Pharma Investors Exhale Despite $7.5 Billion in Drug Price Cuts

(Bloomberg) -- The US government just slashed $7.5 billion from expected spending on drugs in 2026. 

Wall Street’s reaction? A sigh of relief.

Of nine publicly traded companies affected by the initial price cuts negotiated by Medicare, the US health program for senior citizens, only Merck & Co. Inc., AbbVie Inc., Eli Lilly & Co., which partners on Jardiance, and the American depositary receipts of Novartis AG shares fell on Thursday, and the declines were modest. 

The reason is that despite the Biden administration’s victory lap over the drug price cuts that will take effect in 2026, they amounted to a 22% net price discount to what they cost last year.

“We had been thinking possibly in the 25% range,” wrote David Risinger, an analyst at Leerink Partners, in a note to clients. He was at the low end of expectations: some analysts expected 35%.

Barclays called the pricing “benign.” Jefferies said the details were “generally positive for pharma.” 

Merck’s diabetes drug Januvia had the biggest discount on the list price with a 79% cut. AbbVie’s Imbruvica had the smallest discount, at 38%. It was the only cancer drug on the list, a category that has historically provided only limited discounts.

There’s been heated rhetoric surrounding the US’s efforts to lower the cost for medicine. 

Drug companies filed lawsuits over the 2022 Inflation Reduction Act, or IRA, which gave Medicare power to negotiate for lower prices. Drugmakers said price reductions would hobble their ability to develop breakthrough treatments to cure disease and improve lives. 

In turn, the Biden administration has singled out the drug industry for dragging out patents and inexorably raising already-record prices for older medicines. 

Still Making Money

The companies acknowledge that top-selling medicines will keep generating hefty sales even after the new prices are taken into account. This was something executives telegraphed on conference calls that prepared investors for the impact, assuring them the price cuts would be manageable and minimal.

After the new Medicare prices were released on Thursday, Bristol Myers Squibb Co. forecast its blood thinner Eliquis will generate $8.5 billion to $10.5 billion in US sales for 2026, and $8 billion to $10 billion the following year. That will likely beat its performance from last year, when the medicine that was approved in 2012 had US sales of $8.6 billion.

The stock market has validated drug manufacturers’ confidence in their continued profitability. The industry has largely kept pace with the broader S&P 500 Index since the passage of the Inflation Reduction Act. 

Some industry insiders said the process failed to address the fundamental flaws and tangled bureaucracy that makes the US drug pricing system arguably the most complicated in the world. 

The average 22% savings “pales in comparison” to the reductions that come from the introduction of low-cost generic and biosimilar medicines, said David Gaugh, interim chief executive officer of the Association for Accessible Medicines, a generic drugmaking lobby group. 

Gaugh called on policymakers to address problems with the patent system and rebates offered to drug plan managers as ways to cut drug costs instead.

Give and Take

Despite the bombast around the topic, the negotiations between the companies and the US government were more collaborative than may be immediately apparent. The Centers for Medicare and Medicaid Services raised its offers for each drug following discussions, while many drugmakers lowered their counteroffers. Ultimately, Medicare accepted a revised counteroffer proposed by companies for four medicines, according to the agency.

CMS Deputy Administrator Meena Seshamani called it a “productive, back-and-forth, data-driven good faith dialogue.” 

Many manufacturers “offered a price and CMS said OK, we’ll take that price,” she said in an interview. The law establishes a minimum discount for drugs subject to the negotiations, with deeper price cuts for medications on the market longer.

And as is the case with many US laws, the IRA’s real benefits — or lack thereof — will only become apparent over time. The number of drugs involved is expected to gradually expand, so future years could produce bigger discounts.

--With assistance from Damian Garde, John Tozzi and Angel Adegbesan.

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