Trump Announces Plan To Reign In Drug Prices And Pharma Stocks Rally

On Friday, President Trump unveiled his much-anticipated plan to control drug prices in the U.S. During his presidential campaign, Trump had promised to take on the big drug companies and it was feared that the plan would include provisions that would hurt profits in the pharmaceutical industry.

As the president began speaking, the stock prices of the biggest drug companies did in fact briefly decline, only to reverse course and ended the day broadly higher.

The reason?The plan doesn’t seem to be “taking them on” at all.

The biggest fear was that the new plan would include provisions for Medicare to negotiate directly with drug companies on price. Roughly 30% of the dollar value of prescriptions filled in the U.S. is paid for by Medicare, making the U.S. government the single biggest customer for pharmaceuticals by a wide margin. Drug companies have been staunchly opposed to the idea of direct negotiation as it would almost certainly damage profits.

Once it was clear direct negotiation wasn’t on the agenda, investors snapped up shares of the biggest U.S. drug makers, including Abbvie (ABBV), Amgen (AMGN) and Merck (MRK), each of which finished the day 2% or more above their mid-speech lows.

The President takes on softer targets

Trump decried the participation of what he referred to as “middlemen”, meaning primarily Pharmacy Benefit Managers – intermediaries between manufacturers and doctors and pharmacies.

 He also took aim at small pharmaceutical companies who buy up off-patent generic drugs and raise the prices sharply. Because this strategy is mainly the practice of small companies (think Martin Shkreli and Turing Pharmaceutical), it won’t affect the big names and Trump’s plan to speed FDA approval of generic drugs could actually help big pharma.

Finally, Trump took aim at a familiar target – foreign countries. Explaining that other countries pay “a tiny fraction of what the medicine costs in the U.S.” Trump continued, “…it’s time to end the global freeloading.”

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