(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential shifts and reassess our guidance accordingly [see our research here: spglobal.com/ratings].)
This report does not constitute a rating action.
Key Takeaways
- The Trump Administration has issued two executive orders outlining its priorities for reducing drug prices. The President has also discussed extending tariffs to pharmaceutical products. If and how these priorities are translated into law and administrative actions will determine their impact on pharmaceutical companies and credit quality.
- Given broad and bipartisan support for drug-price reform, our base case expectation is that some combination of initiatives will proceed into law but we expect the combined impact to be only moderate. It’s still unclear which companies may be most affected and whether this may pressure ratings.
- MFN is not factored into our ratings or forecasts and we believe that implementing a most favored nation (MFN) pricing mechanism, as proposed, would be highly negative to the branded pharmaceutical industry’s credit quality.
- Potential tariffs could put margin pressure on branded drugs and generic pharmaceutical companies, depending on how they are enacted and the company’s footprint.
- Certain initiatives to spur more competition to branded drugs from generic drugs could be negative for generic companies’ credit quality.
The U.S. population pays significantly more for branded (patent-protected) medicines than any other country and IQVIA, a provider of pharmaceutical data and analytics, predicts overall spending will continue to rise. We expect U.S. policymakers will continue to craft new laws and regulations to make drugs more affordable for patients and especially government payers, and for some of those to be enacted because it has bipartisan support among lawmakers and the support of the current administration. The Trump Administration recently issued two executive orders pertaining to drug pricing, and the Department of Health and Human Services (HHS) subsequently followed with some further clarifications. The most recent--Executive Order 14297--mandated most favored nation (MFN) pricing on drugs, which aims to lower the cost of prescription drugs by drastically reducing the gap between drug prices in the U.S. and those in other developed countries. These efforts could hurt branded pharmaceutical growth and credit quality.
Although we see an increased risk of drug price reform initiatives advancing within the coming year, we don’t believe that highly disruptive initiatives, such as MFN pricing, will proceed into law as proposed because it could severely reduce investment in drug development, a concern that many policymakers have recognized. While we think there will be continued pressure to reduce drug pricing and improve drug affordability, some of the executive orders’ proposals were relatively vague and how and if they become laws or administrative actions will determine their impact. As such, we have not yet explicitly baked those into our company forecasts.
Moreover, most companies are currently well-positioned with prospects for robust revenue growth over the next few years, and most big pharma companies have a cushion for some margin erosion within their current ratings, as well as the ability to maintain their creditworthiness by prioritizing conservative levels of debt leverage. As such, our sector outlook and most ratings on pharmaceutical companies remain stable. That said, if these initiatives constrain revenue and profit growth, they could fuel mergers and acquisitions (M&A) as a way to support revenue growth or lead to further industry consolidation. This could pressure ratings, since multiples tend to be high and larger transactions financed with debt can materially increase the acquirers’ debt leverage.
Most Favored Nation And Medicare Drug Price Negotiation
MFN pricing could highly constrain pharmaceutical companies’ profitability and credit quality. Executive Order 14297 directs the Secretary of Health and Human Services (HHS) to communicate MFN pricing to pharmaceutical companies within 30 days. It states that after that period, if significant progress is not made, the administration will act. It suggests the administration could “impose a rulemaking plan to impose MFN pricing.” In the previous Trump Administration, efforts were made to use HHS’s authority to test payment models to test MFN pricing on 50 Medicare Part B drugs. The administration may attempt a similar route if progress to lower drug prices is not made. However, previously, this approach was met with opposition from the pharmaceutical industry and similar attempts will likely be challenged in court. The administration could also encourage Congress to enact legislation. We believe it is unlikely Congress will enact legislation that would effectuate MFN. We think MFN could be very disruptive and would severely reduce investment in drug development, slowing the pace of advances in medicine. Furthermore, there is a slim Republican majority in both houses, and Republican members of Congress have expressed concern over the degree to which it would slow innovation.
The Trump Administration has stated its intention to improve upon the savings achieved in the previous administration on Medicare drug price negotiation. This is incrementally negative for pharmaceutical companies, though the impact will vary by companies and the extent of the new administration’s achieved discount. For the first 10 drugs, the Centers for Medicare and Medicaid Services (CMS) stated that had the law been in effect in 2023, the discounts it negotiated would have saved 22% in spending (net of rebates) in aggregate.
Accelerating Competition
Expediting competition could reduce branded drug prices, but some initiatives may hurt generic company’s revenue growth prospects. The Trump Administration has indicated a desire to investigate ways to increase competition in the market such as through the acceleration of approval of generics or biosimilars. Currently, there are several proposals to spur competition for biologic drugs by fast-forwarding the adoption of biosimilars, which are akin to a “generic” version of biologic drugs. Another initiative would try to prevent “patent thickets” on biologics; that is, the practice of using multiple patents to complicate biosimilar entry.
In the last Trump Administration, the FDA accelerated the approval of generic drugs, which had an even more negative impact on generic drug companies than it did on branded drug companies. The higher pace of FDA approvals increased generic price deflation because of an increased number of generic competitors for a single drug. This led to rapid price erosion and revenue declines of several generic companies and was a factor in several downgrades as well as defaults. However, it is unclear if the administration would be able to accomplish this again, particularly since it recently cut staff at the FDA.
Tariffs’ Effect On Access To Drugs And Credit Quality
Tariffs on pharmaceutical products or raw materials could reduce branded drug companies’ profitability, but the impact to generic drugmakers is likely to be mixed. Although not part of the executive orders, the Trump Administration has launched a section 232 investigation, indicating that it is considering tariffs on pharmaceutical products. At the moment, pharmaceutical products and their raw materials are excluded from the administration’s newly announced tariffs, but President Trump has threatened to extend import tariffs to pharmaceutical products. Many drug companies obtain raw materials and/or manufacture products outside the country. In the commercial markets, branded pharmaceutical companies may be able to pass on some price increases for drugs with limited competition. However, for Medicare, drugmakers cannot increase prices more than inflation and some medicines will be subject to price reductions as part of Medicare negotiations. Thus, if enacted, tariffs could pressure branded pharmaceutical companies’ margins. However, depending on the tariffs rates, it may make sense for companies to increase U.S. manufacturing to avoid such pressures, but that could involve substantial capital investments or increases to their tax rates if they are currently recognizing profits in a lower-tax jurisdiction.
The U.S. administration’s tariffs levied on Chinese goods were particularly high, even after the recent reduction, and if those tariffs levels are applied to pharmaceutical products or raw materials from China, generic manufacturers could be significantly affected as many have material manufacturing operations in and/or source raw materials from China. Since price points of generic drugs are much lower, margins thinner, and competition fiercer than that of branded drugs, some generic companies, especially those reliant on China, may find certain drugs unprofitable. This will likely be a headwind in the short term for generic companies. However, in the longer-term, some of the larger rated generic manufacturers such as Teva Pharmaceutical Industries Ltd. and Amneal Pharmaceuticals Inc., which have significant manufacturing capacity in the U.S., may gain market share from those without U.S. manufacturing capacity.
Related Research
- Pharmaceutical Industry 2025 Credit Outlook Is Stable As Healthy Revenue Growth Mitigates Pressures, Feb. 3, 2025
- Industry Credit Outlook 2025: Health Care, Jan. 14, 2025
- Credit FAQ: How President-Elect Trump's Tax Proposals Could Affect U.S. Companies In 2025, Nov. 12, 2024
References
- IQVIA. (2024, May). The Global Use of Medicines 2024: Outlook to 2028. https://www.iqvia.com/insights/the-iqvia-institute/reports-and-publications/reports/the-global-use-of-medicines-2024-outlook-to-2028
| Primary Contact: | Tulip Lim, New York 1-212-438-4061; tulip.lim@spglobal.com |
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| Nicolas Baudouin, Paris 33-14-420-6672; nicolas.baudouin@spglobal.com | |
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