A Tweak to Medicare is Good for Merck. Can It Cure the Troubled Stock?

Merck gets half of its revenue from one drug. Company signage on the floor of the New York Stock Exchange earlier this year. (Michael Nagle/Bloomberg)

A new tweak to Medicare’s drug price negotiation program will allow Merck to squeeze more revenue out of its cancer blockbuster Keytruda. The question is whether it will be enough to make a difference for the troubled stock.

Merck shares have dropped by around a third since the start of July 2024, amid investor concern about expiring patents for Keytruda, a top-selling medicine that accounted for half of its revenues in the second quarter of this year.

The patents protecting Merck’s exclusive right to sell Keytruda in the U.S. expire in December 2028, and analysts expect Keytruda sales to plummet as biosimilar competitors hit the market.

That’s only one of the problems lying in wait for Keytruda in 2028, however. Since President Biden signed the Inflation Reduction Act in 2022 allowing Medicare to negotiate drug prices, analysts and the company have expected Medicare to start paying lower prices for Keytruda in January 2028.

Now, a new provision in the spending deal President Donald Trump signed last month will delay Keytruda’s eligibility for negotiated prices by one year. It appears that Medicare won’t pay a reduced rate for Keytruda until 2029.

In a statement to Barron’s, Merck said it now expects “price-setting beginning in 2029.”

That one-year delay on its own likely isn’t a big deal. The messy interplay of the new price negotiation program, the entrance of Keytruda biosimilars, and the launch of a new version of Keytruda that can be quickly injected under the skin, create uncertainty, but one thing is clear: No matter what, Keytruda sales are going to start dropping very quickly in 2029.

“This is nice, but does not change that fundamental view of our business,” Merck CEO Robert Davis said on an investor call late in July, when asked about the delay.

The delay of the new Medicare prices, though, does open one possibility that could improve the company’s prospects a bit, and might boost investor sentiment around the stock.

Merck plans to launch a new version of Keytruda this fall that can be injected quickly through the skin, Barron’s reported last year. The original version of Keytruda must be administered intravenously during a 30-minute session.

The injectable version of Keytruda will compete with biosimilars that must be administered intravenously, and Merck is betting patients and doctors will prefer the quicker, more convenient shot.

As for the price negotiation program, Merck had thought the injected version of Keytruda would be exempt from the lower negotiated prices, and that the company would still be able to charge Medicare full price for the injected version.

An update from the Centers for Medicare and Medicare Services in May blew up that plan: The agency, which administers Medicare and the price negotiation program, said that injectable versions of drugs like Keytruda would be subjected to negotiated prices at the same time as the original medicine.

That was bad news for Merck, and seemed to undermine the injected Keytruda strategy.

The delay of the negotiated prices, however, points to a new possibility. Under the law creating the price negotiation program, drugs that face biosimilar competition are generally exempt from the lower negotiated Medicare prices. As Merck pointed out in its email to Barron’s, the company now expects biosimilar versions of Keytruda to launch in December 2028.

That means that it’s possible that lower prices for Keytruda will never be implemented for Medicare, since cheaper biosimilar versions of Keytruda will be available before 2029.

That’s not a big help for original Keytruda, since the cheap biosimilars will likely swallow market share. But it could be a boost for the injectable version, which in that case wouldn’t face negotiated prices at all.

None of this is certain. Among other things, CMS may be able to impose negotiated prices on eligible drugs even if a biosimilar has already launched, if the agency decides that the biosimilar isn’t having a serious impact on the market.

It’s also the case that these dynamics aren’t radically different than they were before the Medicare negotiations were delayed.

But the new timeline does seem to break open the possibility of a slightly better future for Merck, where the Keytruda patent cliff is softened, after all, by the Keytruda injectables.

Lots of questions remain for Merck. There are still big problems with demand for its HPV vaccine Gardasil in China, which has weighed heavily on investor sentiment since last year. There is still a pipeline that some analysts say leaves much to be desired.

But with the stock down so much, it may be time for investors to revisit the pessimism that has settled on Merck shares.

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com