Pharma Stocks Rally Amid Doubts on Trump’s Drug Pricing Executive Order

Shares of pharmaceutical companies saw gains on Monday as investors expressed skepticism regarding the potential impact of President Donald Trump’s newly signed executive order aimed at reducing prescription drug prices. The executive order, which introduces a “most favored nation” policy, seeks to ensure that U.S. consumers pay the same prices for prescription drugs as the country that has the lowest prices globally.

Market Reaction to New Order

Initially, stocks in the pharmaceutical sector experienced downward pressure following the announcement of Trump’s order. However, as skepticism grew over the actual effectiveness of this initiative, shares began to recover. Key players like Johnson & Johnson (JNJ), AbbVie Inc. (ABBV), Eli Lilly & Co. (LLY), and AstraZeneca PLC (AZN) reported increases in their stock prices. For instance, JNJ gained 0.4%, ABBV climbed by 4%, LLY rose 3%, and AZN improved by 2%.

Moreover, the pharmaceutical-focused exchange-traded funds (ETFs) also witnessed upward movements, with the iShares Biotechnology ETF (IBB) increasing by 4% and the Invesco Pharmaceuticals ETF (PJP) rising by 2%. The overall sentiment in the sector was reflected in the increasing value of the Health Care Select Sector SPDR ETF (XLV), which represents a broader array of drug makers.

Key Components of the Executive Order

During a White House event where Trump signed the order, the administrator for the Centers for Medicare and Medicaid Services (CMS), Mehmet Oz, outlined plans to engage pharmaceutical companies over the next month to discuss the new pricing structure. The administration aims to propose a baseline price for various medications in discussions with drugmakers.

The order features a backstop: if drug manufacturers fail to comply with the pricing structure, U.S. Secretary of Health and Human Services Robert F. Kennedy Jr. will introduce rules to enforce the most-favored-nation pricing. This includes directives aimed at bypassing middlemen, so patients can buy drugs at reduced prices directly from manufacturers.

Concerns Regarding Implementation

Despite the ambitious nature of the executive order, analysts voiced doubts about its execution and effectiveness. Rob Smith, a healthcare analyst at Capital Alpha Partners, noted the order lacks specific policy details, making evaluation difficult. Additionally, Chris Meekins from Raymond James expressed skepticism, stating that Trump has a history of overpromising on drug pricing effects during his previous term, suggesting that the chances of successful implementation might be low.

The executive order aligns with Trump’s earlier claims of potentially reducing drug prices by a staggering 30% to 80%. However, Meekins highlighted that broader claims may lead to legal challenges that could thwart ambitious plans. In a 2024 report, it was revealed that consumers in the U.S. typically pay three times more than those in other countries for prescription medications.

Impact on Pharmaceutical Sector

The executive order also had repercussions for companies involved heavily with pharmacy benefit managers (PBMs), which broker deals between drug manufacturers and insurers. Stocks for companies like CVS Health Corp. (CVS), Cigna Group (CI), and UnitedHealth Group Inc. (UNH) fell, with CVS down 5% and Cigna off 6% in early trading, reflecting concerns about the intermediaries’ role in the pricing landscape.

Conclusion

The mixed reaction of pharmaceutical stocks post-Trump’s drug pricing executive order showcases a complex interplay of investor sentiment and market realities. While the intent behind the order aims to benefit consumers by lowering pharmaceutical costs significantly, the doubts raised by analysts regarding its feasibility could temper long-term expectations in the market. As the administration prepares to engage with drug companies in the coming weeks, the pharmaceutical sector will be closely monitoring developments that could shape its future profitability and pricing strategies.

In the interim, investors will need to navigate these turbulent waters carefully, keeping an eye on legislative updates and their potential influence on the stock market performance of pharmaceutical companies.