S&P 500   5,088.80
DOW   39,131.53
QQQ   436.78
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Sprouts, Block rise; Booking Holdings, Insulet fall, Friday, 2/23/2024
S&P 500   5,088.80
DOW   39,131.53
QQQ   436.78
Dell Technologies breaks out ahead of earnings release
AI Stock Caught Trading Under Secret Name (Ad)
Dropbox’s stock is a falling knife worth catching
Novavax’s dispute resolution and upcoming earnings call
AI Stock Caught Trading Under Secret Name (Ad)
Stock ideas from the 2024 Microcap Conference
Warner Bros. Discover: Debt down, profits up, yet questions remain
AI Stock Caught Trading Under Secret Name (Ad)
Gloom settles over Germany's economy, with businesses downbeat about the coming months
Sprouts, Block rise; Booking Holdings, Insulet fall, Friday, 2/23/2024
S&P 500   5,088.80
DOW   39,131.53
QQQ   436.78
Dell Technologies breaks out ahead of earnings release
AI Stock Caught Trading Under Secret Name (Ad)
Dropbox’s stock is a falling knife worth catching
Novavax’s dispute resolution and upcoming earnings call
AI Stock Caught Trading Under Secret Name (Ad)
Stock ideas from the 2024 Microcap Conference
Warner Bros. Discover: Debt down, profits up, yet questions remain
AI Stock Caught Trading Under Secret Name (Ad)
Gloom settles over Germany's economy, with businesses downbeat about the coming months
Sprouts, Block rise; Booking Holdings, Insulet fall, Friday, 2/23/2024
S&P 500   5,088.80
DOW   39,131.53
QQQ   436.78
Dell Technologies breaks out ahead of earnings release
AI Stock Caught Trading Under Secret Name (Ad)
Dropbox’s stock is a falling knife worth catching
Novavax’s dispute resolution and upcoming earnings call
AI Stock Caught Trading Under Secret Name (Ad)
Stock ideas from the 2024 Microcap Conference
Warner Bros. Discover: Debt down, profits up, yet questions remain
AI Stock Caught Trading Under Secret Name (Ad)
Gloom settles over Germany's economy, with businesses downbeat about the coming months
Sprouts, Block rise; Booking Holdings, Insulet fall, Friday, 2/23/2024

How Much Pain Will Lower Medicare Prices Cause for Pharma Stocks?

Key Points

  • Johnson & Johnson, Novartis, Bristol-Myers Squibb, Merck, Eli Lilly and Amgen are among the drugmakers targeted in upcoming Medicare price negotiations.
  • High prescription drug costs in the U.S. are a popular political concern, but the pharmaceutical industry argues that lowering prices could hinder research and development.
  • The pharmaceutical industry remains highly regulated and subject to government influence, but competition and innovation mean new products are always in the pipeline.
  • 5 stocks we like better than Amgen

Pharmacist checking stock values; Pharma stocks overview.

Major pharmaceutical companies including Johnson & Johnson NYSE: JNJNovartis AG NYSE: NVSBristol-Myers Squibb (NYSE: BMY), Merck & Co., Inc. NYSE: MRKEli Lilly & Co. NYSE: LLY and Amgen Inc. NASDAQ: AMGN were trading normally following news that their drugs would be subject to next year’s Medicare price negotiations.

The move is part of the Inflation Reduction Act, which allows the federal government to negotiate prices of certain drugs for Medicare.


Reducing drug prices in the U.S. is a popular platform for politicians. It’s well known that high prescription drug costs can disproportionately burden retirees and many others. U.S. consumers pay higher prices for drugs than patients in many other countries worldwide, and that financial burden takes a toll on retirees and many others. 

However, for its part, the global pharmaceutical industry argues that reducing consumer costs would compromise its research and development capabilities, hindering the discovery of new technologies. The industry also cites high costs of manufacturing. 

Drugmakers Firing Back with Lawsuits

Johnson & Johnson, Merck, Bristol-Myers Squibb and Japan-based Astellas Pharma OTCMKTS: ALPMY, maker of cancer treatments, filed federal lawsuits saying the law allowing Medicare to pay less for some drugs is unconstitutional.   

The drama will likely take years to play out. Any changes to Medicare-negotiated prices wouldn’t go into effect until 2026. Likewise, pharma companies’ lawsuits will wend their way through the federal court system at a glacial pace. 

Of course, investors will pay attention, although the highly regulated pharmaceutical industry is always subject to Washington’s whims. 

For example, Horizon Therapeutics Public Limited Co. NASDAQ: HZNP are up 5.94% for the week after the Federal Trade Commission ended its attempt to block Amgen’s acquisition of the Ireland-based drug maker.

While regulators have a role in overseeing drug safety, pharmaceutical companies are also under scrutiny for pricing practices. The industry is highly profitable, giving regulators who hope to score points with the public an added incentive to step in. 

Pharma Industry ETFs Post Gains

The SPDR S&P Pharmaceuticals ETF NYSEARCA: XPH is up 1.85% for the week, although its year-to-date gain of 7.97% suggests investors are at least sanguine about the wider industry’s prospects. 

The wider S&P healthcare sector, as tracked by the Health Care Select Sector SPDR Fund NYSEARCA: XLV, has declined by 0.76% this year, lagging the broader S&P 500 index, which has returned 17.59%. 

So will the Medicare negotiations result in lower prices for pharmaceuticals? 

For a time, investors may be reluctant to pile into those stocks very aggressively. However, pharmaceuticals are constantly innovating and bringing new products to market, frequently licensing or buying outright technologies developed by biotech startups.

In other words, the industry isn’t exactly stagnant. 

Along those lines, some drugs on that list aren’t their parent companies' key revenue growth drivers. 

Drugmakers Already Face Ongoing Challenges

One reason the cuts, if they happen, may not put much of a dent in pharma stock prices is competition: Already, drug companies have their own versions of popular products. For example, Novo Nordisk A/S NYSE: NVO Ozempic weight-loss drug competes with Lilly’s Mounjaro. 

Neither is on the list of Medicare-targeted drugs. 

Competition from generic substitutes is also an ongoing reality, as patents for branded medications regularly expire. 

Several drugs on the targeted list will lose their patent exclusivity in 2026 or 2027, shortly after the new law would go into effect, meaning the financial impact of lower Medicare prices may be limited. 

It's improbable that pharmaceutical stocks, as a whole, will undergo a sharp downturn solely because there’s a threat that Medicare pricing may be lower in three years. While price reductions down the road may affect specific drug manufacturers, the pharmaceutical industry has plenty of opportunity for growth in the coming years due to portfolio diversification and innovation. 

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Should you invest $1,000 in Amgen right now?

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Amgen (AMGN)
4.8358 of 5 stars
$289.18+1.4%3.11%23.15Hold$295.30
Bristol-Myers Squibb (BMY)
4.831 of 5 stars
$51.66+0.6%4.65%13.38Hold$61.17
Eli Lilly and Company (LLY)
4.9548 of 5 stars
$769.540.0%0.68%132.68Moderate Buy$663.33
Health Care Select Sector SPDR Fund (XLV)N/A$147.86+0.5%1.35%15.12N/AN/A
Horizon Therapeutics Public (HZNP)
0 of 5 stars
$116.30flatN/A62.19HoldN/A
Johnson & Johnson (JNJ)
4.8445 of 5 stars
$161.84+0.9%2.94%11.72Hold$176.14
Merck & Co., Inc. (MRK)
4.7858 of 5 stars
$129.45+0.1%2.38%924.64Moderate Buy$130.12
Novartis (NVS)
2.233 of 5 stars
$103.90+1.1%2.18%14.47Hold$104.33
Novo Nordisk A/S (NVO)
2.4778 of 5 stars
$123.41-0.9%0.50%45.62Moderate Buy$121.25
SPDR S&P Pharmaceuticals ETF (XPH)N/A$45.18+0.6%1.48%10.11N/AN/A
Compare These Stocks  Add These Stocks to My Watchlist 

Kate Stalter

About Kate Stalter

  • stalterkate@gmail.com

Contributing Author

Retirement, Asset Allocation, and Tax Strategies

Experience

Kate Stalter has been a contributing writer for MarketBeat since 2021.

Additional Experience

Series 65-licensed investment advisor, financial advisor, Blue Marlin Advisors; investment columnist for Forbes, U.S. News & World Report

Areas of Expertise

Asset allocation, technical and fundamental analysis, retirement strategies, income generation, risk management, sector and industry analysis

Education

Bachelor of Arts, Saint Mary’s College, Notre Dame, Indiana; Master of Business Adminstration, Kellogg School of Management at Northwestern University

Past Experience

Founder, financial advisor for Better Money Decisions; editor, stock trading instructor for Investor’s Business Daily; columnist, podcast host, video host for MoneyShow.com; contributor for Morningstar magazine


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