Research in Focus: Medicare price negotiations and the impact on pharma
Research Analyst Luyi Guo, from the Global Research and Healthcare Teams, says the impact of negotiated drug prices, the first of which were announced by Medicare in August, was smaller than feared. Nevertheless, the policy is helping to spur the pharmaceutical industry to rebuild drug pipelines — which could benefit investors in the long run.
4 minute read
Key takeaways:
- Prices for the first 10 drugs subject to Medicare negotiations were announced in August and the impact to the pharma industry was in line with or slightly better than estimated.
- Many of the drugs were already heavily rebated or set to lose patent protection, resulting in only incremental discounting.
- But as more drugs face negotiations in the coming years, the industry is doubling down on innovation, which could unlock value for investors over the long run.
Prices for the first 10 drugs subject to Medicare negotiations have been determined, and the impact to the pharmaceutical industry is better than many feared. In total, the Centers for Medicare and Medicaid Services (CMS) estimate that had the reduced prices been in place in 2023, Medicare would have spent roughly 22% less on the medications, for a total savings of $6 billion.
While 22% may sound like a lot, the net effect is likely to be much lower for many companies. The reason boils down to the fact that most branded drugs already offer substantial rebates in order to be included on plan formularies of insurers, including Medicare. In addition, the CMS discounts are based on 2023 prices. However, net prices for the drugs were already expected to decline before 2026, when the Medicare price caps take effect, due to market competition and/or loss of market exclusivity.
Farxiga, for example, which is taken by certain patients with diabetes, heart disease, or kidney disease, was discounted 68% in negotiations. But after rebates, the incremental discount is likely closer to 10% or less. Immunosuppressive drug Stelara, which addresses conditions such as Crohn’s disease, was discounted 66% from its list price. But the blockbuster therapy is set to lose patent protection in 2025, making the price cut essentially a moot point.
Investor takeaway
The market’s relief at the outcome was reflected by stock returns. For the month of August, an index of pharmaceutical equities rose more than 7%[i] as firms signaled negotiations would have a minimal impact on their business. (By comparison, the S&P 500® Index gained 3.8% over the same period.)
It’s important to keep in mind that under the Inflation Reduction Act (IRA) — the 2022 law that made Medicare negotiations possible — price caps for new drugs will be rolled out every year. In addition, there’s no guarantee future discounting will not be more aggressive. Furthermore, as currently written, the IRA disadvantages small molecules drugs because while biologics have a total of 13 years from launch before price caps can kick in, small molecules have only nine years. Industry experts caution investment in the latter could fall as a result, with some pharma companies already announcing plans to pivot away from small molecules in their pipeline in favor of biologics such as cell and gene therapies, antibody drug conjugates (ADCs), and T-cell engagers.
However, there is also hope Congress may look to harmonize the treatment of small molecules and biologics, especially if the law negatively impacts future choices for patients in therapeutic areas such as oncology and neuroscience.
In the meantime, there is no shortage of innovation taking place within the sector, and many pharmaceutical companies, fortified by an estimated $1 trillion in cash and debt capacity, are aggressively working to build out and diversify drug pipelines. In fact, according to one industry report, this year merger and acquisition activity is on track to surpass the record high of 26 deals of 2023.[ii] Many of the acquisitions target the novel drug modalities mentioned earlier, and in recent months, some pharma stocks have benefited from positive updates from these drugs.
More could be on the horizon. In the second half of the year, clinical trial readouts are expected in obesity, lupus, schizophrenia, and depression. In our view, investors who stay focused on pharma companies investing in innovation and that have improving visibility around their R&D pipelines could stand to benefit.
By the numbers – Medicare price caps
- 79% highest discount from list price among drugs up for negotiation in 2024 (for Januvia, a treatment for diabetes)
- 38% smallest price cut (for Imbruvica, a B cell blocker that addresses blood cancers)
- 70-75% estimated discount of most older drugs before price negotiations, thanks to market competition and rebates
- 9 or 13 year exemption period for small molecules and biologics, respectively, from negotiations
*Source: Centers for Medicare and Medicaid Services, Janus Henderson Investors, as of August 2024.
[i] Bloomberg, from 1 August 2024 to 30 August 2024. Based on the S&P 500 Pharmaceutical Industry, a benchmark of companies classified as pharmaceutical firms in the S&P 500.
[ii] Jefferies, 25 August 2024. Includes deals ≥$500 million in value.
IMPORTANT INFORMATION
Concentrated investments in a single sector, industry or region will be more susceptible to factors affecting that group and may be more volatile than less concentrated investments or the market as a whole.
Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.
S&P 500® Index reflects U.S. large-cap equity performance and represents broad U.S. equity market performance.
Volatility measures risk using the dispersion of returns for a given investment.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
4 minute read
Key takeaways:
- Prices for the first 10 drugs subject to Medicare negotiations were announced in August and the impact to the pharma industry was in line with or slightly better than estimated.
- Many of the drugs were already heavily rebated or set to lose patent protection, resulting in only incremental discounting.
- But as more drugs face negotiations in the coming years, the industry is doubling down on innovation, which could unlock value for investors over the long run.
