Trump’s drug price crackdown, like his trade war, could be more bark than bite
Summary
As in negotiations with foreign nations, minor concessions by drug companies are more likely than a true overhaul.It is appropriate that Donald Trump chose to unveil his new push to cut drug prices on the same day his administration moved to ease tariffs on China. Investors are betting that the ultimate hit to big pharma could be similarly muted.
As with Trump’s trade brinkmanship, victories on drug pricing could be vaguely defined, with deals subject to extended negotiation. That is why, despite the tough talk, now may be an opportune time to invest in the beaten-down sector.
On Monday, President Trump signed an executive order aimed at lowering prescription drug costs, directing his administration to peg U.S. prices to those paid abroad. On the surface, it is an ambitious attempt to rein in America’s notoriously high drug spending. Much of his diagnosis was on point—including the claim that Americans subsidize global innovation and his crude but not incorrect jab that “fat shots" like Wegovy cost a fraction in the U.K of what they do in the U.S.
Yet while Trump’s announcement was full of bluster, it lacked policy detail. And in the U.S., the pathways to overhauling drug spending are narrow and mostly run through Congress. That is why President Joe Biden’s Inflation Reduction Act, which empowers Medicare to negotiate some prices, went through the legislative route—and why Trump initially tried to advance his “Most Favored Nation" approach through the current tax bill.
With Congress not cooperating, Trump pivoted to an executive order that implies sweeping impact—potentially applying not just to government programs but also to the commercial insurance market. “We’re going to pay the lowest price there is in the world," Trump said Monday.
The new order directs Health and Human Services Secretary Robert F. Kennedy Jr. to inform drugmakers of U.S. price targets for medicines that are aligned with those of other countries. If the companies don’t make progress toward adopting these prices, the administration will propose a rule-making plan that imposes the prices, and allows importation of drugs from overseas.
Tying U.S. drug prices to those paid overseas isn’t new for Trump. His first administration tried to implement a similar Medicare-focused rule, but it was struck down in court on procedural grounds. Analysts expected him to revisit that playbook—but this time, his administration seems to hope that the threat alone will pressure the industry into giving him a win. Trump does have plenty of levers against Big Pharma, including his pending tariff announcement as well as his administration’s ability to block mergers and acquisitions. Trump could also conceivably implement de facto international price referencing for certain drugs through the already enacted IRA negotiating powers passed under Biden.
But as with much in Trump’s world, bombastic threats can often give way to negotiated settlements with minor concessions that allow him to declare victory. Take last week’s modest U.K. trade agreement, which featured market openings for U.S. ethanol and beef worth mere hundreds of millions of dollars. It is easy to imagine a similar pharma scenario a few months from now, with Trump flanked by pharma leaders as he touts a 20% price cut, perhaps on drugs already nearing patent expiration.
President Trump signed an executive order Monday aimed at lowering prescription drug costs.
“This EO is not a material event in our view," wrote Chris Meekins, an analyst at Raymond James. “It reminds us of how in President Trump’s first term he was all bark, no bite on drug pricing…He has tools available to him to impact drug pricing, but whether he will use them remains to be seen."
Even if Trump does push forward with international reference pricing on blockbuster drugs in a way that could seriously dent the industry’s profits, pharma has ways to blunt the impact. Companies could try to block the effort on legal grounds. And if that is unsuccessful, they could pull products from low-price countries—a harsh but viable move—or inflate list prices abroad while using backdoor rebates to obscure the real cost from the U.S. government.
“If he succeeds, I think it will save money for a while. However, the industry will likely factor this into their prices in other countries, or delay launching there to avoid that information factoring into U.S. prices," says Anna Kaltenboeck, a health economist who helped write Biden’s drug pricing law and now runs healthcare consulting firm Verdant Research. “Ultimately, there’s no substitute for simply drawing a line on what we pay based on our own view of a drug’s value."
For long-term investors, the uncertainty—which also includes forthcoming pharma tariffs and changes at the Food and Drug Administration—is leading to bargain prices in healthcare at a time when the broader stock market is already back to lofty levels. The NYSE Arca Pharmaceutical Index is currently trading at 13.6 times its earnings over the next 12 months, which reflects a roughly 10% discount to its 10-year average and a more than 30% discount to the S&P 500’s 20.5 multiple.
Make no mistake: Pressure on pharma is real and unlikely to fade soon. But much of that risk is already priced in—leaving room for patient investors to step back in.
Write to David Wainer at david.wainer@wsj.com
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