TLDR
- Pfizer agreed to reduce drug prices for Medicaid patients after pressure from the Trump administration
- The deal came as Trump’s 60-day deadline for drugmakers to comply with his pricing policy expired Monday
- Pfizer stock jumped 6% on the news as the company becomes the first major pharmaceutical to reach an agreement
- Trump signed an executive order in May requiring U.S. drug prices to match those in other wealthy nations
- The White House is preparing to launch TrumpRx, a website allowing cash-paying Americans to buy drugs directly from the government
Pfizer stock climbed 6% Tuesday after reports emerged that the pharmaceutical company reached a deal with the Trump administration to cut drug prices for Medicaid patients. The Washington Post broke the story, indicating an announcement could come as soon as today.
The agreement makes Pfizer the first major drugmaker to comply with President Trump’s pricing demands. Trump signed an executive order in May directing the government to negotiate new pricing with pharmaceutical companies.
The order requires drugmakers to charge U.S. customers no more than they charge patients in other wealthy nations. Trump has called this his “most-favored-nation” policy.
In July, Trump gave pharmaceutical executives 60 days to bring U.S. prescription costs in line with his policy. That deadline passed on Monday.
Letters went out to CEOs at Pfizer, Gilead, Bristol Myers Squibb, Johnson & Johnson, Amgen, AbbVie, Novartis, and AstraZeneca. Pfizer CEO Albert Bourla was among the recipients.
Trump complained last week about drug pricing disparities. “We pay much higher for drugs than the rest of the world,” he said. “We subsidize the rest of the world [and] we’re not doing that anymore.”
Voluntary Compliance Versus Mandatory Cuts
Pfizer chose the voluntary route rather than risk government-imposed price controls. The executive order laid out a two-step approach.
Step one involves attempting to get companies to lower prices voluntarily. Step two could involve the government imposing mandatory cuts.
By acting first, Pfizer handed Trump a political win while maintaining some control over its pricing decisions. This strategy helps preserve profit margins better than mandatory cuts would.
The company also potentially positions itself as a preferred provider of drugs to Medicaid. Getting on the administration’s good side could help Pfizer’s growth prospects.
The deal will result in slimmer profit margins on affected medications. But investors seemed to view the voluntary approach as better than the alternative.
Pfizer stock traded at $25.30 by mid-afternoon Tuesday. The shares are up from a 52-week low of $20.91 but remain well below the 52-week high of $30.43.
TrumpRx Website in Development
The Wall Street Journal reported that the White House is preparing to launch a website called TrumpRx. The site would let Americans who pay cash buy pharmaceuticals directly from the government at lower prices.
This initiative represents another piece of Trump’s broader drug pricing strategy. The combination of direct sales and negotiated Medicaid prices could reshape how Americans access medications.
Pfizer’s quick response may benefit the company in the short term. However, if other drugmakers follow suit, the entire industry could face increased pricing pressure.
The stock currently trades at 12.6 times trailing earnings and 10.9 times free cash flow. Pfizer pays a dividend yield of 7.17%.
The company’s gross margin stands at 67.34%. How much the pricing deal affects that margin remains to be seen.
