What Impact Will Medicare Price Negotiations Have on Big Pharma Stocks?

When Joe Biden ran for president in 2020, he promised to allow Medicare to negotiate directly with pharmaceutical companies. Last year, he signed the Inflation Reduction Act into law and achieved that campaign promise.

On Tuesday, the Biden Administration announced the 10 prescription medications that will first be included in negotiations between drugmakers and the Centers for Medicare & Medicaid Services (CMS). What impact will Medicare price negotiations have on big pharma stocks? Let's dive in.

Which stocks could be affected?

It's important to first understand exactly which big pharma stocks could be affected by Medicare price negotiations. Here are the drugs on the initial list released by the White House along with the companies that market them:

Data sources: CMS, Reuters.

Nine of the top 10 biggest drugmakers by market capitalization are on the list plus privately held Boehringer Ingelheim. 

Assessing the potential impact

Johnson & Johnson (JNJ -0.46%) has three drugs that will be subject to Medicare price negotiations, including Imbruvica, which it co-markets with AbbVie. Medicare spent around $11.3 billion on these three medications between June 2022 and May 2023. J&J's share price slipped nearly 2% on Tuesday morning following the Biden Administration's announcement.

However, the actual impact of Medicare negotiations might not be all that great with the initial 10 drugs. For example, biosimilars to Stelara should reach the U.S. market in 2025, which is before the negotiated prices take effect. A generic version of Xarelto could also be marketed in the U.S. by 2025.

Bristol Myers Squibb (BMY 0.34%) could have greater financial exposure to Medicare price negotiations than Johnson & Johnson. Medicare spent $16.5 billion on blood thinner Eliquis between June 2022 and May 2023. Bristol Myers splits U.S. profits on the drug equally with Pfizer. However, U.S. sales of Eliquis make up a bigger percentage of Bristol Myers' total revenue than they do for Pfizer.

But Bristol Myers' share price rose by around 1% on Tuesday. Why? Probably at least in part because investors realize that Eliquis will lose patent exclusivity in 2028, only a couple of years after the negotiated prices are scheduled to go into effect. 

Not putting the cart before the horse

None of the other big pharma stocks with drugs on the list for Medicare price negotiations moved much on Tuesday. That seems appropriate for three primary reasons.

First, it's not yet known how big of a discount will be negotiated between CMS and each drugmaker. Any percentage put forward at this point is just speculation.

Second, as previously discussed, several of the drugs on the list have biosimilars or generics on the way relatively soon. As a result, the financial impact of any Medicare price negotiations on the big pharma companies involved will be limited.

Third (and perhaps most importantly), it remains to be seen if CMS will actually be able to negotiate the prices for the 10 drugs on its list. Big pharmaceutical companies, including AstraZeneca, Bristol Myers, Johnson & Johnson, and Merck, have filed lawsuits in federal courts to block the Medicare price negotiations.