Trump Signs Executive Order to Slash Drug Prices, Target PBMs I LPL Research Blog
On May 12, President Donald Trump signed the “Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients” executive order aimed at making prescription drugs more affordable for Americans. The premise driving the initiative is that drug manufacturers have deeply discounted their products in foreign markets and subsidized profits with elevated prices within the U.S.
Government subsidies for research and development, along with differences in prices between countries, have created a free-rider problem where the global benefits of improved pharmaceuticals are paid for disproportionately by the U.S. This is deemed unfair by the current administration, and steps to eliminate the practice have been proposed. The most recent solution is for Americans to pay a “most-favored” price no higher than the lowest price in other countries.
On its face, all of this seems to be mounting pressure on pharmaceutical manufacturers to lower prices domestically. All else equal, price reductions domestically would be difficult to completely offset by raising prices internationally. This has the potential to compress margins by eroding pricing power and would provide a significant headwind to drug manufacturer share prices.