Despite the unveiling of the first ten drugs targeted for pricing negotiations by Medicare, major pharmaceutical companies saw positive performance at the end of the week. This move by Medicare could potentially weaken their longstanding bargaining power within the federal health insurance program.
Well-known therapies from Bristol Myers, Pfizer, Eli Lilly, AbbVie, Johnson & Johnson, Bayer, AstraZeneca, Novartis, Merck, Amgen, and Novo Nordisk were included in the list of targeted drugs.
However, the VanEck Pharmaceutical ETF, which represents many of the drugmakers, remained unchanged with a slight gain for the week. Investors seemingly disregarded the potential impact on the industry from the upcoming negotiations, which were introduced through last year’s Inflation Reduction Act (IRA).
According to the Biden administration, the drugs listed, used to treat various conditions from heart diseases to cancer, accounted for 20% of total Medicare Part D spending for the 12 months ending May 31, 2023, equating to $50.5 billion.
UBS analysts, led by Colin Bristow, stated that the target drugs identified by Medicare were largely anticipated by both the analysts and Wall Street. Although this announcement marked a significant step in implementing the IRA, companies and investors are still analyzing the potential impact of the act.
However, the pharmaceutical industry trade group Pharmaceutical Research and Manufacturers of America (PhRMA) criticized the move, arguing that it prioritized short-term political gains over what is best for patients. PhRMA also noted that many of the selected drugs already had substantial rebates and discounts due to private market negotiations in the Part D program.
“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 in response to the publication of the list by CMS.
PhRMA, along with companies like Merck and Bristol Myers, has already filed legal challenges against the program.
“The cancer moonshot will not succeed if this administration continues to dismantle the innovation rocket we need to get there,” added the organization, referring to President Biden’s 2022 cancer-fighting initiative.
BTIG analyst Justin Zelin agrees that the IRA may impact biopharma innovation. However, he believes that the selected drugs for negotiations nearing the end of their exclusivity dates will not significantly hinder the industry.
“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.
With Medicare prepared to adjust prices based on generic or biosimilar entry in the United States, Leerink Partners also downplayed concerns surrounding the negotiations. They argued that the negotiated prices would only be valid for a year before Medicare unveils a new list for 2027.
JPMorgan’s Chris Schott added that even for other targeted drugs, their financial performance for the companies would not be significantly affected. Schott does not expect this update to have a “meaningful impact” on the companies’ earnings per share (EPS) and revenue as these drugs make up a small contribution to their financials.
Meanwhile, Goldman Sachs attributed the muted stock reaction to the persistent uncertainty surrounding pricing negotiations. The firm believes that the more impactful event to watch will be Medicare’s initial offer of maximum fair prices, expected to be announced by February.