An Eli Lilly diabetes treatment landed on the Biden administration’s list of prescription drugs that Medicare will target for price cuts — a move that may hit sales but doesn’t change our investment thesis on the pharma stock. Lilly’s Jardiance is among the first 10 prescription drugs subject a new, contentious negotiation process between Medicare and drugmakers. Other medications selected for negotiation include Bristol-Myers Squibb ‘s Eliquis and Xarelto, which is made by former Club holding Johnson & Johnson (JNJ). The agreed-upon prices would take effect Jan. 1, 2026. The Biden administration, which unveiled the full list Tuesday, heralds the initiative included in last year’s Inflation Reduction Act as way to reduce out-of-pocket drug costs for older Americans. Nearly 66 million Americans are enrolled in Medicare , a government-run health program for seniors and people with disabilities. Eli Lilly’s revenue from Jardiance — which it markets alongside privately held German biotech firm Boehringer Ingelheim — is likely to suffer due to Medicare negotiations. But the magnitude is far below what it would take to shake our belief in the company’s bright long-term prospects. Those are primarily illuminated by Mounjaro, Lilly’s diabetes and likely soon-to-be weight loss drug, and its Alzheimer’s pipeline led by donanemab. Compared to those growth drivers, Jardiance is a minor character in the Eli Lilly investment story. Bank of America models Jardiance to be roughly 6% of Lilly’s total sales in 2026, “so the [profit-and-loss] impact will likely be limited,” analysts wrote in a note to clients Tuesday. To be sure, Jardiance is expected to be Lilly’s fifth best-selling drug this year — and then fourth in 2024, 2025 and 2026, when lower prices paid by Medicare are supposed to kick in, according to analyst estimates compiled by FactSet. But the company is still looking at 2.5 more years of respectable sales growth from Jardiance — up 36.5% year over year in 2023, to $2.82 billion, and roughly 14% in 2024 and 2025. Then it slows considerably in 2026, rising just 3.4% annually to $4 billion in sales. However, the deceleration is not entirely due to likely lower realized prices from Medicare negotiations. Even before Inflation Reduction Act’s passage in August 2022, analysts projected Jardiance’s annual growth rate expected to slow substantially later in the decade because its patent is set to expire, according to historical FactSet estimates. Meanwhile, Lilly’s overall revenue is projected increase roughly 17.1% in 2024, 18.2% in 2025 and 13.7% in 2026 – at which point companywide sales are seen totaling nearly $52 billion, according to FactSet. Those significant growth rates fueled in large part by Mounjaro, which is expected to generate about $23 billion in revenue for obesity and diabetes in 2026, FactSet data shows. That’s 44% of Lilly’s projected total sales. Broader impact The pharmaceutical industry is fighting back, with multiple drugmakers — such as Merck (MRK) and J & J — challenging the program in court. The companies claim Medicare’s price negotiation scheme violates multiple amendments in U.S. Constitution, including the First and Fifth, and would stifle innovation. Wall Street analysts had expected Jardiance, which can also treat heart failure, to become subject to negotiations, making Tuesday’s official announcement more of a formality to Eli Lilly shareholders. In general, there were few surprises in the list, which also includes Bristol Myers Squibb ‘s (BMY) blood thinner Eliquis, said BMO Capital Markets analyst Evan Seigerman. More broadly, Seigerman suggested that investors have had time to anticipate the first two rounds of price negotiations, at least, and contemplate which drugs might be impacted based on publicly available Medicare spending data. “I think there’s just generally a misconception with the [Inflation Reduction Act] that this negotiation in 2026, 2027 is going to decimate these pharma stocks,” Seigerman said in a CNBC interview. The Inflation Reduction Act gave the Centers for Medicare and Medicaid Services the ability to directly negotiate with drugmakers, a common practice in other countries. Companies can opt out of the negotiation process, but doing so will require them to pay a large tax on U.S. sales of the drug. The government will present what it calls a “maximum fair price” for each drug to their manufacturers drugmakers by Feb. 1, and they’ll have a month to respond — either accepting the proposal or presenting a counteroffer. The negotiation window ends Aug. 1, 2024. Medicare’s negotiation program targets the most costly drugs for the agency, according to a CMS fact sheet . For the first year, only 10 drugs were allowed to be selected for negotiation, but 15 additional therapies can be added in each 2027 and 2028. Beginning in 2029 and beyond, an additional 20 drugs can be eligible each year. To qualify for Medicare negotiation, drugs must lack of competition from generic versions, and have been on the market for a certain period of time when the negotiated price goes into effect — 9 years for small molecule drugs, which are often taken orally , and 13 years for biologics, a more complicated class of therapies typically given through injection or infusions. Eli Lilly looks “relatively protected” from early Medicare negotiations, BMO’s Seigmerman said. Under the current framework, Mounjaro would likely be eligible for the negotiation list in 2031, according to Seigerman, while the clock hasn’t started ticking yet on Alzheimer’s therapy donanemab because the Food and Drug Administration has yet to approve it. Lilly expects a decision by year-end. One area to watch is Lilly’s current top-selling drug, Trulicity, which was first approved by the FDA in 2014 . That means the biologic diabetes treatment could be eligible for negotiations in the 2027 cycle. However, the drug’s primary U.S. patent also is set to expire in 2027, Eli Lilly said in its latest annual report . And current Wall Street estimates have Trulicity sales peaking in 2025, at $8.32 billion, according to FactSet. In recent quarters, about 13% to 14% of patients who have started taking Mounjaro for diabetes switched from Trulicity. Despite seeing a “minimal impact” on Eli Lilly’s revenue in the near term, Seigerman said the advent of Medicare negotiations is impacting decision-making at the Club holding and the pharmaceutical industry, more broadly. “It changes the way investments are thought about now and R & D is spent now. That’s the nuance,” Seigerman told CNBC. Negotiated prices may not take effect until 2026, but the program “changes the drugs that are going to be available in the 2030s,” he said. “And we won’t know what we don’t have.” (Jim Cramer’s Charitable Trust is long LLY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Medicare wants to cut the price on an Eli Lilly drug. What it means for LLY shares
Eli Lilly headquarters in Indianapolis, Indiana, US, on Wednesday, May 3, 2023. Eli Lilly & Co.’s shares climbed in early US trading after its experimental drug for Alzheimer’s slowed the progress of the disease in a final-stage trial, paving the way for the company to apply for US approval.
AJ Mast | Bloomberg | Getty Images
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