Trump’s move to slash U.S. drug prices creates uncertainty for pharma stocks

While many sectors are being shaken by rapid policy shifts, healthcare has followed an especially rough road under the Trump administration.

The latest development takes aim at the U.S. biopharma industry. On May 12, President Trump signed a new executive order (EO) that seeks to lower U.S. drug prices by requiring pharmaceutical manufacturers to match the lower prices in other high-income countries. Under the proposed “most-favored nation” (MFN) policy, if a prescription costs $50 in the U.S. but only $20 in another developed country, the U.S. government would tell the drugmaker it is only willing to pay $20 for that drug.

According to the EO, the Department of Health and Human Services (HHS) and the Administration for Centers for Medicare and Medicaid Services (CMS) and other administration officials will communicate MFN price targets to drug manufacturers. If significant progress isn’t made within 180 days of the order, the Secretary of HHS will propose new rules to enforce the price mandate, including mechanisms to sell to directly to consumers and reimportation from countries where drugs are available at lower costs.

Notably, Trump may be taking a more supportive stance toward companies that have invested in the U.S. In his press conference, he acknowledged that several biopharma companies have recently committed to investing billions of dollars in U.S.-based manufacturing and capital expenditures. He also warned he would consider using trade negotiations – including tariffs on other goods such as car imports – to help U.S.-based biopharma companies level the playing field with Europe.

Awaiting clarity

As with many of the policy changes currently taking shape, the MFN proposal is still in flux and faces many obstacles. Trump attempted to implement the policy during his first term but was met with significant industry and legal pushback. In this second attempt, Trump has said he will broaden the scope of the policy beyond drug prices paid by government programs like Medicare. He claims the new policy would reduce prescription drug prices in the U.S. by 30% to 80% almost immediately.

The sheer lack of detail in the EO also makes it difficult to assess the immediate impact. For example, the order cites no obvious legal authority to mandate lower drug prices, so it remains to be seen how effectively the Trump administration would be able to enforce the new policy. And it is unclear which insurance programs would be targeted and to what extent.

Biopharma stocks breathe a (temporary) sigh of relief

One of the biggest fears for the industry is the possibility that the MFN pricing would become part of the budget reconciliation bill in Congress, which would make immediate enforcement much more plausible. That appears to be off the table for now, although the bill is still being negotiated, and Trump has pushed hard for inclusion. Still, the relief was palpable in markets as most biopharma stocks rebounded sharply following market open on May 12 after being down in pre-market trading.

Overall, while we are also encouraged by Trump’s moderately more constructive tone on the proposed policy, we recognize the risks it poses in its current form. Broad drug pricing controls could reduce funding, slow innovation, and put jobs at risk – not to mention threaten the United States’ global leadership position in this vitally important industry.

Stay focused on fundamentals 

In addition to the host of unknowns related to the MFN proposal, there is still significant uncertainty around issues such as tariffs on pharma imports, as well as the final contours of the budget reconciliation bill. Against this backdrop, healthcare stocks may continue to be prone to volatility. However, we believe we are slowly nearing the end of the regulatory uncertainty that has weighed on the sector since the U.S. election.

Furthermore, as we stated recently, policy in healthcare is always nuanced. Potentially damaging actions by the Trump administration are balanced out to some extent by policies that stand to benefit the sector.

Lastly, the entry point for long-term investors has rarely been this attractive: The healthcare sector trades at a nearly 20% discount to the benchmark versus the long-term average of a 4% premium. Starting from such low valuations, we believe healthcare stocks are primed for gains when there’s positive news.

Amid this latest bout of policy uncertainty, we believe investors should stay focused on the attractive fundamentals, accelerating innovation, and unique blend of defensive characteristics and idiosyncratic growth opportunities of the healthcare sector.

Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.

Volatility measures risk using the dispersion of returns for a given investment.