⚠ Medicare Price NegotiationModerate threat
Eli Lilly (LLY) — threat to the moat
The IRA lets the US government negotiate prices for the first time — the rules of the richest market changed.
For decades the United States was the market that let drugmakers set their own prices, and it funded a disproportionate share of the industry's global profits. The Inflation Reduction Act changed that in principle1: for the first time, Medicare — the largest single payer for medicines in the country — can negotiate prices on selected high-cost drugs, and the list of negotiated drugs expands over time: in January 2026 HHS selected Trulicity and Verzenio for government-set prices effective in 2028.2 A structural check on US drug pricing, long resisted by the industry, has finally arrived, and it is unlikely to be repealed.
The danger is a slow, widening squeeze rather than a sudden blow. The initial negotiations touch only a handful of older, high-spend drugs, but the mechanism is now established and the pool grows each year, and a drug becomes eligible some years after launch — meaning even today's blockbusters will eventually face negotiated prices while still on patent. For a company whose economics rest on charging high US prices during the patent window, a permanent government counterparty at the negotiating table is a lasting headwind on the most profitable part of the model.
Lilly's mitigations are genuine: negotiation still leaves room for strong prices on truly valuable drugs, the vast volume of the obesity and diabetes market can offset lower unit prices, and much of Lilly's growth comes from newer drugs not yet exposed. But an owner should recognize that the era of unfettered US pricing is ending, that the negotiation mechanism will expand and reach today's winners in time, and that the single most profitable feature of the American drug market is now, permanently, less free than it was.
- ReportedThe Inflation Reduction Act changed that in principle: for the first time, Medicare — the largest single payer for medicines in the country — can negotiate prices on selected high-cost drugs, and the list of negotiated drugs expands over time: in January 2026 HHS selected Trulicity and Verzenio for government-set prices effective in 2028.Inflation Reduction Act (2022) — Medicare drug-price negotiation authority, first negotiated prices phasing in — Enacted 2022; negotiations ongoing · publ. 2022-2026 · source ↗
- ReportedThe Inflation Reduction Act changed that in principle: for the first time, Medicare — the largest single payer for medicines in the country — can negotiate prices on selected high-cost drugs, and the list of negotiated drugs expands over time: in January 2026 HHS selected Trulicity and Verzenio for government-set prices effective in 2028.Eli Lilly Form 10-K, FY2025 - revenue $65,179M (Mounjaro $22,965M, Zepbound $13,542M, Verzenio $5,723M); gross margin 83.0% (81.3%); R&D $13,337M; marketing, selling and administrative $11,094M; acquired IPR&D $2,910M; net income $20,640M; price -6% and volume +50% (U.S. price -10%, volume +53%); rebates, discounts and returns deducted $62,135M; capital expenditure $7,841M; operating cash flow $16,813M ($8,818M, $4,240M); U.S. compound patents: Cyramza 2026, Trulicity 2027, Jardiance 2029, Verzenio 2031, Olumiant 2032, Mounjaro/Zepbound 2036, Jaypirca 2037, Retevmo 2038, Inluriyo 2039; HHS selected Trulicity and Verzenio in January 2026 for government-set prices effective 2028; six products above $3 billion were 82% of revenue; three wholesalers each 16%-24% of revenue — FY2023-FY2025 · publ. February 2026 · source ↗