Big pharma’s jumbo profits are under threat in America

For America’s politicians, there are few easier bogeymen to rail against than pharma bosses. Only a fifth of the country has a positive opinion of the industry, according to Gallup, a pollster—meaning its executives rank below even estate agents in the public’s esteem. The eye-watering prices of many drugs in America have created the impression of a greedy industry that exploits the sick.

Donald Trump, at least in this respect, seems all too happy to follow convention. On May 12th the president signed an executive order that seeks to force drugmakers to reduce their prices in America to align with the lowest rate they charge in other rich countries. That adds to the consternation of pharma bosses already fretting over Mr Trump’s protectionism. Although they were excluded from the sweeping “reciprocal” tariffs announced on April 2nd, duties remain on the table. Executives warn that the combined effect would be to snarl supply chains, raise treatment costs and slow the development of new medicines.

Start with the president’s attempt to rein in prices. The executive order instructs his administration to “communicate price targets” to firms based on international benchmarks and establish a mechanism for patients to buy their drugs directly, bypassing the middlemen that pervade America’s convoluted health-care system. Companies that do not comply could face “aggressive measures”, though the order offers little detail on what these might involve.

There are many problems with the plan. It ignores the fact, for instance, that generic drugs, which make up 90% of prescriptions in America by volume, cost around a third less than in other rich countries, according to the rand Corporation, a think-tank.

Branded drugs, though, are more than four times as pricey in America as in comparable markets. But pegging prices to those abroad may not achieve the president’s aims. America is by far the biggest market for most drugmakers, accounting for around two-fifths of sales and two-thirds of profits for the industry (see chart). Rather than cutting prices there, many firms would raise them abroad and perhaps pull out of some countries altogether, meaning Mr Trump’s policy would shrink their businesses while doing little to lower health-care costs in America.

That is supported by recent research. A study in 2022 by Pierre Dubois of the Toulouse School of Economics and co-authors simulated what would happen if America matched its drug prices with Canada. They concluded that drugmakers would only modestly reduce prices in America—but sharply increase them in Canada. Another paper by Margaret Kyle of the École des Mines, in Paris, reaches a similar conclusion using evidence from European countries that tie their prices to those elsewhere.

For now, the industry is taking comfort from the fact that the order faces many hurdles before it becomes reality. A similar proposal during Mr Trump’s first term was struck down in court, and drugmakers are likely to challenge the effort again. What is more, the order is “plagued with implementation issues”, notes Melanie Whittington of MEDACorp, a research firm. Enforcement will probably require congressional approval, which may not be forthcoming. Although some Republicans support the idea, Mike Johnson, the speaker of the House, has said he is “not a big fan”.

Such consolations do not apply when it comes to Mr Trump’s trade policies. On April 1st the administration launched an investigation into whether pharmaceutical imports threaten national security. If they are deemed to do so, tariffs could follow. The president has floated rates of between 25% and 200%.

That would be a pain for drugmakers. They rely on global supply chains that have been designed to cut not only production costs but taxes, too. Take the example of Keytruda, a blockbuster cancer treatment from Merck, which is manufactured in Ireland. According to Jefferies, an investment bank, Merck holds the intellectual property (IP) for Keytruda in the Netherlands. The arrangement allows the firm to book profits at a tax rate of 10.5%, roughly half what it would pay if the IP resided in America.

Several big pharma firms are pledging to boost output in America in response to the tariff threat. Johnson & Johnson plans to invest $55bn, Roche $50bn, Eli Lilly $27bn and Novartis $23bn over the next few years. But factories take time to build. David Ricks, Eli Lilly’s chief executive, warns that if tariffs are imposed, firms like his will take a hit to profits, as existing contracts with insurers limit their ability to pass on higher costs.

All this could force firms to cut costs elsewhere, most likely in research and development, thus slowing the creation of new medicines and ultimately costing lives. Meanwhile, the production of generics, for which profit margins are thin, will not move from low-cost countries such as India, meaning tariffs will push up prices for American patients. Mr Trump’s policies may achieve little more than a giant headache for patients and drugmakers alike.