By Josh Nathan-Kazis

Buried in a 200-page technical document released by the Centers for Medicare and Medicaid Services late Monday was a short, convoluted paragraph that could translate to big problems for Johnson & Johnson, Merck, Bristol Myers Squibb, and a handful of their big pharma peers.

The paragraph could spell the end of a strategy the drugmakers had believed would allow them to put off the impact of Medicare price cuts for some of their top-earning cancer drugs.

The plan had been to shift patients to newer injectable versions of the cancer drugs, and then keep charging Medicare high prices for the injectable versions even after the original versions were subject to the new price negotiation program.

The paragraph on page 13 of Monday night's guidance document suggests that the Trump administration might be planning to put an end to that workaround. The problem for investors is that a lot of drugmakers had bet heavily on the gambit, building it into their strategies to blunt the impact of the inevitable revenue drops that are coming as a wave of monoclonal antibody cancer therapies approaches the end of its patent life.

For Merck, the new guidance could disrupt the company's plans to drag out revenue from Keytruda, the cancer megablockbuster responsible for nearly half its sales. For Johnson & Johnson, it would mean that revenue from their cancer drug Darzalex Faspro would drop sharply in 2029, five years earlier than expected. And for Bristol, it might be bad news for Opdivo Qvantig, which could see its sales drop in 2028, also earlier than expected.

Shares of all three of the drugmakers were falling on Tuesday. Merck was down 3.4%, Johnson & Johnson was down 3.8%, and Bristol was down 2.6%. The S&P 500 was up 0.9%.

Also down was Halozyme, the biotech that makes the ingredient that allows Opdivo Qvantig, Darzalex Faspro, and other medicines to be quickly injected, rather than slowly infused. Its shares were down 25%.

Neither Merck, Johnson & Johnson, nor Bristol responded to a request for comment.

The new CMS guidance doesn't yet change Medicare's price negotiation program. Under the current rules, complex drugs known as biologics are eligible for the negotiation process after 13 years, but the clock restarts for a new version of the drug that adds an additional active ingredient.

That means, for example, that Johnson & Johnson's Darzalex will be eligible for Medicare price negotiations in 2029, but that Darzalex Faspro, which adds Halozyme's Enhanze so it can be injected subcutaneously, wouldn't be eligible until 2034.

Now, CMS appears to be rethinking that approach. In Monday's guidance, the agency said it is "soliciting comments" on how it "might consider" grouping combination drugs where one ingredient doesn't impact the disease the drug is approved to treat together with their original version.

It's a confusing paragraph, but CMS seems to be signaling it's considering a change for the negotiated prices that go into effect in 2028 that would, for example, make a combination drug like Darzelx Faspro eligible for negotiations at the same time as the original Darzalex.

That's probably closer to the intent of the 2022 Inflation Reduction Act, which is the law that set up the price negotiations, according to Leerink Partners analyst Daina Graybosh.

"We all know it's against the intent," Graybosch said of the current policy. "The other feedback I got from some investors is -- 'I mean, this is right, right? You should not be able to get around IRA with [subcutaneous formulations].'"

Graybosch said a change in policy would bring enormous complexities. It might be hard to make the case, for example, that an ingredient added to help the drug spread through the body isn't active against the disease the drug is meant to treat. There are also complications with how the policy would interact with the biosimilar market, which makes cheaper versions of biologics once their patents expire.

The bottom line, though, is that the odds that this strategy works for the drugmakers are much lower than they seemed to be on Monday morning.

For Merck, it's a major blow. This past summer, Merck CEO Robert Davis told Barron's he was "quite confident" that subcutaneous Keytruda would be exempted from the price negotiation program.

As Barron's reported in a cover story in August , the shift to a subcutaneous version of Keytruda is a significant pillar of the company's plan to weather the Keytruda patent cliff. The FDA is set to decide on whether to approve subcutaneous Keytruda in late September.

The new subcutaneous version of Keytruda may still be helpful in beating back competition from biosimilars set to launch in 2028. But now it's less likely to help the company deal with lower prices paid by Medicare for the drug, which could also hit in 2028.

Graybosch, who covers Merck, maintained her Outperform rating on the stock. "I didn't downgrade Merck because they're so beaten up," she said. The stock is down 20% this year, and 40% over the past 12 months. "Even if I basically say [subcutaneous Keytruda] gives you almost nothing, then I am still a Buy on Merck."

Graybosch's Leerink Partners colleague David Risinger, however, did cut his rating of Johnson & Johnson on Tuesday. He downgraded the stock to Market Perform from Outperform, and cut his target price to $153 from $169.

In a note, Risinger wrote that he had previously thought that Darzalex Faspro sales in the U.S. would be $10.7 billion in 2028, accounting for 10% of Johnson & Johnson's entire estimated sales that year, and he had expected the drug to contribute 22% of the company's total operating profit that year.

"If it is price controlled in 2029, the drug's US profit contribution could take a meaningful hit," Risinger wrote.

For now, all investors can do is wait. A final decision from CMS on its policies for 2028 is expected later this year.

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

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

May 13, 2025 13:55 ET (17:55 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.