Healthy Returns: Medicaid cuts in Trump's megabill may affect some drugmakers more than others

President Trump's new tax and spending package introduces over $1 trillion in Medicaid cuts, marginally impacting pharmaceutical companies with varying exposure (e.g., Vertex Pharmaceuticals at 25% of U.S. revenue, Bristol Myers Squibb/Pfizer at 4%), though more drugs will be exempt from IRA price negotiations, with financial effects starting in 2027. Separately, digital health funding reached $6.4 billion in H1 2025, driven by AI startups securing 62% of venture capital, alongside rising megadeals and M&A activity despite a slight decline in overall deal volume.

Analysis

The legislative landscape for pharmaceuticals is mixed following the passage of President Trump's spending package. While the bill introduces over $1 trillion in Medicaid cuts, the financial impact is characterized by analysts as a "marginal negative" and is delayed until 2027. However, exposure is highly concentrated, with Vertex Pharmaceuticals (VRTX) and Gilead (GILD) deriving 25% and 22% of their U.S. revenues from Medicaid, respectively, making them most vulnerable to this long-term headwind. In contrast, Bristol Myers Squibb (BMY) and Pfizer (PFE) are significantly more insulated, with only 4% U.S. revenue exposure each. A key mitigating factor for the industry is a provision that exempts more drugs from the Inflation Reduction Act's price negotiations, creating a potential tailwind. Separately, the digital health sector demonstrates robust momentum, with funding in H1 2025 reaching $6.4 billion. This growth is overwhelmingly driven by AI-enabled startups, which captured 62% of venture funding. The market is also showing signs of maturation, evidenced by a consolidation in deal volume but a rise in megadeals and M&A activity, alongside the reopening of the IPO market with successful debuts from Hinge Health and Omada Health.

Key Decisions for Investors

• Investors should differentiate their pharmaceutical holdings based on Medicaid exposure, re-evaluating long-term growth prospects for highly exposed names like Vertex and Gilead versus more insulated companies such as Bristol Myers Squibb and Pfizer.
• It is crucial to monitor which specific drugs will be exempted from IRA price negotiations under the new bill, as this represents a significant potential offset to the Medicaid revenue headwinds and could create specific stock-level opportunities.
• Consider increasing exposure to the digital health sector, specifically targeting private or public companies with a core AI focus, given this segment's dominance in attracting venture capital, rising M&A activity, and improving exit opportunities via the public markets.