Lilly, AZ, AbbVie and J&J face big potential hit from Medicare pricing bill: analysts

After years of government standstill on drug prices in the U.S., could the Senate this week pass a "watershed" bill enabling drug price negotiations? It remains to be seen, but analysts are busy poring over the available details to see how the legislation may affect the industry's top players.

Among big drugmakers, Eli Lilly, AstraZeneca, AbbVie and Johnson & Johnson are particularly exposed to the current Medicare negotiation proposal, analysts with SVB Securities wrote in a Friday note to clients. The companies sell a mix of lucrative oncology and diabetes medicines in Medicare.

As the legislation stands, if passed, Medicare would be able to control drug prices for 10 medicines in 2026, with the number growing to 60 by 2029, the analysts said. In 2026 and 2027, Medicare would only control Part D drug prices, but in 2028, it could also negotiate prices in Part B, where doctors administer therapies, according to the SVB team.

Medicines would be eligible for Medicare negotiations after nine or 13 years on the market, depending on whether they are a small molecule or a biologic. But because pharmaceutical companies often secure much longer periods of exclusivity than either nine or 13 years, the bill risks cutting off the "tail" of profitable drug sales, the SVB analysts pointed out. Drugs at risk of losing their "tail" include Johnson & Johnson's multiple myeloma med Darzalex plus AstraZeneca's cancer therapies Tagrisso and Calquence.

For drugs facing a generic or biosimilar rival, Medicare would no longer seek to negotiate prices, the SVB team pointed out.

"We are concerned about the negative impact of proposed legislation on future innovation and the financials associated with some of the most helpful drugs for Medicare recipients," the SVB analysts wrote. "Not only would the economics for many drugs be curtailed before loss of exclusivity, but innovators’ willingness to develop new drugs, in particular small molecule therapies for seniors, would likely diminish."

Notably, Merck doesn't have much exposure to the proposal because its superstar oncology drug Keytruda is expected to face expected biosimilars in 2028, or the first year that Part B drugs would be included, the analysts noted.

But there's still uncertainty around the discussions. The analysts are waiting to see the final legislation, plus they're waiting on whether the Senate parliamentarian supports the "teeth" of the bill that would give Medicare its negotiating power. And it's an open question as to whether the Senate can pass the bill before it goes on recess at the end of the week.

As congressional discussions have played out in recent weeks, biopharma has mounted a defense. Last month, Michelle McMurry-Heath, president and CEO of the trade group the Biotechnology Innovation Organization, called the Medicare negotiation proposal "misguided" and said it would "ultimately harm the very patients and seniors that lawmakers claim to be helping."

In all, the SVB analysts pointed out two "positives" and five "negatives" for the drug industry in their review of the available details. On the plus side, the analysts said many of today's top drugs don't face much exposure thanks to their projected loss of exclusivity later in the decade. And because Part B drugs aren't expected to be included until 2028, many existing big-selling medicines won't see much of an effect.

But the negatives outweigh the positives for the industry, the analysts figure. For one, the new discounts would apply to "gross" prices, but companies already pay sizable rebates in Medicare. That means the companies could have to make "massive payments to the government relative to reported net sales," the SVB team wrote.

Further, products such as CAR-T therapies and vaccines, which were expected to be safe from biosimilar competition, would face "significant" risk. 

While SVB's list of concerns goes on, the team also warned that the government could get more aggressive on drug pricing in the future if the bill passes.

Lawmakers and U.S. officials have been publicly hitting at high drug prices for years, but the government has been unable to pass major reform despite the subject being popular among voters. In June, a West Health/Gallup survey found 8 in 10 Americans favored government drug pricing actions over concerns of the reform hurting pharmaceutical innovation.