The Centers for Medicare and Medicaid Services may be paying much less for some of the world's most commonly prescribed drugs in the coming years. That's because Medicare is about to start negotiating some of the prices it pays directly with pharmaceutical companies, based on a new legal framework that was instituted as part of President Joe Biden's Inflation Reduction Act.
This week, the Biden administration announced the names of the 10 drugs that are first up on the negotiations list. And three of them belong to Johnson & Johnson (JNJ -0.46%). In fact, one is its best-selling product, immunology drug Stelara.
Stelara brought in more than $9.7 billion last year for Johnson & Johnson. Its other two drugs on the list -- cancer treatment Imbruvica and blood thinner Xarelto -- each generate more than $2 billion annually. So, should we consider the price negotiations as a threat to its biggest revenue sources?
A promise to lower drug prices
The upcoming negotiations aim to start fulfilling President Biden's campaign promise to lower the prices Americans pay for certain costly prescription drugs. From June 2022 through May 2023, Medicare spent a total of $50 billion on all of the drugs on the negotiations list -- and of that, about $11 billion was for the three Johnson & Johnson drugs under consideration.
Medicare will begin negotiations with pharmaceutical companies this year -- companies may make counteroffers -- and Medicare will determine a final price by September of next year. The agency then will apply the prices as of Jan. 1, 2026. But one particular thing may make a drug ineligible for these potential price changes, and that's if a generic competitor enters the market.
This brings us back to Johnson & Johnson. The company expects Stelara biosimilars to enter the market as of 2025, and Xarelto may face competition by that year, too -- before the new prices are even put into place. Imbruvica, co-marketed by Johnson & Johnson and AbbVie, could see competitors enter the market later this decade.
This means price negotiations probably won't impact these Johnson & Johnson blockbusters. Of course, competition will -- but the company is prepared for that. Earlier this year, the company said its goal of reaching $57 billion in pharmaceutical sales in 2025 factored in the impact of Stelara's loss of exclusivity. Management said new products and certain key assets will drive pharmaceuticals growth. The company has nearly 100 candidates in the pipeline spanning therapeutic areas such as cardiovascular and immunology.
Lawsuits to halt the effort
Now, let's get back to the subject of Medicare price negotiations. It's also important to note that the expected negotiated price cuts may not even be implemented. Several big pharma companies (including Johnson & Johnson) and a pharmaceutical industry lobbying group have filed lawsuits aiming to halt the government's effort, calling the price negotiation aspect of the law unconstitutional. The administration has responded that there's nothing in the Constitution that would stop Medicare from negotiating prices with drugmakers.
So, let's get back to our question: Is this upcoming effort by Medicare a threat to Johnson & Johnson's earnings from its top-selling drugs? Of course, if lawsuits don't stop the negotiations and lower prices are applied, this could eventually hurt certain Johnson & Johnson's earnings -- and those of other pharma companies -- particularly as additional products are added to the negotiation list in future years.
But it's important to keep in mind that even in this scenario, the bottom-line impact on those companies may be limited. That's because to qualify for inclusion in the negotiations, a small-molecule drug must have been on the market for at least seven years, and a biologic must have been commercialized for 11 years or more. So companies will have opportunities to significantly grow any particular drug's revenue during that time.
If negotiations do become part of the landscape, we could even imagine pharmaceutical companies taking this into consideration -- and pricing certain innovative products higher in their earlier years on the market to compensate.
All of this means that Medicare price negotiations won't be a huge threat to Johnson & Johnson's profits from its top-selling products today or in the future. The company, and other pharma giants, may hit a stumbling block, but this challenge won't keep them down. And that's positive news for pharmaceutical investors.
