Can the president move the needle on U.S. drug prices?

President Trump's executive order targeting U.S. drug prices through most-favored-nation pricing aims to coerce manufacturers into lowering costs, but Barclays analysts warn of potential legal and implementation challenges that could limit its effectiveness and question whether savings will reach consumers due to intermediaries. While a hypothetical 10% drop in transaction prices could lower CPI and PCE indices by 9 and 28 basis points respectively, the order's impact on inflation and other categories like health insurance remains uncertain, potentially leading to counter-intuitive effects.

Analysis

The executive order signed on May 12, targeting U.S. drug prices through a most-favored-nation (MFN) pricing model, signals a continued governmental focus on influencing pharmaceutical costs. Barclays' analysis suggests the administration's strategy primarily relies on coercing drug manufacturers, but faces significant "legal and implementation challenges" that could curtail its effectiveness. A critical uncertainty highlighted by Barclays is whether any reductions in manufacturer prices would translate to lower "transaction prices" for consumers, as intermediaries like pharmacy benefit managers, pharmacies, and insurers might absorb such savings. The order also mandates the Secretary of Health and Human Services (HHS) to investigate a direct-to-consumer drug purchase program. Compounding the complexity, proposed pharmaceutical tariffs could exert upward price pressure, potentially undermining the intended cost-cutting. While a hypothetical 10% decrease in transaction prices could lead to a 9 basis point reduction in year-over-year CPI and a roughly 28 basis point fall in the PCE index, Barclays warns of potential "counter-intuitive" inflationary impacts in other areas, such as health insurance. The limited actual savings achieved through Medicare Part D negotiations, where discounts of 38-79% on ten drugs resulted in only $1.5-1.8 billion in government savings against a $6 billion projection, serves as a cautionary precedent for the potential gap between intended and realized outcomes of such pricing interventions.

Key Decisions for Investors

• Investors should closely monitor developments regarding the MFN executive order, particularly any HHS rulemaking and ensuing legal challenges, as its successful implementation, though uncertain, could impact pharmaceutical manufacturers' revenues and margins.
• Evaluate the likelihood of cost savings being passed through the complex pharmaceutical supply chain to consumers, as intermediary absorption could mute the broader economic and deflationary impact.
• Consider potential portfolio adjustments in healthcare and related sectors, accounting for both the direct effects on drug pricing and indirect consequences, such as potential inflationary pressures in health insurance or the impact of new pharmaceutical tariffs.