How Medicare drug price negotiations could hit pharma stocks

As a string of negative headlines and promising new developments present ideal buying opportunities for investors, Josh Lipton and Julie Hyman perform a mid-year check on the pharmaceutical industry. Goldman Sachs senior biotechnology analyst Chris Shibutani joins Market Domination to break down the health of the pharmaceutical large-caps and unrecognized areas of opportunity in the sector.

Shibutani says the industry is "quite healthy," but acknowledges there are always "cross currents." He points to "tremendous advancements" in biotechnology innovation rising to daunting unmet needs, from cancer to cardiovascular disease. The analyst points to "holy grail-like" opportunities such as obesity drugs, and notes improvements in chemotherapy and next-generation antibody-drug conjugates for cancer treatment.

However, Shibutani explains that the Inflation Reduction Act may challenge the industry, as the landmark legislation stipulates drug price negotiation for Medicare that is "beginning to play out."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This article was written by Gabriel Roy

Video transcript

In today's Yahoo Finance playbook.

We are doing a mid year check on the pharmaceutical industry string of negative headlines and promising new developments present ideal buying opportunities for investors and joining us now to discuss is Chris Shibutani Goldman Sachs, senior biotechnology analyst in global investment research, Chris, it's, it's good to see you.

It is that time of year, Chris where it feels right to maybe take a deep breath and, and and figure out where we are and where we're headed.

Um So when you look at your coverage universe Chris and may maybe we can start with the large caps uh that you cover pfizer Merck Eli Lily, big picture Chris.

Um How healthy, how resilient does that sector look to you, Chris?

Yeah, thank you for having me on Josh.

I think the pharmaceutical industry is very much considered the beachhead property within health care.

Broadly, the industry is quite healthy but naturally there are always cross currents happening.

I think from an innovation standpoint, we're seeing tremendous advancements in the development of novel therapies to address some of the most daunting unmet needs that uh people have in health care, particularly in cancer.

And cardiovascular disease clearly.

And I'm sure we'll touch upon this therapeutics that address obesity and overweight have very much captured headlines and drawn attention very broadly.

Maybe some of the negative headwinds include the traditional aspects of thinking about policy implications.

We know that the Inflation Reduction Act has a drug price negotiation component for Medicare that is beginning to play out.

And this is part of the overall backdrop that the industry is navigating its way through.

Chris.

I want to get to that Medicare pricing in a moment.

But first, I want to ask you a little bit more about this obesity versus everything else because as you noted, it has captured a lot of the headlines, all of the air in the room, the dollars, et cetera.

Are you think, do you think as a result that there are treatment areas and therefore companies that have been sort of overlooked that you, that you think investors should be looking at right now to be fair?

I think that there are certain aspects of the industry where almost holy grail like opportunities have always been out there and, and finding approaches for the management of weight overweight and obesity is clearly been amongst those for decades.

Uh And then I think we are at this juncture where we have therapeutics that are delivering meaningful benefit and also with a profile of acceptable safety that has made them go mainstream and therefore, has earned that capture of attention.

But to your question.

I would agree.

I think that there are very significant developments that perhaps don't quite connect as tangibly with mainstream folks.

Uh in terms of thinking about the benefit that isn't to say that it isn't creating very important innovations at the scientific level, whether it's genetic based therapies, gene therapies.

We're seeing some of the first that are approved trend levels of unmet need that are being addressed, perhaps not on the same scale and scope and potential global opportunity, but yet very meaningful from the when you think about the long history and the trajectory of our understanding of certain diseases and uh I think of the constant drumbeat of the fact that perhaps in cancer, something that touches so many people's lives directly or indirectly, we are seeing continued innovation and developments, advances of some of the traditional therapies like chemotherapy.

Now the next generation version that's becoming very much a promising source of active treatments and research antibody drug conjugate.

So there are other areas that are very relevant.

It's just hard as you say because all the oxygen seems to be getting drawn out of the room by the scale of the obesity opportunity, Chris, another theme, your space has been M and A and you know, listen, why not?

Big Pharma has plenty of cash?

Do you see that theme?

Continuing, Chris?

And if so, are there any potential acquisition targets on your radar?

Yeah, I think in any of the major industries and whether you look at the landscape, it's just part of the natural history, right?

We have several leading companies, I think typically about a dozen leading global companies in the US and Europe and of those companies at the revenue scale.

In order to move the needle in the minds of investors, you need to be able to continually replenish your new products that are driving the growth as well as the pipeline, which hold the promise for future growth, embedded risks as well.

All companies recognize that the innovation that they focus on in the research laboratories is very important but the not made here, mentality is the source of risk or failing for companies who relied too much upon that.

So I think we would expect to see continued M and A another important factor in the drug industry, patents, patents have defined dates of effect, inspiration.

And we think of them in terms of ends of exclusivity or loss of exclusivity, perhaps cliffs or erosions or revenues.

Companies recognize they can see this coming down the road years in advance because these are date certain events, Josh.

And so from that standpoint, companies know they need to replenish their portfolios.

And that's often another important reason why business development and M and A is just a foundational part of the playbook, Chris, as I mentioned.

Uh let's get to those uh Medicare drug price negotiations, as you say it was passed as part of the IRA, but we have seen sort of aspects of, of these negotiations becoming more clear to some extent.

So which drug makers do you think are most and least affected?

Do you think it's going to be material for the industry?

So I think ultimately it will touch upon the entire industry.

Certainly the first year that we're seeing play out there were 10 drugs that were selected for which the drug prices that are ultimately determined and negotiated will go into effect in 2026.

We're going to learn what those 10 negotiated price levels are by September 1st.

So that's not too far away from now, from that standpoint, this will go on as part of the Inflation Reduction Act, Ira with a set protocol.

In terms of thinking about how in subsequent years starting in 2027 2028 it will expand both in terms of the number of drugs and not to get too inside baseball.

But in terms of thinking about Medicare, there's part D but there's also part B and so there'll be an expansion in the number and the breadth of potential drugs that could be included.

So ultimately, it is very relevant for every company across the industry.

However, need to recognize that innovation is at the core of the driving force.

Companies can again anticipate this.

And therefore, we're seeing that markets for products are truly global.

Medicare is an important pair, but only one of several components.