Tough pills to swallow for biopharma

The biopharmaceutical industry faces various headwinds over the next several years, and the current Trump administration injects additional layers of uncertainty. However, there is likely to be additional information coming to light that will help investors parameterize what the impact of some of these changes could mean. Will they only be just smaller bumps in the road, or conversely, will they mark the beginning of a tougher period that forces bigger change and adaption by participating companies? The current administration is likely interested in showing the voting public that the new administration will lower the cost of drugs ahead of the November 2026 midterm elections.

 

The new potential threats for the industry are threefold: (1) sector-specific tariffs, (2) tougher IRA price negotiation and (3) introduction of a “most favored nation” (MFN) framework for U.S. drug pricing. On tariffs, many drug companies are in the midst of making multiyear, multibillion-dollar reshoring commitments as a way to negotiate away (or at least minimize) the possibility of tariffs that, in their most challenging form, could impact things like transfer pricing arrangements, leading to higher taxes. In our view, the industry may find success, as it would deliver on the administration’s goal of moving manufacturing back to the U.S. One challenge, however, is that both tariffs and on-shoring work against the concept of lower drug pricing.

 

On IRA pricing, 2024 was the year where the first round of drugs (totaling 10) went into the negotiation process, for implementation in 2026. By November of 2025, the next round of drugs (totaling 15) will have gone through the same, and there is investor concern that the magnitude of price concessions will be greater than what occurred last year. The process is criticized by the drug industry as lacking transparency and also as not really being a “negotiation” per se. One drug to watch in this next round of price cuts is semaglutide, one of the two market-leading GLP1s for obesity/diabetes.

 

MFN is where the greatest disruption could potentially occur if the concept is applied broadly to all Medicare drugs. It would depend, of course, on the magnitude of the reductions and which ex-U.S. countries are used as benchmarks, but a common rule of thumb is that ex-U.S. prices in Europe are in the range of 30–50% lower than net prices in the U.S. If the administration is intent on pursuing MFN, it seems most likely to us that it would be tested first, in a limited capacity, just in one part of Medicare through what is called a CMMI Demonstration Project. In principle, here too the drug industry could conceivably and proactively make price concessions as a way to fend off MFN, but historically the industry is loath to give any ground on price because it creates a “slippery slope” phenomenon. We have previously published various scenarios looking at the financial impact on drug company earnings per share of MFN pricing, and not unexpectedly, it varies dramatically by company.