Biopharma and US Policy: Tariffs Increasingly Manageable; Medicaid Pricing Policy Looks Unrealistic

In letters to pharma CEOs on July 31, US President Donald Trump pushed firms to implement most-favored-nation pricing for Medicaid by the end of September. This follows a policy announced July 28 that will impose 15% tariffs on imports from the EU, replacing potential Section 232 investigation tariffs.

Why it matters: Since the Trump administration’s May executive order, the administration clearly hasn’t been satisfied with concessions proposed by the pharma industry.

• Most large-cap biopharmas have announced significant US manufacturing investments over the next few years, aiming to appease the Trump administration and lessen the long-term impact of any tariffs.
• The Trump administration is still looking for leverage to force prices down to levels closer to those in other developed markets.

The bottom line: We’re not changing our biopharma fair value estimates or our largely wide-moat take on the industry. Even in a realistic worst-case scenario of an MFN pilot program in Medicare Part B, we think firms have enough of a cushion for returns on invested capital to outearn their cost of capital.

• On tariffs, firms have made adjustments to inventory and production rates at existing facilities to defend near-term profits, and new US manufacturing investments protect long-term profits. We factor in a high-teens tax rate (up from midteens today) as a potential long-term outcome.
• On MFN pricing, we think a broader Medicaid program is unrealistic and therefore not factored into our valuations. Congress needs to be involved for anything larger than a small pilot program, and it rejected a proposal to mandate MFN pricing for Medicaid during the recent budget reconciliation process.

Bulls say: There is an alternative to MFN pricing that is much more manageable for innovators, which focuses on cutting drug spending without cutting prices paid to innovators and bypassing pharmaceutical benefit managers with direct-to-consumer initiatives.