnson & Johnson (NYSE:JNJ), Bayer (OTCPK:BAYZF), AstraZeneca (AZN), Novartis (NVS), Merck (MRK), Amgen (AMGN), and Novo Nordisk (NVO) were part of the list.
However, VanEck Pharmaceutical ETF (PPH), which represents many of the targeted drugmakers, remained flat with a slight gain for the week as investors shrugged off a significant industry impact from upcoming negotiations, a provision introduced with last year’s Inflation Reduction Act (IRA).
According to the Biden administration, the drugs in the list, used to treat multiple conditions ranging from heart diseases to cancer, accounted for $50.5B, or about 20%, of total Medicare Part D spending for the 12 months ending May 31, 2023.
UBS analysts led by Colin Bristow argued that most of the drugs Medicare targeted were in line with their expectations and those of Wall Street. While the announcement marked a pivotal moment in implementing the IRA, “the potential impact of IRA is still being analyzed by companies/ investors,” the team added.
However, the drug industry trade group Pharmaceutical Research and Manufacturers of America (PhRMA) criticized the move, which leads to revised drug prices for the Medicare Part D program in 2026.
“Today’s announcement is the result of a rushed process focused on short-term political gain rather than what is best for patients,” PhRMA said after CMS publicized the list.
“Many of the medicines selected for price setting already have significant rebates and discounts due to the robust private market negotiation that occurs in the Part D program today.” PhRMA and companies such as Merck (MRK) and Bristol Myers (BMY) have already brought legal challenges to the program.
“The cancer moonshot will not succeed if this administration continues to dismantle the innovation rocket we need to get there,” the organization added, referring to a cancer-fighting initiative President Biden announced in 2022.
BTIG analyst Justin Zelin agreed. However, despite concerns about IRA’s impact on biopharma innovation, Zelin sees no major industry headwind because some of the drugs selected for negotiations are nearing their loss of exclusivity (LOE) dates.
“We view the initial drugs selected as less of a headwind to the industry as may have been feared, or anticipated, as the impact to tail revenues for drugs with only a few years of exclusivity may be minimal,” Zelin added.
According to him, JNJ, which has the highest exposure to pricing negotiations with three drugs on the list, will have minimal impact as its targeted products, which indicate an average age of 14 years, are nearing the end of LOEs.
With Medicare prepared to adjust the prices based on generic or biosimilar entry in the U.S., Leerink Partners also shrugged off concerns, arguing that negotiated prices will only be valid for a year before Medicare unveils a new list for 2027.
JPMorgan’s Chris Schott added that even other targeted drugs were not critical for the companies’ financial performance.
Schott does not expect the update to have a “meaningful impact” on the firm’s estimates, as those drugs make up a rather small contribution to the companies’ earnings per share (EPS) and revenue.
Meanwhile, Goldman Sachs argued that the persisting uncertainty related to pricing negotiations was a reason for the muted stock reaction. The firm notes that Medicare’s initial offer of maximum fair prices, expected to be announced by February, will be the more impactful event to watch.
More on Medicare pricing negotiations
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