Big Pharma's Big Conundrum

Since returning to the White House, President Donald Trump has wasted no time shaking things up...

He has frozen federal funding... blocked renewable-energy projects... and removed the U.S. from the Paris Agreement on climate change.

Trump has even tried ending birthright citizenship – a policy that grants automatic citizenship to anyone born in the U.S.

Now, executive orders aren't laws... And Congress could ultimately block them.

Even so, most of Trump's moves have made headlines... and spooked investors.

Yet, one item on the president's agenda has largely flown under the radar. And it could have a huge impact on everyday citizens, at least in the short term...

Trump wants to roll back price controls on U.S. pharmaceutical companies...

At first glance, this seems like a massive win for Big Pharma. It would give U.S. companies more freedom to charge higher prices.

But there's a catch... Trump also wants to slash U.S. contributions to global drug development... and eventually lower drug prices.

He believes the U.S. is being "ripped off" on drug pricing. As a result, his administration will likely revisit policies from his first term to make other countries pay more for drugs.

In 2020, he tried to tie what Medicare paid for certain drugs to the lowest price paid by other developed countries. However, legal challenges blocked this move.

Trump could now revive a similar approach because...

The U.S. shoulders most of the costs for global R&D...

In 2024, U.S. drug companies plowed more than 85% of their operating cash flows into R&D. Overall, European counterparts only made up 29% of global R&D investments.

And this has gotten worse over the years... Between 2010 and 2022, European pharmaceutical companies grew their R&D spending by a bit more than 4% per year. Meanwhile, U.S. firms have grown their R&D by almost 6%

On top of that, U.S. consumers pay about three times more for prescription drugs than other developed nations, inflating Big Pharma's cash flows.

The problem is, U.S. firms can't bring down drug prices unless they eat into their research budgets... and also slow down the innovation flywheel.

Essentially, Americans fund the creation of new drugs... while other countries acquire them at a heavy discount.

Countries like Germany and Italy, for example, set low "reference prices" on different types of drugs. This pressures drug manufacturers to reduce prices for drugs that have good alternatives.

If they don't, consumers just switch to cheaper products.

Trump is trying to shift some of the R&D burden to other developed nations in order to...

Finally give U.S. consumers a break...

Many Americans already spend more than they can afford on health care, including drugs. And they clearly bear the burden of pharmaceutical innovation.

There's no quick fix for this, though... Cutting prices locally would only slow down innovation. And that would hurt untold numbers globally.

For now, high drug prices will fund R&D while the U.S. figures out how to get other countries to contribute more.

The government may tie domestic drug prices to the lower prices paid by other wealthy nations. Trump could also negotiate trade deals, or implement tariffs, to pressure European countries to increase drug spending... He could even restrict Europe's access to U.S. drug exports.

Tomorrow, we'll take a deeper look at just how bad this problem has gotten for U.S. consumers and what a path forward might look like.

Until the dust settles, investors in this space should tread lightly... and pay close attention to Trump's drug-pricing policies moving forward.

Regards,

Joel Litman
February 5, 2025