By Elsa Ohlen

The biggest threat to pharmaceutical companies may not be tariffs after all. Potential lower prices risk not only bringing down revenue from medicines already on the market, but also hurting the long-term innovation that is crucial for the industry.

The pharmaceutical sector is facing a trifecta of threats from Washington, Leerink Partners analyst David Risinger told Barron's on Friday. " Threats from tariffs, threats to drug pricing in the United States...[and] threats to the speed of drugs getting to patients in the country."

While they are all of serious concern to the industry, one stands out. President Donald Trump says news related to drug pricing is coming. "We're going to have a big announcement next week on some of this," he said this week. "We're being ripped off, as you know, very badly."

Drug prices are an average of 2.78 times higher in the U.S. than in other OECD countries, a government-contracted study found in 2024. The cost of branded drugs was at least 3.22 times as high, even after adjustments for estimated U.S. rebates.

Trump wants to change that. He wants to explore so-called most-favored-nation pricing in an attempt to lower drug prices for Americans. That would peg U.S. prices, likely at least initially for some drugs paid for via Medicare, to the lowest level paid by comparable countries.

That sort of pricing, depending on its implementation, could be of greater concern than tariffs, said Risinger. Historically, U.S. innovation has stood out, aiding both exports and employment, he said. "Clearly, if prices are taken down to ex-U. S. levels, R&D spending and productivity may decline as well."

The magnitude of pricing pressure and tariffs is still unknown but the uncertainty is weighing on pharma stocks. The S&P 500 Pharmaceuticals industry index is down nearly 10% over the past three months. And it still appears premature to call the bottom for pharma stocks.

The U.S. is a huge market for pharmaceuticals, so prices here are significant for the industry. Out of the 10 largest pharmaceutical companies based on market value, seven are U.S.-based. The largest drugmaker by market capitalization, Indiana-based Eli Lilly, got 67% of sales from its home country last year. The sector's largest company by revenue, Johnson & Johnson, got 57%.

Some of the biggest pharma companies in the rest of the world, such as Europe's Novartis, Sanofi and Novo Nordisk, as well as Japan's Takeda Pharmaceutical and Israel's Teva Pharmaceuticals, also get more than half of their revenue from sales in the U.S.

It's easy to see that regulating drug prices downward would cause an immediate dent in profitability. Critics of the drug industry counter that the high cost of pharmaceuticals means many people aren't able to get the drugs they need, even with industry efforts to make prices affordable for patients who are less well off.

An Eli Lilly spokesperson described most-favored-nation pricing as "a misguided attempt at addressing drug prices that would do nothing for patients while jeopardizing the nearly $200 billion in new U.S. investments recently announced by biopharmaceutical companies" in an email to Barron's. The other companies didn't immediately respond to requests for comment.

Developing new drugs is a lengthy and expensive process. Getting a medicine to market typically takes 10-15 years. Roughly 90% of the experimental drugs that reach the Phase 1 clinical trial stage never reach the market.

The relatively higher U.S. pricing has been a key source of the advancement of innovation in biopharmaceuticals, Risinger says. The risk with lower prices is that companies will have to invest less in research and development, meaning fewer drugs are created.

Deep cuts at the National Institutes of Health and reductions to, or the removal of, grants to universities for drug and vaccine research aren't helping innovation, either.

"Other countries should allocate more health care spending to innovative medicines, and my hope is that the administration will advance policies that bring equipoise in investment across countries who benefit from American innovation," Bristol Myers Squibb CEO Chris Boerner wrote in an op-ed published on the healthcare news website STAT this week. "However, slashing U.S. investment in medicines or importing lackluster policies of less innovative health care systems is not the answer."

The "big announcement" Trump has promised will involve a drug-price plan whereby the MFN principle is applied for a selection of drugs within the Medicare program, Politico reported Wednesday. The White House didn't reply to a request for more information.

"The devil still may be in the details," Risinger says. "We'll have to see whatever that detailed plan is...and then watch future developments."

Write to Elsa Ohlen at elsa.ohlen@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 09, 2025 16:51 ET (20:51 GMT)

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