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Medicare Drug Pricing Changes Could Be Coming: Time to Ditch Pharma Stocks?

Two types of stocks have performed well overall so far this year as the broader market has tanked. It makes sense that energy stocks would be up, considering the high prices of oil and natural gas. Several big pharmaceutical companies have also beaten the market in 2022 as investors viewed them as safe havens.

However, those particular havens might not be so safe in the not-too-distant future. Major Medicare drug pricing changes could be coming. Is it time to ditch pharma stocks?

Manchin on the hill

The Inflation Reduction Act of 2022 — a new piece of compromise legislation hammered out by Senate Majority Leader Chuck Schumer of New York and moderate Democratic Sen. Joe Manchin of West Virginia is a smaller successor to President Joe Biden’s Build Back Better Act. The legislation still attempts to address a wide variety of issues, including climate change, debt reduction, inflation, and high prescription drug costs. And Manchin’s ideas on how to reduce the costs of prescription drugs have been floating around on Capitol Hill for years.

Currently, private health insurers negotiate prices with drugmakers, but the Center for Medicare and Medicaid Services (CMS) is barred from doing so for Medicare. Instead, Medicare pays 106% of the average sales price obtained by those smaller private organizations.

Manchin wants to require the Center for Medicare and Medicaid Services to negotiate prices with biopharmaceutical companies for several especially costly drugs. His plan would also require drugmakers to provide rebates to Medicare if their drug price increases are higher than the inflation rate.

The secretary of Health and Human Services would be responsible for identifying the drugs for which price negotiations would be conducted. Beginning in 2026, 10 of the drugs for which Medicare spends the most would be on the list. In 2027 and 2028, the number would increase to 15. In 2029 and afterward, CMS would negotiate prices for 20 drugs.

Big pharma backlash

As you might expect, big pharmaceutical companies aren’t happy about the proposed Medicare drug pricing changes.

Pfizer (NYSE: PFE) CEO Albert Bourla stated in the company’s second-quarter conference call, “In reality, it’s not a price negotiation because they are forcing their will by implementing a 95% tax, according to previous guidance. That will cost the industry significant [sic] — we estimate $270 billion over 10 years.” 

Of the 10 drugs that Medicare Part D spent the most on in 2020, two were marketed by Pfizer: blood thinner Eliquis — which it co-markets with Bristol Myers Squibb (NYSE: BMY) — and breast cancer drug Ibrance.

AbbVie (NYSE: ABBV) and Johnson & Johnson (NYSE: JNJ) together market the costliest drug for Medicare Part D in 2020 — cancer treatment Imbruvica. Unsurprisingly, AbbVie CEO Rick Gonzalez said on his company’s Q2 call that the proposed bill “has far more negatives than it has positives in it.” He added that “the long-term implications of this bill are pretty significant” for the biopharmaceutical industry.

Merck‘s (NYSE: MRK) cancer immunotherapy Keytruda was Medicare Part B’s costliest drug in 2020. The company’s president, Rob Davis, said during its Q2 call that management believes that the ability of Medicare to negotiate drug prices “will be highly chilling on future innovation.” 

Ditch time?

With pharma executives worried about the potential impact of the Inflation Reduction Act, should investors worry too? Is the best move to avoid pharma stocks? I think any immediate reaction would be premature.

For one thing, the passage of the proposed legislation in its current form isn’t a slam dunk. If even one Democrat opposes it in the Senate, it will fail. Even if the bill does pass, there’s still a possibility that a future president and Congress could make changes to the law before the Medicare changes take effect in 2026. 

Perhaps pharma stocks will be less attractive because of these Medicare drug pricing changes. But I wouldn’t bet against them just yet.

Keith Speights has positions in AbbVie, Bristol Myers Squibb, and Pfizer. The Motley Fool has positions in and recommends Bristol Myers Squibb and Merck & Co. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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