Johnson & Johnson (JNJ 0.98%) is one of the world's largest and most prominent healthcare players. The pharmaceutical leader has a long and impressive track record of innovation, financial results, and stock market performance. However, Johnson & Johnson has encountered issues in recent years that, for some investors, raise serious questions concerning its ability to deliver the same results it has in the past. One of these headwinds relates to the Inflation Reduction Act (IRA), a relatively new law in the U.S. that grants Medicare the power to negotiate the price of some pharmaceutical drugs. The first round of negotiations is now over, and we are starting to see the impact this law could have on some of Johnson & Johnson's medicines.
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Three of Johnson & Johnson's drugs targeted
The IRA price negotiations concern drugs Medicare spends the most on. The first 10 medicines the U.S. Centers for Medicare and Medicaid Services chose to go through this ordeal include Johnson & Johnson's blood thinner Xarelto, immunosuppressant Stelara, and cancer drug Imbruvica. Johnson & Johnson co-markets Xarelto and Imbruvica with Bayer and AbbVie, respectively. Monthly price reductions for all three under the IRA will be massive. Xarelto's cost will decrease to $197, a 62% decline from its 2023 comparable monthly price tag.
Imbruvica's will be cut by 38% to $9,139, while Stelara will experience a 66% drop to $4,695. Johnson & Johnson is the only company with multiple drugs on the list of IRA price negotiations, so it will be particularly affected compared to its peers that are also targeted. These new prices will only go into effect in 2026. Xarelto, Stelara, and Imbruvica made up a non-negligible 19% of Johnson & Johnson's total revenue in the second quarter.
Stelara was the only one of the three whose sales grew year over year. The plaque psoriasis treatment recorded revenue of $2.9 billion, 3.1% higher than the year-ago period. Imbruvica's sales declined to $770 million, 8.5% lower than the prior-year quarter. Xarelto's sales of $587 million dropped 7.9% year over year. Johnson & Johnson blamed Xarelto's decline on an unfavorable patient mix, while it pointed to stiff competition as the reason why Imbruvica's sales are moving in the wrong direction. Both also saw their revenue decrease on a year-over-year basis in 2023.
Ditto for Imbruvica in 2022; though Xarelto's revenue increased that year, it was by just 1.4%. So, Xarelto and Imbruvica have not been growth drivers for Johnson & Johnson recently. If this trend continues, they will make up an even smaller share of its top line by the time the negotiated prices take effect. Meanwhile, Stelara, the only one of the three that has consistently contributed meaningfully to top-line growth, could start facing biosimilar competition in the U.S. by next year.
In other words, none of Johnson & Johnson's three drugs targeted by the IRA feature in the company's long-term plans.
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The long-term view
This first round of IRA negotiations should be somewhat manageable for Johnson & Johnson. But what about the next round, which will select up to 15 more drugs? And the one after that, which will select up to another 15 drugs? The number will then go up to 20. Some of Johnson & Johnson's other medicines could be targeted. So far, legal challenges to the IRA have been unsuccessful, but there are several ways Johnson & Johnson could escape this challenge.
The company could redirect its R&D toward therapies likely to avoid these price negotiations since they only concern the ones Medicare spends the most on, i.e., those widely used among seniors. A drugmaker that develops therapies for rare pediatric diseases won't have to worry about this issue. Johnson & Johnson doesn't have to change its ways completely. For a company with such a vast portfolio, substantial funds, and a large workforce, relatively minor tweaks to its typical approach could go a long way.
Of course, that's just one of the many solutions Johnson & Johnson could implement. It could also devote more time and research to its medtech segment. The bottom line, though, is that Johnson & Johnson has survived for over 100 years, a period that includes significant legal and regulatory changes. In my view, the pharmaceutical giant is more than capable of thriving under the IRA. And, of course, Johnson & Johnson remains a top stock for dividend investors.
Johnson & Johnson has raised its payouts for 62 consecutive years. Despite the IRA, investors can still trust the company to deliver consistent results and dividend hikes over the long run.
