About a year ago, President Joe Biden signed the Inflation Reduction Act into law. Among the many things that law achieved was to give Medicare, for the first time, the ability to directly negotiate the prices it pays for some of the single-source drugs that it spends the most on each year.
Recently, the Centers for Medicare and Medicaid Services (CMS) published a list of the first 10 drugs that will be subject to price negotiations. The prices that come out of those talks are scheduled to take effect in 2026.
Before you start selling off your pharma stocks in a panic, have a look at what investors can expect from these negotiations in the years to come.
|Drug Name||Drugmaker(s)||Commonly Treated Conditions||Gross Cost to Medicare Part D (June 2022-May 2023)|
|Bristol Myers Squibb(NYSE: BMY) and Pfizer(NYSE: PFE)||Blood clots||$16.48 billion|
|Jardiance||Eli Lilly(NYSE: LLY) and Boehringer Ingelheim||Diabetes||$7.06 billion|
|Xarelto||Johnson & Johnson(NYSE: JNJ) and Bayer(OTC: BAYR.Y)||Blood clots||$6.03 billion|
|Januvia||Merck(NYSE: MRK)||Diabetes||$4.09 billion|
|Farxiga||AstraZeneca(NASDAQ: AZN)||Diabetes||$3.27 billion|
|Entresto||Novartis ||Heart failure||$2.88 billion|
|Imbruvica||AbbVie(NYSE: ABBV) and Johnson & Johnson||Blood cancer||$2.66 billion|
|Stelara||Johnson & Johnson||Psoriasis||$2.64 billion|
|Fiasp, Novolog||Novo Nordisk ||Diabetes||$2.58 billion|
Bristol Myers Squibb, Pfizer, and AstraZeneca
By February, CMS must propose to Bristol Myers Squibb an initial offer for what it views as a "maximum fair price" for Eliquis, the blockbuster blood thinner that it developed and commercialized jointly with Pfizer. With nearly $16.5 billion in annual gross Medicare sales, this could be the most significant negotiation CMS undertakes with big pharma.
BMS and Pfizer will have 30 days to respond to the government's offer, either accepting it or making a counteroffer. If an agreement isn't reached in that first round, there could be up to three rounds of negotiation meetings between then and Aug. 1.
Though the CEO of BMS has described the process as unfair, the partners can choose not to sell Eliquis to Medicare if they don't feel the negotiated price they are being offered is acceptable.
Among these 10 drugmakers, Bristol Myers Squibb could face the largest challenge as a result of the new negotiated prices. Last year, Bristol Myers reported $11.8 billion in Eliquis revenue, which was more than a quarter of its total sales.
Pfizer has less reason to feel bothered about the upcoming Eliquis price negotiations. The company reported $6.5 billion in revenue from the blood thinner last year, which only worked out to about 6.5% of its $100.3 billion in total revenue.
Bristol Myers Squibb is also entitled to royalty payments from AstraZeneca regarding sales of Farxiga, an SGLT2 drug that helps type 2 diabetes patients to excrete excess blood sugar in their urine. Luckily for Bristol Myers Squibb, it already transferred most of the rights for Farxiga royalties to third parties.
AstraZeneca also has little to fear from upcoming negotiations with Medicare. U.S. Farxiga sales were responsible for less than 3% of its total revenue in the first half of 2023.
Jardiance -- another SGLT2 drug similar to Farxiga -- is second on the list in terms of Medicare sales volume, but the potential effect of these negotiations on Eli Lilly's top line will be manageable.
In the second quarter, Jardiance sales jumped 45% higher year over year to an annualized rate of $2.7 billion, or around 8% of Eli Lilly's total revenue. While Jardiance is a growth driver for the company, it's not the most important drug in its lineup. Sales of Mounjaro, Lilly's new weight-management drug, exploded to an annualized rate of $3.9 billion in the second quarter.
Johnson & Johnson, AbbVie, and Bayer
With three drugs on this list, Johnson & Johnson will be doing a lot of negotiating with Medicare in the months ahead. Fortunately for the company and its investors, the drugs up for negotiation aren't huge growth drivers anymore.
Xarelto is a blood thinner similar to Eliquis that Johnson & Johnson co-developed with Bayer. For the second quarter, Johnson & Johnson reported that U.S. Xarelto sales rose 5% year over year to an annualized rate of $2.5 billion. That works out to about 2.5% of the healthcare giant's total revenue.
Imbruvica is a blood cancer treatment that J&J developed in collaboration with Pharmacyclics, which was subsequently acquired by AbbVie. Unfortunately for AbbVie and J&J, competition from treatments that work along similar lines pushed U.S. sales of Imbruvica down by 26% year over year in the first half of 2023.
Stelara is an injectible biologic treatment for psoriasis. It's a big seller for J&J now, but the main patent protecting its market exclusivity expires this year. By the time new prices negotiated with Medicare go into effect in 2026, Stelara will probably already be competing with lower-priced biosimilars.
Januvia is a type 2 diabetes treatment first approved in 2006. Merck currently leans on it for less than 5% of total sales.
Negotiations with Medicare won't be an issue this time around because Januvia's already losing market share to a slew of more recently approved diabetes treatments, including Ozempic and Mounjaro. Moreover, generic versions of Januvia will likely begin decimating U.S. sales of the drug in 2026, shortly after the prices to be negotiated with Medicare are set to take effect.
If I didn't know better, I'd say it looks like CMS is trying to avoid riling up the pharmaceutical industry by selecting treatments that aren't terribly important to the companies that sell them. As is often the case with big events that get a lot of news coverage, the upcoming negotiations probably won't change the overall investing thesis for any of these eight companies.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb, Merck, and Pfizer. The Motley Fool recommends Amgen, Johnson & Johnson, and Novo Nordisk. The Motley Fool has a disclosure policy.