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Will Trump's Surprise Drug Pricing Plan Boost Pharma Stocks?

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President Donald Trump on Friday unveiled his plans of lowering drug prices, in keeping with promises he made in the run-up to the Presidential elections. Pharmaceutical companies and the broader industry had been anticipating that Trump would come down heavily on them, as he had long criticized drugmakers of “getting away with murder” by charging way too much for their products.

However, these fears were dispelled as Trump’s proposal will actually not directly hamper the profitability of drug companies. Instead, the reforms are aimed at increasing competition for medicines, cutting list prices and reducing patients’ out-of-pocket costs. This pleasant surprise gave stocks of pharmaceutical companies a boost.

Long-Standing Committment

Lowering drug prices was one of Trump’s presidential campaign promises. He had committed to take on the big drug companies, which was also supported by Trump’s Democrat opponent Hillary Clinton.

Since then, Trump has time and again criticized drug manufactures and pharmaceutical companies for charging too much for their products. This had kept the pharmaceutical companies reeling under pressure for quite some time, as they had feared that Trump’s pharma plan could hurt their profits. The broader pharma sector SPDR S&P Pharmaceuticals (XPH) has declined 6.3% year to date. And the industry had feared further losses, apprehending harsh measures from Trump on Friday.

Raising Competition on the Anvil

The twist in the tale came when Trump stressed on increasing competition for medicines. This was one of the highpoints of his speech on Friday. Framing his plan as the “most sweeping action in history to lower the price of prescription drugs for the American people” and describing it as “American Patients First,” he laid out a policy that intends to increase pharmaceutical competition and the power of negotiations while lowering patients’ out-of-pocket costs. Trump’s policy also aims at creating incentives to lower list prices of prescription drugs.

The reforms certainly are a ray of hope for American patients for whom the rising cost of healthcare is a nagging concern. The American Patients First plan will have both immediate actions as well as future opportunities for both lowering out-of-pocket costs faced by patients and reducing drug prices. Interestingly, Trump refrained from raising direct Medicare price negotiations on Friday, although this was one of his agendas during his presidential campaign.

Pharma Stocks Rally on Trump’s Reforms

Clearly, Trump’s American Patients First plan doesn’t seem to be a threat to pharmaceutical companies and their profits. In fact, it is very much in line with the financial interest of drugmakers and health insurers and will no way hamper their profits. These fears, which had often resulted in shares of pharma companies taking a hit in the last few months, finally saw them bouncing back on Friday.

Although the sector declined initially on Friday, stocks started rallying by the time Trump had finished his speech. Shares of Regeneron Pharmaceuticals, Inc. (REGN - Free Report) increased 6.2%. Also, shares of CVS Health Corporation (CVS - Free Report) , Merck & Co., Inc. (MRK - Free Report) , Pfizer Inc. (PFE - Free Report) , and Walgreens Boots Alliance, Inc. (WBA - Free Report) were up3.2%, 2.8%,1.3% and 0.3%, respectively. Merck & Co has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Trump Spares Drugmakers

The biggest reason behind this rally is that Trump’s plan actually doesn’t hurt U.S. pharmaceutical companies at all. In fact, the administration keeps in place, and in a few cases, extends the role of drug middlemen, who have been often been blamed for spiking drug costs.

Trump’s plan calls for drug companies to display prices in ads and restrict “gag clauses” for pharmacists. This proposal comes because some pharmacies and pharmacy benefit managers (PBM) have contracts that donot allow pharmacists from letting patients know if a drug on the cash counter would be cheaper than if it was purchased usingtheir insurance.

However, Trump’splan gives the companies new powers in Medicare Part D, the U.S. program under which seniors get drug coverage. This would allow Medicare to change the list of covered drugs midyear in order to push back against price hikes of some generic drugsthat donot actually have so much competition. This led to shares of healthcare service companies like McKesson Corporation (MCK - Free Report) , Express Scripts Holding Company , AmerisourceBergen Corporation and Cardinal Health, Inc. (CAH - Free Report) rising 2%, 1.8%, 1.4% and 1%, respectively.

Summing Up

Trump’s American Patients First, which comes with a set of reforms, had sparked fears among pharmaceutical companies for quite some time. However, the fears seem to have subsided somewhat, as the new plan doesn’t hurt drugmakers and their profits. This saw investors’ confidence finally getting reinstated and pharma and biotech stocks rallying.  

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