Innovation is the only defence against drug price crackdown

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The US market is the engine of the global pharmaceutical industry. Its exceptionally high drug prices help deliver as much as three-quarters of the sector’s global profits. But taxpayer-funded Medicare is set to pull back the throttle. The first round of formal drug price negotiations — enabled by the 2022 Inflation Reduction Act — kicks off this week.  

The haggling concerns 10 treatments, including cancer, stroke and diabetes medications, which together cost Medicare some $50bn a year. Price cuts will be revealed in September, assuming lawsuits brought by manufacturers do not derail the programme. The impact could be significant for companies such as Bristol Myers Squibb. Its blood thinner Eliquis is expected to account for more than a quarter of sales in 2026, according to Visible Alpha. 

Many medicines were already facing competition as patents expire. The average impact should be modest enough, even as the programme is rolled out to save Medicare an estimated $100bn over 10 years. Medicare accounts for 15 per cent of global drug sales, according to Morningstar. The US Congressional Budget Office expects negotiations to lower its average drug price by 8-9 per cent in 2031, net of rebates and discounts.

There is also a redesign of the way drug bills are split. As things stand, the government pays 80 per cent of the “catastrophic” coverage when costs balloon beyond a threshold — $11,206 in 2023. Pharma companies contribute 70 per cent of a slice of the costs below that. This component will be scrapped from 2025. Instead, drugs companies will be on the hook for an uncapped 20 per cent share of catastrophic costs.

The shake-up puts a ceiling on patients’ contributions, which should boost demand across the board. It will also create winners and losers. Dropping the 70 per cent discount is a boon for makers of cheaper drugs, such as cardiovascular medications. Conversely, makers of drugs costing more than about $25,000 will have to give bigger rebates, according to UBS. The reforms will encourage pharmacy benefit managers to limit use of the most expensive drugs.

That will hit companies like AstraZeneca, maker of oral cancer drugs such as Tagrisso. It should still be manageable. Analysts expect US oncology to account for 17 per cent of overall revenues in 2025. AstraZeneca also has a well stocked pipeline tilted towards complex biologic medicines. These are not as exposed to price negotiations as pills. 

For all companies facing the new Medicare regime, much rides on drug discovery. The best-placed companies can buy or build highly prized new medicines. US reforms will put Big Pharma under pressure. But the most innovative companies will retain their significant pricing power.