Drug Prices Down, Biotech Profits Up? Here’s the Trade – 5/13

How to Trade President Trump’s Drug Cost Reduction Order

President Donald Trump is once again turning the spotlight on high drug prices, and the market is taking notice. In a bold move aimed at aligning U.S. medication costs with those of other developed countries, Trump is expected to sign an executive order demanding that pharmaceutical companies lower their drug prices.

This announcement is part of a broader effort to tackle one of the most controversial and costly aspects of the American healthcare system: prescription drug prices. According to a recent Reuters report, “White House officials said the government will give drug makers price targets in the next 30 days and will take further action to lower prices if those companies do not make significant progress towards those goals within six months of the order being signed.”

While such headlines typically strike fear into the hearts of pharmaceutical investors, the initial market reaction—though negative—quickly reversed. Many drug stocks that dipped on the news bounced back as analysts and traders took a closer look at the details.

Why the Market Reversed Course

At first glance, Trump’s plan appears to be a major threat to the pharmaceutical industry. For years, U.S. drug prices have been significantly higher than in countries like Canada, Germany, and the U.K., largely due to a complex web of middlemen, opaque pricing structures, and the lack of government negotiation power.

However, a closer reading of the order suggests that this may not be the disaster for drugmakers that many feared.

According to Barron’s, “It looks like it could be a blessing in disguise for drug makers, fundamentally restructuring the U.S. drug industry in a way that hurts pharmacy benefit managers.” These benefit managers, often referred to as PBMs, act as intermediaries between drug manufacturers, insurance companies, and pharmacies. Over the years, they’ve been accused of driving up costs through convoluted rebate systems and lack of transparency.

Trump’s executive order appears to shift the focus toward the direct-to-consumer market. This could end up bypassing pharmacy benefit managers entirely, allowing drug companies to sell directly to consumers or through more streamlined channels. That, in turn, could mean more pricing power and better margins for the pharmaceutical firms themselves.

In fact, many drug companies have already spent millions of dollars lobbying against PBMs and advocating for a system that puts more power back in their hands. So while the executive order sounds like a clampdown, it may actually further a goal that many pharmaceutical companies already support.