Recently, the Trump Administration signed an executive order to lower the prices Americans pay for prescription drugs. According to the administration, the U.S. funds roughly 75% of global pharmaceutical profits despite having less than 5% of the population.
It's no secret that brand-name drugs in the U.S. are much more expensive than they are abroad. In the spirit of fairness, the new executive order directs the Secretary of Health and Human Services (HHS) to communicate price targets to drugmakers.
If drugmakers don't accept new price targets, as expected, HHS is to propose rules that impose most-favored-nation pricing. Here's a look at how this could hammer profits for Eli Lilly, Pfizer, Bristol Myers Squibb(NYSE: BMY), and their peers.
Image source: Getty Images.
How bad is it?
In 2013, Bristol Myers Squibb began selling an oral blood thinner called Eliquis in both the U.S. and Japan. It's been a huge success in both markets because previous blood-clot preventers generally required intravenous administration and constant observation by hospital staff.
In Japan, Eliquis launched at an annual cost of around $1,000, or around one-third the cost in the U.S. market when it launched. Thanks to competing oral blood thinners that have since become available, the annual cost of Eliquis in 2024 declined to $900 annually in Japan.
Last year, in the U.S. market, the same Eliquis tablets cost patients $7,100 annually. The price is much lower in Japan because its government is the only entity there to negotiate with. Unlike America's private insurers, government payers can't pass higher drug prices on to consumers by raising their monthly premiums. For these reasons, government payers insist on hard bargains that drugmakers must accept.
In the U.S., Medicare and Medicaid have been prohibited from negotiating directly with drug manufacturers since the 1990s. The Inflation Reduction Act of 2022 required HHS to negotiate with drugmakers for certain drugs covered under Medicare Part D. This is the first time in decades that government payers in the U.S. have been able to negotiate drug prices.
Eliquis is one of 10 Part D drugs that Medicare negotiated down, according to the terms of the Inflation Reduction Act. In 2026, its cost will drop to $2,772 annually. While this is a big step in the right direction, it's still more than triple what folks in Japan will pay.
What does most-favored-nation status mean?
Rather than boost the U.S. government's ability to negotiate directly with drugmakers, the Trump Administration wants to impose most-favored-nation pricing, which essentially means that when foreign governments do a better job negotiating drug prices than, say, UnitedHealth Group, all the American insurance companies, Medicare, and Medicaid will get the same deal.
If most-favored-nation pricing sounds familiar, it's because the first Trump Administration already tried it. It was immediately challenged in court, and injunctions prevented its implementation. Legal judgements blocked the most-favored-nation program because the government hadn't followed proper administrative procedures in its implementation.
Unfortunately for cash-strapped patients, the new administration hasn't explained how its new attempt to impose most-favored-nation pricing is any different. Given the previous failure, investors can reasonably expect business as usual in America's lucrative pharmaceutical market.
Stay calm
The latest drug-price reduction proposal from the White House isn't a reason to sell your pharma stocks. Sadly, now isn't a great time to start positions in any drugmaker, either.
On April 1, HHS fired over 3,500 Food and Drug Administration (FDA) employees. Already, the agency has missed deadlines regarding several new drug applications.
Drug patents are relatively short-lived, so big pharma companies must constantly launch new products to overcome inevitable losses to generic competition. If drugmakers find it extra challenging to push new treatments across the FDA's finish line, it could become impossible for Bristol Myers Squibb and its peers to continue growing. It's probably best to hold off on investing in this industry until investors are sure a smaller FDA can keep up.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb and Pfizer. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.
