Makers of billion-dollar drugs set to face their first U.S. price negotiations

Some of the most widely used drugs in the U.S. may be heading for lower prices under Medicare, a move that could save taxpayers billions of dollars and squeeze profits for big pharmaceutical companies.

The U.S. government is preparing to release a list this week of 10 drugs that the health program for the elderly will be able to negotiate prices for—one of the key elements of President Joe Biden’s signature Inflation Reduction Act. Analysts expect Johnson & Johnson’s Xarelto blood thinner and Indianapolis-based Eli Lilly and Co.’s Jardiance for diabetes to be among the medications chosen.

The ability for the government to haggle over prices is a marked change for pharma companies that have long been able to charge whatever they think a medication is worth, even as most other industrialized companies bargain hard. With the IRA now enabling Medicare to come to the table over products that have long been on the market, drugmakers are girding for the prospect of lower revenue from some of their biggest sellers.

For taxpayers, the savings could be significant: Negotiations could save the U.S. $36.5 billion from 2026 to 2028, according to Wells Fargo Securities. Drugmakers are suing the government to stop the squeeze.

“They’re going to earn less money,” said Spencer Perlman, an analyst with policy research firm Veda Partners. “That’s just a fact.”

Medicare spends more than $200 billion on outpatient prescription drugs annually. Eliquis, the Bristol-Myers Squibb blood thinner used to prevent heart attacks and strokes, cost the program more than $12 billion in 2021 alone.

Under the IRA, the price ceiling for a selected drug will be set between 75% and 40% of its average price, with steeper discounts for drugs that have been on the market longer. Medicare will halve its costs for the chosen drugs on average, according to Congressional Budget Office estimates. That will lower the health program’s spending total by almost $100 billion through 2031, when annual savings will approach $25 billion.

List expected Tuesday

Complexities in the law make it hard to predict precisely which drugs will be affected. Analysts agree on some, but surprises could trigger unusual stock reactions, analysts from Goldman Sachs said. Overall, large pharma stocks have traded at a “depressed level” relative to the broader market, they wrote, and the announcement of the drug list won’t necessarily cause shares in the sector to move.

The list is expected Tuesday, Politico reported, citing unnamed people involved. The White House is planning an event on lowering health-care costs Tuesday with Biden and Vice President Kamala Harris.

The process set in motion this week won’t hit sales until 2026, and even then analysts suggest its early effects will be modest. The law would shave 3% from Bristol’s revenue that year, Bloomberg Intelligence analysts estimate, and 1% or less for the other companies seen undergoing the first round of negotiations. Cowen analysts deemed the impact “manageable” for pharma companies.

Each year, Medicare will add drugs to its low-cost shopping list, reshaping how medications are made and sold in the U.S. drug market. The government can only negotiate for the drugs that Medicare spends the most on—the top 50 retail prescription drugs and the top 50 administered by physicians. The price cuts don’t apply to other purchasers like private insurers or patients paying cash.

Still, it’s a sea change that pharma companies have dreaded.

“This misguided policy does not strike the right balance between incenting investment and innovation and improving affordability and access,” Merck Chief Executive Officer Robert Davis said earlier this month on a call with analysts.

Price concessions

Big drugmakers have long fought to maintain their products’ patent protection and forestall the arrival of generic competition. The IRA undercuts that strategy, demanding price concessions on products that have been on the market for years and have no generic alternatives. Keytruda—provider of 35% of Merck’s revenue over the past three years—and Bristol’s Opdivo will both become potential candidates for negotiations in 2028.

The administration calls that a win for the taxpayers who fund Medicare and for the seniors enrolled in it. To the companies, it’s price-setting, and they’re hitting back. Drugmakers have filed cases in courts across the U.S., potentially leading to split appellate decisions and a trip to the Supreme Court. The U.S. Chamber of Commerce is seeking to halt negotiations before they even start.

U.K.-based AstraZeneca filed suit on Friday, arguing the IRA will shorten drugmakers’ window to recoup their investments. Companies are already front-loading revenue with higher launch prices, said BMO Capital Markets analyst Evan David Seigerman, pointing to Bristol’s Sotyktu that came to the market last year at an annual price of more than $70,000.

“You just have to start out with higher cash flows because you know in the out years you’re going to have lower cash flows,” Seigerman said.

Delays possible

Drugmakers are warning they can’t take chances on new products if the returns are going to shrink. They might delay seeking approval until they have evidence to get drugs cleared for their most lucrative uses. And they may focus on biologic drugs, which get 13 years of protection from negotiation, compared to nine for pills.

Indeed, the CBO estimates that price negotiations and other measures in the IRA will lower the number of new drugs coming to market by about 1% over the next 30 years.

That isn’t necessarily bad: The policy may encourage companies develop new, innovative products rather than their own versions of other companies’ branded drugs, said Juliette Cubanski, deputy director of Medicare policy at KFF, a nonprofit health-policy research organization. And drugmakers may not fight generic competitors as vigorously, because drugs with generic equivalents are exempt from price negotiation.