Donald Trump's Pfizer deal could change how governments tackle medicine prices

The development adds yet another weapon to the US government’s armoury for restraining medicine prices: Coercion.

No government likes sky-high drug prices. Many have devised mechanisms to regulate them—ranging from a drug price control authority that can assess prices for reasonableness and affordability and impose ceilings, to negotiations leveraging bulk purchases for national healthcare programmes, and issuing compulsory licences to third parties to manufacture vital drugs if they are not being supplied in reasonable quantities or at reasonable prices by the patent holder.

A lopsided system

While the US healthcare system is based on private insurance and healthcare providers, for the most part, two government-run programmes are major buyers of pharmaceuticals: Medicaid and Medicare. Medicare is for the elderly and disabled, while Medicaid—the larger programme—caters to the less well-off.

Donald Trump’s One Big Beautiful Bill had cut Medicaid funding, and Democrats have withheld votes needed to avert a government shutdown, demanding that funding be restored to pre-cut levels.

The Pfizer deal gives the Trump administration ammunition to say that Democrats are playing politics, even as the President is bringing drug prices down for low-income populations.

He had written to all major pharma companies in July, asking them to lower prices to the levels at which their drugs were sold in Europe. Now, he has announced 100% tariffs on branded and patented medicine imports, unless the drugmakers start investing in the US.

Until Joe Biden passed his Inflation Reduction Act in 2022, Medicaid was prohibited by law from negotiating prices with pharma firms. Negotiations have commenced under the authorization provided by the Act, but the negotiated low prices are slated to kick in only in 2026.

US drug prices are high compared with international standards, even relative to other wealthy nations, because the country has a highly decentralized healthcare system, in which private health insurance, a breed of intermediaries called Pharmacy Benefit Managers, and private hospitals strike opaque deals on the prices of drugs under patent. The saving grace is that intensely competitive generics account for the bulk of drug sales.

Canada and Europe, in contrast, have national health programmes that can procure drugs centrally, giving them significant bargaining power over major drugmakers.

The pharma industry has successfully convinced Americans that high prices are necessary to fund drug research and innovation. Whether drug prices merely reflect the spread-out cost of research and development (R&D) on failed as well as successful research or entail price gouging is anyone’s guess. Only competition from generics and other patented drugs that are near substitutes can bring prices down, aided by policies such as bulk procurement.

The Trump administration has abandoned structured, institutional mechanisms to bring drug prices down and resorted to bullying and arm-twisting. Pfizer has chosen to give in to such tactics. However, it is noteworthy that its guidance to the markets does not indicate any adverse impact on financial performance.

Unintended consequences

This could mean a number of things. For one, Pfizer could choose to raise the prices of its drugs sold in Europe. If the benchmark rises, American drug prices can be set against it, without any significant loss to the company.

It can restrict the range of drugs it sells at a discount, whether to Medicaid or on TrumpRx. Other prices could go up. By the time a committee investigates and determines by how much prices have gone up on which drugs and to what extent such price rise violated the commitment to offer most-favoured-nation prices, that is, the price at which the drug is sold in other countries, the present administration’s term might be over. And new controversies could be trusted to hold the public’s attention.

Pfizer, although based in the US, has production facilities worldwide, including in India, to take advantage of lower costs and be near the end market. The offer to invest $70 billion in the US is merely a way to disguise its inevitable research spending as a concession won from Trump.

The Global Innovation Index 2024 identifies the pharma and biotechnology sector as one with the second-largest spending on R&D, behind only information and communications technology hardware and electrical equipment, whose champions include the likes of chipmaker Nvidia.

Within the pharma industry, Pfizer has some catching up to do, having reduced R&D spending in 2022-23, even as companies such as Eli Lily and Novartis increased their R&D budgets by 25% or more. By making its essential R&D a bargaining chip to obtain reprieve from tariffs on imports from its factories abroad, Pfizer has little to lose and much to gain.

While it is a mutually beneficial round of shadowboxing for the US government and Pfizer, their deal sets a precedent for the government using arbitrary coercion against a company to have its way.

Want to slash import duties on your shipments to the US? That seems to be the latest example of an “offer you can’t refuse", made famous by a certain Michael Corleone.