Investors shrug off drug price talks' effects
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Unless you were under a rock, you saw Thursday's news that Medicare negotiated a better deal than the private market for some of the program's top-selling drugs.
Why it matters: So what? How meaningful is that difference, and what will the longer-term effects be?
- Some seniors will likely pay less out of pocket for drugs (that's a whole different topic), and that obviously matters to patients. But how pharma interprets the negotiated prices and reacts to them will have a huge impact on future drug development.
Our thought bubble: Democrats are thrilled, Republicans are appalled. The drug industry is complaining publicly but telling investors everything is fine.
- For all of the uproar this law caused when it was passed, the financial world's reaction to the Biden administration's rollout made everything seem pretty good — for now.
Between the lines: The announced prices — an overall 22% reduction in net spending but no details on individual drugs' net price reductions — are less drastic than some feared.
- "There are strong price reductions, but it also shows there is plenty of room for the industry to continue to make some profits on these drugs," Vanderbilt University's Stacie Dusetzina said.
Analysts are reacting much more neutrally than the politicians.
- In a note titled "CMS Spins, Pharma Wins (Relatively)," Raymond James analyst Chris Meekins wrote that "the impact is far less than politicians proclaimed and the industry as a whole seems to be managing this fine so far."
- And in a note titled "Sigh of Relief," Leerink analysts concluded that "22% is not as bad as anticipated earlier this year," though recent earnings calls had assuaged fears somewhat.
Where it stands: No one knows for sure the net prices of Medicare Part D drugs, much less what they would have otherwise been in 2026. But there are some estimates, and Medicare's negotiated rate is generally lower than those estimates.
- Here's a comparison from American Enterprise Institute economist Ben Ippolito, using data from this study.
The big picture: If there's anything everyone agrees on, it's that America's high drug prices make up a grossly disproportionate bulk of pharma's revenue compared with the rest of the world's.
- Critics — including many politicians from both parties — say all that means is that America is getting ripped off.
- Pharmaceutical companies and some experts say that this subsidization allows drug companies to keep searching for and investing in new therapies despite too-low prices in other countries.
Regardless, that tasked the administration with figuring out how much of a revenue haircut — or a subsidy reduction — drug companies could take without sacrificing the new drugs we want them to continue bringing to market.
- So far, that haircut seems to be pretty manageable.
- "We've shown that it can be done successfully and the sky doesn't fall," said Harvard's Aaron Kesselheim. "It's not surprising to me that the markets haven't come crashing down, because I think this process was not set up to bankrupt the pharmaceutical industry."
