Merck (MRK) faces an interesting threat to its future. The company has lost the ability to control the prices of one of its principal products in the United States.
A 2022 federal law, the Inflation Reduction Act, gives the Centers for Medicare & Medicaid Services (CMS) to negotiate reimbursement amounts for drugs Medicare Part D pays for. The first 10 drugs CMS will negotiate prices for include Merck’s Type-2 Diabetes treatment Januvia (sitagliptin).
Merck & Co (NYSE: MRK) made $4.513 billion from Januvia or Janumet sales in 2022 and $913 million from Januvia sales in the fourth quarter of 2022. CMS negotiations could further reduce Merck’s Januvia profits. Notably, Merck’s Januvia revenues fell by 15% in 2022 from $5.288 billion in 2021.
How Drug Negotiations could Hurt Merck (MRK)
Giving the CMS control of drug prices could hurt Merck because Medicare is America’s largest buyer of prescription drugs. Around 50.5 million people use Medicare Part D drug benefits, which cover prescription costs.
Medicare Part D was a bonanza for Merck because the law that created the program, the Medicare Modernization Act of 2003, made it illegal for the CMS to set drug prices. Hence, Merck could set the price of Januvia.
Januvia is a cash cow for Merck. There were 9.886 million Januvia prescriptions in the US in 2020, ClinCalc estimates. Furthermore, the average total cost of a Januvia prescription was $926.71 or $15.31 a day, in 2020. Therefore, I estimate Januvia generated $9.161 billion in revenues in 2020.
Furthermore, Merck estimates it made $4.513 billion from Januvia in 2022 and $5.288 billion from Januvia in 2021. Januvia revenues fell because of a contamination scare in the US.
Why Merck (MRK) Fears the Inflation Reduction Act
However, the Inflation Reduction Act will let the CMS control drug prices beginning in 2026. Merck executives fear the CMS. The company has filed a federal lawsuit that alleges the negotiations are unconstitutional price controls, Reuters reports.
I think Merck executives fear the CMS because politicians are under pressure to reduce drug costs. Remember, 2024 is a presidential election year and older Americans (Medicare Part D’s principal users) are an important constituency.
Notably, most Americans enroll in Medicare at age 65. Tellingly, 67% of Americans over 65 vote, KFF estimates. The average voting rate for Americans is 52%. Moreover, there were 37.086 million US voters over 65 in 2022 and those people are more likely to vote.
Therefore, I conclude whoever is president in 2026 will pressure the CMS to cut drug prices as low as possible. Moreover, President Joe Biden (D-Delaware) faces a close race with Donald J. Trump Senior (R-Florida). Notably, both Biden and Trump have promised to reduce drug costs on the campaign trail.
I think will take years for courts to rule on the Inflation Reduction Act’s constitutionality. Moreover, the federal courts will face intense political pressure to keep drug prices low. I predict, the federal courts will let drug price negotiations stand. Probably by refusing to rule on the matter.
Can Merck Survive Drug Price Controls?
Merck executives’ greatest fear is that the CMS will start negotiating for all Medicare Part D drug prices. This threatens Merck because Medicare Part D is big business.
For example, insurers offer 801 Medicare Part Stand-Alone Prescription Drug Plans. Interestingly, the number of Medicare Prescription Drug plans fell from 1,877 plans in 2007.
Pressure to negotiate drug prices is high because buyers paid $3.4 billion in out-of-pocket costs on the 10 drugs on the CMS’s list in 2022, the US Department of Health and Human Services claims. Moreover, those drugs cost Medicare Part D $50.5 billion between 1 June 2022 and 31 May 2023.
Merck (MRK) is Losing Money
Interestingly, Merck (MRK) is profitable. For example, Merck’s quarterly revenues grew from $14.593 billion on 30 June 2022 to $15.035 billion on 30 June 2023. Similarly, Merck’s quarterly gross profits grew from $10.377 billion on 30 June 2022 to $11.011 billion on 30 June 2023.
Conversely, Merck reported a -$5.012 billion quarterly operating loss on 30 June 2023. The quarterly operating income fell from $5.067 billion on 30 June 2023. Hence, Merck is losing money without the price controls.
Interestingly, the quarterly operating cash flow fell from $4.302 billion on 30 June 2022 to $3.704 billion on 30 June 2023. Yet Merck can generate enormous amounts of cash.
For example, Merck reported a quarterly ending cash flow of $9.786 billion on 31 March 2023. However, the quarterly ending cash flow fell to -$4.047 billion on 30 June 2023. There was a $1.139 billion quarterly ending cash flow on 30 June 2022.
Merck (MRK) has less cash and more debt
Finally, Merck’s cash and short-term investments fell over the past year. Merck’s cash and short-term investments fell from $10.128 billion on 30 June 2022 to $6.378 billion on 30 June 2023. The cash and short-term investments hit a high of $13.192 billion on 31 December 2022.
In contrast, Merck’s total debt rose from $31.663 billion on 30 June 2022 to $34.072 billion on 30 June 2023. Interestingly, Merck’s quarterly financing cash flow went from -$1.777 billion on 30 June 2022 to $3.758 billion on 30 June 2023. Thus, Merck went from paying debts to borrowing more money.
Finally, Merck (MRK) has lost value. Its total assets fell from $107.095 billion on 30 June 2022 to $104.469 billion on 30 June 2023. Conversely, Merck’s share price rose from $86.42 on 6 September 2022 to $106.49 on 6 September 2023. Hence, Mr. Market thinks Merck has more value as it loses value.
Is Merck (MRK) a Safe Investment?
Investors will wonder if Merck (MRK) is safe because it is a tremendous dividend stock.
Merck has scheduled nine 73₵ quarterly dividends between 6 October 2023 and 25 July 2025. Overall, Merck offered a $2.92 forward dividend and a 2.69% forward dividend on 6 September 2023.
However, I think the dividend is in jeopardy because of the changing political climate in the United States. The US has an aging population that relies on Medicare Part D. Around 16.8% of Americans, or 55.8 million people, were over 65 in 2020, the US Census Bureau estimates. That number grew by 15.5 million between 2010 and 2020.
Hence, the number of people on Medicare Part D and political pressure to control prices will increase. I predict, price controls will cut Merck’s revenues and profits in the years ahead.