Wednesday, August 30, 2023

You may have seen news on the political or healthcare pages earlier this week about the Biden Administration announcing the first 10 drugs that will be subject to price negotiation with the U.S. Medicare program.

Here at Calcbench, we wanted to look at that issue through a financial reporting lens: If the U.S. government does negotiate lower prices for those 10 drugs, what might that mean for the pharmaceutical companies that manufacture them? 

After all, as we’ve explored before on this blog, pharmaceutical companies typically report their sales of blockbuster drugs as separate operating segments. So we can see just how much revenue specific drugs bring to a pharma company, and just how important those blockbuster sales are to the company’s overall revenue picture.

And wouldn’t you know it, all 10 drugs subject to Medicare price negotiation are disclosed by their manufacturers. Hooray!

Table 1, below, shows the 10 drugs flagged by Medicare and their 2022 sales. 

As we can see, the company facing the most pricing pressure is Bristol Myers Squibb ($BMY), since its anti-coagulant drug Eliquis (used to prevent strokes in people with heart conditions) accounted for more than 25 percent of Bristol’s total revenue in 2022. 

We don’t know how much Medicare’s negotiated price might reduce that revenue stream; the lower prices wouldn’t even start until 2026, and presumably Big Pharma will fight this negotiation power in court. Still, Bristol now has a target painted on its back. Financial analysts can use that information to ask management about new drugs coming down the pipeline, the potential for voluntary price cuts to avoid negotiations, and so forth.

We must also note the delicate position of Johnson & Johnson ($JNJ), which manufacturers three of the 10 drugs targeted by Medicare. Altogether those three drugs account for 16.8 percent of the $94.9 billion in revenue J&J reported last year. 

Again, the question to ask management is what strategies they are pursuing to avoid a revenue crunch roughly three years from now. Developing a new blockbuster drug can take upwards of a decade and $1 billion in research costs. If a manufacturer on this list wants to widen its pipeline, the time to do that isn’t even now; it’s yesterday.

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