US drug prices: Medicare curbs may be more show than tell

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Like Big Tobacco, drug companies get little love on Capitol Hill. In a deeply divided America, the need to tackle soaring drug prices is one of the few issues that unites both Republican and Democrat voters. For good reason. The US spent a record $378bn on prescription drugs in 2021.

The Biden administration wants to tame the health cost beast with price controls. It on Tuesday announced a list of 10 prescription drugs subject to Medicare price negotiations under the Inflation Reduction Act.

The drugs on the list cost Medicare more than $50bn in the 12 months to May 31, said the Centers for Medicare and Medicaid Services. They include Eliquis, a blood thinner produced by Bristol Myers Squibb (BMS) and its partner Pfizer, the diabetes treatment Jardiance sold by Boehringer Ingelheim and Eli Lilly, and Xarelto, another blood clot prevention medicine from Bayer and the Johnson & Johnson subsidiary Janssen Pharmaceuticals.

BMS looks most vulnerable given its exposure to Eliquis, which generated over a quarter of total revenue last year. Wells Fargo reckons the company could take a 4 per cent hit to annual revenue while Pfizer could see a 1 per cent drop in sales. Much of the risk appears priced in, with the two stocks down 13 and 29 per cent respectively so far this year,

More drugs will be added to the list in coming years. But for now, the sell-off looks premature. The negotiation process is lengthy. Lower prices would not take effect until 2026. Moreover, lawsuits filed by drugmakers and trade groups challenging Medicare’s new haggling powers could mean the price cuts might not even occur.

Many of the drugs listed are older and close to losing their patent protections. Companies can also work around any curbs by launching drugs at much higher list prices before they become subject to Medicare negotiations. Despite the hoopla on both sides, the impact of the price control should be less dramatic than markets anticipate.

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