The Trump Administration announced that the United States will be lowering prescription drug prices to keep in line with the Most Favored Nation (MFN) clause. The Executive Order (EO) is designed to lower prescription drug prices for Americans to prices paid by similar medium-to-high income nations.  This comes only a few years after the Inflation Reduction Act of 2022 (IRA), which included a drug price negotiation program designed to lower drug prices for consumers and is still being challenged in courts by drug manufacturers. Although the IRA is being implemented to reduce drug prices for certain classes of drugs, the MFN prescription drug pricing order seeks to reduce the costs of all prescription drugs for American consumers. Below, we’ll dive into details about how the Executive Order to cut drug prices could affect the pharmaceutical industry.

What is the Order? 

The MFN clause, in regard to U.S. drug pricing, ensures that the U.S. pays the same or lower prices for prescription drugs as other developed countries. The Executive Order directs the U.S. Trade Representative and the Secretary of Commerce to verify that foreign countries are not intentionally lowering market prices and contributing to higher prices in the U.S. The EO also pushes for direct-to-consumer sales, eliminating middlemen like pharmacy benefit managers (PBMs) to allow consumers to receive them at a lower price. If drug manufacturers fail to match MFN pricing, it is the responsibility of the Department of Health and Human Services to propose rules and take “aggressive action” to reduce the cost of drugs. .  

Potential Effects on the Industry 

The MFN Executive Order has the potential to have a significant impact on the pharmaceutical industry, particularly drug manufacturing companies. As the implementation of this new order hangs in the future, the economic uncertainty can cause volatility in the stock market. Many large pharmaceutical companies already saw a price drop in their stocks directly following the announcement of the EO.  

Lower drug prices also mean lower profit margins for drug manufacturing companies, potentially leading to an overall revenue decline. The policy is directly designed to lower reimbursement rates. Although the order calls for the removal of middlemen to help cut costs for the consumer, manufacturers negotiate net prices with PBMs, already accounting for rebates. PBMs only retain about 6% of the drug dollar, while this new EO is set to cut costs by up to 30-80%.  

While removing PBMs could reduce some costs for manufacturers, it will not compensate for the significant decrease in net price that the order requires. This overall decline in revenue could negatively impact jobs and R&D in the pharmaceutical industry. Decreased revenue means less funding for R&D, potentially delaying new drug launches. Additionally, investors may be hesitant to offer funding for new projects as the potential for future revenue remains uncertain.  

If enforced, the EO could lead to many long-term effects on the pharmaceutical industry and the life sciences industry overall. Drug companies may start to raise drug prices in other countries to allow for higher drug prices in the U.S. Drug companies may also prioritize low-cost development drugs for widespread conditions, rather than focusing on innovation for the treatment of rare diseases, to increase revenue.  

In addition, the MFN EO could set a precedent for more government control over drug pricing and regulatory price controls of other life sciences industry products. As U.S. drug manufacturers attempt to adjust to accommodate this new order, there is potential for China to step in and take over as the largest producer of innovative drugs. With the Trump administration’s push to move drug manufacturing to the U.S., lobbyists could use this as a negotiation point and express the need for more money to be invested in American companies.   

This EO has the potential to have both short and long-term negative effects on the pharmaceutical industry. Pharmaceutical companies will soon have to find a way to navigate these challenges, and it’s important that they start to prepare now.  

How the Industry Can Prepare 

Uncertainty of the EO’s implementation makes it difficult to know what the future landscape of the pharmaceutical industry will look like, but companies can still do some things to prepare.  

Focusing on optimizing production costs can help pharmaceutical companies expand profit margins to account for revenue loss. By utilizing artificial intelligence (AI), companies can reduce R&D costs. AI can shorten the time needed to analyze large datasets of chemical compounds and disease mechanisms and can create models to predict how compounds will interact with biological targets. These features can reduce the need for more test trials and speed up the R&D process.  

AI is also being implemented across industries to help lower the cost of goods sold. By improving efficiency, AI can help lower R&D costs and, in turn, increase profit margins or reduce drug prices. By optimizing the manufacturing and production of drugs, AI can help reduce the strain the EO will have on the pharmaceutical industry.  

Looking Ahead 

The future of this EO, and therefore the pharmaceutical industry, is uncertain. However, there has been a push in recent years to lower the costs of prescription drugs. Pharmaceutical companies can take steps now to prepare for the potential revenue decline from drug sales in the future.  

Contributions from Natalie Pollock