Drug Stocks Recover as Trump's Order Proves Not as Bad as Feared

Shares of key drugmakers like Eli Lilly LLY, Pfizer PFE, Merck MRK, AbbVie ABBV, Gilead, Bristol-Myers, Amgen AMGN and several other U.S. pharmaceutical stocks were in the green at market close on Monday. The stocks recovered well from their pre-market decline on Monday in response to President Trump’s social media post, which stated that the government will sign an executive order later in the day that will result in a 30% to 80% decrease in prescription drug prices in the United States.

However, the post did not specify whether the order would apply to Medicare, Medicaid or other government health programmes.

What the Executive Order Says

The President feels that the cost of prescription drugs in the United States is higher than in any other country, sometimes even five to ten times higher. Trump issued the executive order around midday on Monday. The executive order pushes for “most-favored-nation pricing,” meaning Americans should pay no more than the lowest price offered to other developed countries for prescription drugs. The order aims to push drugmakers to offer prescription drugs to U.S. cash-pay consumers at lower prices.

The order mentioned that the Department of Health and Human Services (HHS) will create programs to let Americans buy drugs directly from pharmaceutical companies at the most-favored-nation lowest price. The HHS was instructed to notify drug manufacturers of new price targets within 30 days.

The order also mentioned that The Secretary of Commerce and U.S. Trade Representative must act against foreign countries that unfairly suppress drug prices. The order also mentioned that if prices do not come down quickly, a rule will be proposed to enforce these prices.

The Order Not as Bad as Feared for Drugmakers?

It looks like the executive order aims to push Americans away from Medicare, Medicaid or other government health programmes and pharmacy-benefit managers to cash-pay options. The details of the order are limited and it seems that more work needs to be done. The immediate impact of the order was not clear and questions have been raised about the legality of the pricing negotiations. Probably as the order was not as hard-hitting as feared, drug stocks recovered from the pre-market decline. The broader market rally amid easing of trade tensions between the United States and China also contributed to drug stocks’ rise.

Trump tried to implement a similar rule at the end of his last term in 2020. However, it was squashed by federal courts for procedural reasons. The latest executive order will also likely be challenged in court.

Drug Price Controls on the U.S. Government’s Radar

The U.S. government is already trying to control healthcare costs through its federal health insurance program under the Inflation Reduction Act (“IRA”) passed in 2022 under Joe Biden. Every year, Medicare spends billions of dollars on reimbursing medicines. The IRA has made significant changes to how drugs are covered and paid for under Medicare. Under the IRA, the U.S. government gave authority to Medicare to negotiate the price of some prescription medicines directly with drug manufacturers, hoping to save the government billions of dollars. Before the IRA was passed, Medicare was not allowed any such negotiations with drug manufacturers.

Under the U.S. government’s drug price negotiation program, the Medicare Part D program was redesigned to require drugmakers to bear more of the liability for certain drug benefits and government price-setting for certain Medicare Part D drugs (starting in 2026) and Medicare Part B drugs (starting in 2028).  The program also included penalties for significant increases in the prices of drugs.

The list for Medicare price negotiations released by the Centers for Medicare & Medicaid Services mostly includes expensive medicines for cancer, diabetes, autoimmune conditions and blood thinners, with more drugs expected to be added every year.

The Trump administration is also looking to impose tariffs on imports of pharmaceutical products. Tariffs on pharmaceutical imports can lead to potential disruptions to global supply chains and an increase in production costs.

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This article originally published on Zacks Investment Research (zacks.com).

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