Please find the below update on the biopharma market for the week of May 12, 2025.
MFN: Here We Go
Note: This week's note is not accompanied by an attachment.
Today, President Trump unveiled an executive order (EO) promising to lower prescription drug prices by 30% to 80% through reference pricing, otherwise known as most-favored-nation (MFN) pricing.
The order directs HHS to negotiate deeper discounts using foreign drug prices as reference points—so-called reference pricing. The idea is that U.S. consumers should pay the same price for drugs as consumers in other countries.
Before delving into the details, it's worth noting that we've been here more than a few times before. Attacks on drug pricing have often been proposed by politicians—particularly during election seasons or when incumbents are struggling in the polls.
However, the pharma industry has persevered throughout these attacks, and values have grown dramatically through all of this.
Pricing issues were in the news and political foreground in 2000, 2007, 2015, 2018, and 2022. There was only one instance where legislative attempts to impact pharma prices were successful (the IRA), and even then, the value of most larger pharma companies has risen since.
What the Executive Order Says
Basically, the EO says that drug makers have 30 days to achieve most-favored-nation price targets communicated to them by the Trump Administration, then if within 30 days if this does not happen in some unspecified aggregate sense then HHS shall compel drug makers to comply with most-favored nation pricing.
Specifically, the language says:
“(a) Within 30 days of the date of this order, the Secretary shall, in coordination with the Assistant to the President for Domestic Policy, the Administrator for the Centers for Medicare and Medicaid Services, and other relevant executive department and agency (agency) officials, communicate most-favored-nation price targets to pharmaceutical manufacturers to bring prices for American patients in line with comparably developed nations.
(b) If, following the action described in subsection (a) of this section, significant progress towards most-favored-nation pricing for American patients is not delivered, to the extent consistent with law:
(i) the Secretary shall propose a rulemaking plan to impose most-favored-nation pricing;
(ii) the Secretary shall consider certification to the Congress that importation under section 804(j) of the Federal Food, Drug, and Cosmetic Act (FDCA) will pose no additional risk to the public’s health and safety and result in a significant reduction in the cost of prescription drugs to the American consumer; and if the Secretary so certifies, then the Commissioner of Food and Drugs shall take action under section 804(j)(2)(B) of the FDCA to describe circumstances under which waivers will be consistently granted to import prescription drugs on a case-by-case basis from developed nations with low-cost prescription drugs;
(iii) following the report issued under section 13 of Executive Order 14273 of April 15, 2025 (Lowering Drug Prices by Once Again Putting Americans First), the Attorney General and the Chairman of the Federal Trade Commission shall, to the extent consistent with law, undertake enforcement action against any anti-competitive practices identified within such report, including through use of sections 1 and 2 of the Sherman Antitrust Act and section 5 of the Federal Trade Commission Act, as appropriate;
(iv) the Secretary of Commerce, and the heads of other relevant agencies as necessary, shall review and consider all necessary action regarding the export of pharmaceutical drugs or precursor material that may be fueling the global price discrimination;
(v) the Commissioner of Food and Drugs shall review and potentially modify or revoke approvals granted for drugs, for those drugs that maybe be unsafe, ineffective, or improperly marketed; and
(vi) the heads of agencies shall take all action available, in coordination with the Assistant to the President for Domestic Policy, to address global freeloading and price discrimination against American patients.”
Limited Government Authority to Enact MFN-Type Price Controls
This is a very odd executive order because it doesn’t do anything. Rather, it directs government agencies to ask for voluntary price increases in other countries or reductions in the U.S. Then, when this doesn’t happen then HHS can implement rules to counter this.
While there is some room to specify prices under Medicaid and Medicare Part B this would be quite complicated. Specifically, HHS doesn’t negotiate prices for Medicaid. This is left to the states. Further, Medicaid already gets more than a 20% price discount so this would be less consequential. We wouldn’t be surprised to see this start as a pilot project of some sort.
Very Difficult to Implement Executive Order
It’s also possible that President Trump would direct Medicare Part B drugs to comply with international reference pricing. In 2020, the Trump administration attempted to implement an MFN rule via executive order for Medicare Part B drugs. It was blocked in federal court due to procedural issues and industry opposition. But, if such rules survived court challenge, then this would not be good news for many companies, particularly those that drive sales using the peculiarities of ASP+6 pricing.
Indeed, the federal government cannot currently negotiate drug prices directly for Medicare Part D under existing law, except through provisions of the IRA, which gives broad discretion to the government on a limited set of drugs.
Basically, we see no way that the federal government is going to be able to get U.S. drug prices down to international levels (or international prices up to U.S. levels) administratively or legally in the next 30 days.
It looks impossible.
The order also has interesting language permitting legalized importation of drugs from other countries under Section 804 of the Medicare Modernization Act of 2003.
While this sounds like a back door way to get price equalization this move is laden with major issues. First, the FDA needs to approve these steps on a “case by case basis”. Bear in mind that this is the same FDA that just got hit with a 25% headcount cut by DOGE. And, drug reviewers weren’t touched. DrugBank Online lists 4,717 approved drugs in the U.S. So who and how is the FDA going to work through case-by-case reviews of over 4,000 drugs in the next 30 days? Bear in mind that labels, trade dress, presentation and the like can very across countries so allowing Sec 804 importation will be quite burdensome for the FDA.
A further issue noted by John Maraganore is that prices paid in other countries are typically not ones that require co-payment while those in the U.S. do. He noted that the best way to really lower drug costs for Americans would be to lower out of pocket costs.
Low Probability of Implementation
MFN pricing would likely face lawsuits on constitutional and administrative law grounds (e.g., under the Takings Clause or the Administrative Procedure Act). Obviously, if Congress can pass a new law, this would change (but this is not what the White House proposes).
With drug stocks trading up after the MFN news one can’t miss the market’s impression that there is more smoke than fire in the latest Trump drug price initiative.
Price Controls Have Had Unintended Negative Consequences
It's important to note that past attempts at price controls have often had unintended consequences. Rent controls, in many cities, have, if anything, been detrimental to the poor. A meta-analysis of over 100 studies by Bourne and Bagley of the ultra-conservative Cato Institute, for example, found that "rent control often leads to a reduced supply of rental housing, as it discourages new construction and investment." A 2017 study by Stanford economists found that after rent control was expanded in San Francisco, landlords removed 30% of the newly controlled units from the rental market, leading to a 15% decrease in the city's total rental housing stock. Property owners are more likely to neglect maintenance of their apartments. A National Apartment Association Study (2024) found that doubling the number of rent-controlled units in a metropolitan area correlated with a 16.2% increase in severely inadequate housing units, indicating a decline in housing quality.
MFN Likely to Be a Lose-Lose Proposition for Society
Similar unintended consequences would be likely here. Critics, including PhRMA and many biotech CEOs, argue that MFN pricing rules in the U.S. would:
- Disincentivize innovation
- Lead to price increases abroad
- Encourage companies to withhold products from countries with lower prices
- Risk unintended shortages or care delays
An April 14 report entitled "'Most-Favored Nation' Drug Pricing Has Three Significant Problems" by Darius Lakdawalla and Dana Goldman of the Schaeffer Institute of USC considered the pros and cons of MFN-type rules for the U.S. and noted three major problems with such proposals:
"1. It is easily gamed. Rather than drive U.S. prices lower, drug companies and their overseas customers could create the appearance of higher prices overseas by agreeing to confidential rebates—already common overseas—that produce the same old low net prices; 2. It can't undo the basic economics of the global drug marketplace. Our research at USC’s Schaeffer Center reveals about 70% of global pharmaceutical profits flow from the U.S. market. Facing a choice between deep cuts in their U.S. pricing or the loss of weakly profitable overseas markets, we can expect many firms to pull out from overseas markets at their earliest opportunity, leaving U.S. consumers with the same prices, pharmaceutical manufacturers with lower profits, and future generations with less innovation. In sum, everyone loses. 3. It cedes pricing decisions to foreign governments. Our Western peers do not share U.S. views on how to value new medicines."
John Crowley, Head of BIO, also did not mince words on May 12th: “Want to see your healthcare rationed? Want to have a government bureaucrat decide what medicines your sick child may have? Want to kill the biotechnology industry and hand it to China? Then you'll love the Executive Order that the White House just issued that would force the United States to rapidly adopt socialized medicine, drug rationing and foreign price controls. This is called "Most Favored Nation" (MFN) and it is terrible policy. There are better ways to ensure affordability and access to medicines for all. And we will be sharing some bold ideas with the President and leaders in Congress ahead very shortly. Importing socialized medicine will not make American's healthier or our economy stronger. It will only serve to empower China and our other adversaries and undermine our economic and national security. Applying other countries’ antiquated approach to how they value – and pay – for medicines will stall investment across America’s biotech companies, risk access to vital treatments and cures for millions of American patients, and lead to fewer American jobs.”
Some Odd Language on Direct-to-Consumer Access of Drugs
The EO threatens to cut out drug middlemen as well, directing the government to allow consumers to directly purchase drugs at MFN prices without middlemen interference.
Forgive us, but this seems to be least well thought out aspect of the EO.
Perhaps the most obvious clue that this EO is more designed to be political theatre than policy reality. Maybe we need a new phrase for things like this: “fake policy” perhaps?
Drugs are distributed through a complex supply chain. From factory to a series of distributor warehouses to warehouses of chain stores and then to individual stores. The idea here somehow is that the government is going to become an overnight version of McKesson or CVS and directly deal with consumers. Developing the supply chain, relationships, the software and people to do this would likely take two to four years. We have some firsthand experience to prove it, by the way.
So Why Would Trump Try the MFN Gambit Now?
While President Trump is generally unpredictable and many consider him impulsive, we continue to hold the view that he is largely rational in his actions.
So why would President Trump push the MFN topic now?
It's important to note the obvious: drug pricing is a hot-button issue for many voters. Many consider the pharma industry not to be acting in their best interests and, thus, view attempts to regulate prices as positive.
Trump played this up to the max in his ALL CAPS post previewing MFN rules on Truth Social on Sunday, May 11th.
We don't think it's a coincidence that this falls on the same day that Trump is announcing a tariff deal with China that sounds good until one realizes that it's temporary, lasting only for 90 days.
Trump's poll numbers are dropping despite incessant dialogue on tariffs, attacks on Harvard and the NIH, accusations that federal agencies are "woke," etc.
While Trump's base is still with him, the broader public, unfortunately, is not buying his policies and rhetoric.
A poll released on May 9 by the Associated Press and NORC Center for Public Affairs Research reflects a disapproval rating of 51.1% for the second-term president. Just a week earlier, the aggregate listed a 45% approval number on May 2.
Trump has the worst numbers of any U.S. president at this point in more than 80 years.
If you will, we see the MFN move as an attempt to curry favor with voters at a politically vulnerable moment.
One of the trickiest things for President Trump is assessing the gain/pain ratio for taking on this issue. Is his recent posting a sign of weakness or instead one of political cunning?
We are far from qualified to know fully but would note that a May 2024 tracking poll found that 83% of voters consider it "very important" for presidential candidates to address inflation, but only 15% mentioned prescription drug prices as an issue they wanted candidates to discuss.
Our own view is that the potential inflationary consequences of tariffs are front of mind with voters and that the political hay to be had from discussing drug reference pricing is not that high.
What's odd about this topic is that most Americans who are upset with the drug industry are Democrats. Remember Biden and Bernie's attempts to get insulin prices down.
Trump implies that he is interested in embarrassing Democrats in Congress with MFN rules. Our guess is that he is soon going to have strange bedfellows from the likes of AOC and Bernie Sanders. Far from embarrassing Democrats, Trump may find himself facing resistance from his own party.
Our conversations with Washington experts, more in the know than us for sure, indicate that Trump's team feels that he will likely have a very limited window to get things done in Congress.
Hence, the rapid-fire string of policy initiatives, generally made by executive order rather than by legislative action.
The backdrop could not be more consequential. We are seeing "tariff wins" so far that have not amounted to much, broad concerns in the American populace on inflation, and broad concern that Republican policies are going in the wrong direction.
Trump needs to get tax cuts through Congress, and the longer the battle goes on, the less easy it's going to be to get the changes through. There is a big push underway to get it done sooner rather than later. Mychael Schell wrote in The Hill on May 12th: "House Republicans are barreling into a critical week for passing President Trump's legislative agenda—even as they remain far apart on a number of key, hot-button issues. The House Ways and Means Committee, which has jurisdiction over taxes, and the House Energy and Commerce Committee, which oversees Medicaid policy, are both scheduled to begin debating—and eventually voting to advance—their parts of the 'big, beautiful bill' Tuesday at 2 p.m., kicking off what is expected to be a pair of marathon hearings."
House Speaker Mike Johnson is going to attempt to pass the entire "big beautiful bill" by the end of next week. This ambitious timeline requires a markup from both committees and Republican unity in an evenly split chamber.
We will be impressed if this happens.
The much-vaunted China tariff breakthrough involved a 90-day truce—which effectively puts the issue past much of the tax cut debate.
Our own view is that the Trump Administration will have little will to fight for MFN rules in court and bear the pain within his own party once the reconciliation/tax bill is through Congress, and that's because the unintended consequences of the bill will be apparent by the time election day comes around in 2026.
Background Negotiations with the Pharma Industry
President Trump likes to create leverage in negotiations and, as we have previously noted, has been in deep negotiations with the pharma industry since election day. He has been arguing that pharma companies don't employ enough people onshore and do not charge the same prices across markets.
Our understanding is that this negotiation process has gone reasonably well, which is why pharma companies were left out of the tariff bill. You may recall that threats to impose these tariffs have not materialized.
Our sense is that the pharma industry has been relatively flexible in these conversations, trying to avoid something drastic like MFN rules. Countless companies have committed to build plants in the US.
Impact of the MFN Rules and the Stock Market
Perhaps as a barometer of the market’s understanding that MFN isn’t particularly practical, the XBI has risen by 4% as of lunchtime on May 12th.
Let’s imagine, for the sake of argument, that MFN rules are passed. Who would be most affected?
Companies with high exposure to Medicare part B include those that sell back of the eye drugs for DME and those that sell biologics for oncology. MedPac found that nearly 40% of Medicare Part B spend is on ten well-known drugs like Keytruda, Eylea etc. If one googles “Medicare Part B Drug Spending Dashboard” you can check on any company’s sales levels through this program.
Companies with high exposure to Medicaid include those selling drugs for HCV, HIV, autoimmune conditions, diabetes (particularly insulins) and antipsychotics. To get details on any one company or drug you can google “CMS Medicaid Drug Spending Dashboard.”
Which Companies Have Low Exposure to Reference Pricing?
There are many companies that little to no exposure to reference pricing initiatives. First, companies with recently approved drugs that have launched in the U.S. only would have no exposure. Think names like Ionis, Madrigal and Verastem.
Many commercial biotech companies just aren’t selling that much outside the U.S. For example, last year Blueprint had 88% of its sales in the U.S.
Further, many companies that sell substantial amount of drugs outside the U.S. provide minimal discounting.
BioMarin is an interesting case in point. More than half their sales of their rare disease drugs are outside the U.S. But the prices charged are not that different. For example, the wholesale acquisition cost of VOXZOGO for achondroplasia is $899 a vial in the U.S. and $840 in Europe. That’s less than a 7% differential.
Circumvention is Likely to be Rampant
Presumably, it would not be possible to penalize a company that sells drugs in the U.S. at one price but where the same drug is sold by a completely different company at another price. This would violate a number of constitutional protections. Thus, it’s possible to either split a company into two (think about the history of Merck KgAA and Merck Inc) to allow price discrimination or to just sell the rights of the less valuable country to a third party (two-company effective price discrimination).
Further, it’s possible to change the presentation of a drug so that what is sold in one country is not the same as what is sold in another. This may allow one to sidestep reference pricing.
We were in India last week and can report widespread conversations about asset acquisitions from multinationals of emerging markets drug rights in order to facilitate two-company effective price discrimination.
Also, it was very interesting to see the excitement in the country about the recent approval of tirzepatide. India has a huge problem of obesity and the local middle-class populace is lining up to buy the drug. The drug is only available in single dose vials. A month’s supply of 5mg drug costs $200. While well under the U.S. price, Lilly could just take the vials off the U.S. market and only sell pen versions and argue that the products are different. Our conversations also indicated that sales would be brisk were Lilly to raise the price of the drug by 150% to match the U.S. price.
Summary
To summarize, while we wouldn’t be surprised to see some volatility this week in biopharma company share prices, we do not believe that Trump’s MFN pricing proposal is likely to stick.
The rule itself is relatively toothless and largely focuses on encouraging other countries to increase prices rather than forcing the U.S. to lower prices.
Like so many other Trump policy proposals (think annexation of Canada), Trump appears to be playing to his base at moment of political risk and vulnerability.
While no one can predict with certainty what will happen with the MFN proposal, we think this is likely to be end up being yet another paper tiger that has roared at the pharma industry.
Best,
Tim Opler
Managing Director
Stifel Investment Banking
Direct Phone: +1 212-257-5802
oplert@stifel.com
|
