Here's How This Pharmaceutical Giant Is Protecting Itself From President Trump's Tariffs. Should It Matter to Investors?

As President Donald Trump's escalating tariff policies threaten to raise costs across global supply chains, one pharmaceutical giant is taking steps to protect its bottom line. On Sept. 30, Pfizer (NYSE: PFE) became the first big pharma company to agree to implement most-favored-nation pricing for the U.S.

As you may recall, Trump said the White House would impose a 100% tariff on any branded pharmaceutical product unless the company takes steps to bring manufacturing back to the U.S. The Trump administration is also trying to implement a scheme it calls most-favored-nation pricing.

Why are drugs more expensive in America?

In the U.S., government payers like Medicare and Medicaid generally weren't allowed to negotiate pricing until recently. The Inflation Reduction Act of 2022 allows Medicare to negotiate prices for certain drugs. That said, the program is new and limited.

Lack of negotiating power in the U.S. is a big reason that branded drugs in Europe tend to cost significantly less than they do in the United States. Pharmacy benefit managers and the health insurance companies like UnitedHealth Group that operate them are another reason. Drugmakers often raise list prices on new drugs to more than double the net price they expect to record once insurance companies, wholesalers, and pharmacies take their cut.

What is the Trump administration doing about high drug prices?

Instead of giving the government more permission to negotiate with drugmakers or abolishing the rebates that insurance companies extract from drugmakers, the White House is asking drugmakers to police themselves while threatening them with new tariffs.

In July, the White House sent letters to leading manufacturers that outlined steps they must take to bring down the prices of prescription drugs. Those steps include providing most-favored-nation pricing to every single Medicaid patient. The White House also made it easier to sell medicines directly to patients, provided they do so at most-favored-nation prices.

What is Pfizer doing to avoid tariffs?

On Sept. 30, Pfizer CEO Albert Bourla met with the president to sign a landmark agreement to implement most-favored-nation pricing, and it agreed to invest more heavily in U.S. operations, claiming the agreement would "ensure U.S. patients pay lower prices for their prescription medicines while strengthening America’s role as the global leader in biopharmaceutical innovation."

The White House said Pfizer will receive a three-year grace period regarding tariffs, provided it invests further in U.S.-based manufacturing. Wall Street was more than pleased. Shares of Pfizer spiked more than 10% in the days following the announcement.

Pfizer's stock price wasn't the only beneficiary of its new agreement with the White House. From Sept. 29 through Oct. 7, the industry tracking iShares US Pharmaceuticals ETF rose by 6.4% as investors in the industry got more optimistic.

Why pharma stock investors shouldn't worry about tariffs, or Trump's price deals

So far, it looks like the only place where Pfizer and its big pharma peers will be required to offer special pricing is on a yet-to-be-launched direct purchasing platform to be named TrumpRx. Bypassing insurance companies, wholesalers, and pharmacies means the net prices that Pfizer receives from sales through TrumpRx probably aren't going to be any worse than the net prices it already receives from traditional sales channels.

Pfizer's peers haven't met with the Trump administration to sign similar deals yet, but they're already laying the groundwork. In June, Novo Nordisk announced a $4.1 billion investment to expand a manufacturing plant in North Carolina. In September, Eli Lilly announced plans to build a new $6.5 billion manufacturing facility in Texas.

Investors probably don't need to worry that the big pharma companies they're invested in are going to overspend on U.S. manufacturing. It can take several years just to upgrade an already functioning pharmaceutical manufacturing facility. That's because manufacturers need to convince the Food and Drug Administration that the active ingredients a new facility produces are exactly the same as the ingredients used for the clinical trials that supported the drug's approval decision.

A lengthy regulatory process for new pharma manufacturing facilities means the Trump administration and its tariff threats should end before anyone expects recently announced construction projects to begin operating. If you're considering an investment in Pfizer or any of its big pharma peers, don't let most-favored-nation pricing or reshoring initiatives influence your decision.

Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Novo Nordisk and UnitedHealth Group. The Motley Fool has a disclosure policy.