The Feds are ‘playing nice’ with pharma, at least for now

The U.S. government released the final prices for 10 top-selling drugs on Thursday, and Wall Street breathed a sigh of relief. Big Pharma might not be happy with Medicare’s new mandate to negotiate drug prices, but the discounts weren’t as bad as some initially feared.

Shares of Bristol-Myers Squibb, whose blockbuster blood thinner Eliquis was targeted for negotiations, ended up 1.5% higher at the close on Thursday. The broader industry traded up as well.

The government’s announcement confirmed what companies had been telegraphing in second-quarter results calls: The initial hit to earnings from the Inflation Reduction Act, which allows Medicare to directly negotiate the prices of some drugs, is going to be mild.

There are a few reasons for that. For one, many drugs were already going off patent soon and therefore were set to face price erosion anyway. Secondly, the drugs are already discounted in order to be placed on pharmacy-benefit managers’ formularies. Take Eliquis, the Bristol-Myers drug that is shared with Pfizer. The government announced a 56% cut from the list price on Thursday. But the companies already pay about a 40% to 50% rebate on the drug to parties such as pharmacy-benefit managers, estimates Akash Tewari, an analyst at Jefferies. That means the government cut was more like an additional 15% or so, which should reduce revenue by $80 million to $100 million a year, he estimates. That isn’t great. But it is a fraction of the $10.5 billion to $12.5 billion in sales that Bristol-Myers is now forecasting for the drug in 2026.

The bottom line is that the government is certainly extracting an additional discount, but it isn’t a major one for many drugs. The overall net cut to spending, according to the Centers for Medicare & Medicaid Services estimate based on 2023 prices, is about 22%, though even that number is widely debated among analysts.

The short-term overhang might be gone, but the long-term risk for pharma is still very much present. The government has now given itself the power to reduce the prices of blockbuster drugs and there is no telling whether it will always play nice. Future administrations could use those powers to demand much steeper price cuts.

Next year, the Centers for Medicare and Medicaid Services will release its target list for price reductions in 2027. And the system, as currently designed, “leaves the door open to a much more heavy-handed approach,” wrote Christopher Raymond, an analyst at Piper Sandler. “And with politics very much front and center right now, we do worry that another very large shoe is likely to drop.” Huge blockbusters like Novo Nordisk’s Ozempic for diabetes and Merck’s Keytruda for cancer will eventually land on the list as well.

An additional concern is that future legislation could allow for more price curbs, both in government programs as well as in the commercially insured market.

Big pharma seems to have avoided a worst-case scenario so far. But the thing that pharma so badly wanted to prevent—government powers to directly reduce drug prices—is now the law of the land.

Write to David Wainer at david.wainer@wsj.com