Key Takeaways
- Pharma stocks seesawed on the news of President Trump’s ultimatum to lower prices, continuing a tough year for healthcare stocks.
- The outlook for Trump’s mandate is unclear, as Congress would have to put it into law, outside of smaller pilot programs.
- Despite the headwinds, biopharma stocks appear undervalued to Morningstar analysts.
Pharmaceutical stocks slumped after President Donald Trump sent letters to 17 drugmakers with an ultimatum to reduce drug prices in 60 days, compounding recent woes among healthcare stocks. Trump insisted that the firms sell new drugs to the United States at the lowest prices of any developed country (the “most favored nation” status).
Other demands include extending the most-favored-nation pricing of existing drugs to Medicaid patients, participating in direct-to-consumer drug sales, and agreeing to an “explicit agreement” to return revenue gained from increasing overseas drug prices to the US. The letters follow a May 12 executive order aimed at reducing drug prices.
“This news is a continuation from Trump’s executive order in May, where he threatened potential most-favored-nation pricing if pharmaceutical CEOs did not lower US prices to suggested levels closer to international prices. He threatened price drops as much as 60%-90% in his comments in May,” notes Karen Andersen, director of equity research at Morningstar. “Since then, pharma management teams have met with the administration and Robert F. Kennedy Jr., but there have not been any moves by pharma to lower prices—meetings were mostly explaining to the administration why it is so hard to raise international prices, such as tight budgets and willingness to reject coverage if prices are too high.”
The firms receiving letters were AbbVie ABBV, Amgen AMGN, AstraZeneca AZN, Boehringer Ingelheim, Bristol Myers Squibb BMY, Eli Lilly LLY, EMD Serono (a subsidiary of Merck KGaA MKKGY), Genentech (a subsidiary of Roche RHHBY), Gilead Sciences GILD, GSK GSK, Johnson & Johnson JNJ, Merck MRK, Novartis NVS, Novo Nordisk NVO, Pfizer PFE, Regeneron REGN, and Sanofi SNY.
Pharmaceutical stocks slumped Thursday afternoon after the letters were published on Truth Social. For the most part, the group rebounded on Friday, but Trump’s push comes as just the latest headwind for the industry and healthcare stocks more broadly.
The US healthcare sector has struggled this year, with the Morningstar US Healthcare Index down 3.4% in 2025, compared with the 6.6% year-to-date gain for the Morningstar US Market Index. With the overall healthcare sector weighed down by UnitedHealth’s UNH woes, drugmakers have fared somewhat better. The Morningstar US Drug Manufacturer Index is up 2.%% in 2025.
Outlook for Trump’s Drug Pricing Mandate
This is the latest salvo in the effort to push down drug prices. The prospects for his mandate, however, are unclear, Andersen says. “Trump is again threatening most-favored-nation pricing and asking pharma firms to do this by the end of September in the Medicaid program, which is perhaps 10% of US drug spending, or face serious consequences, although it is unclear what those could be,” she explains.
“The problem with this proposal is that Congress would need to pass anything larger than a small pilot, and this would be larger than a small pilot,” Andersen says. “Medicaid MFN pricing was already removed from Trump’s One Big Beautiful Bill prior to its passage. This is because even Republicans in Congress were concerned about how lower Medicaid prices could result in significant price cuts in other programs, like the 340B channel, which bases its pricing on Medicaid prices. 340B is a popular way for hospitals to obtain drugs at cheaper prices, and the program is growing quickly, already larger than Medicaid spending. Essentially, Medicaid MFN pricing could affect a much larger portion of the drug market, perhaps more than 20%.
“We think the chances of an MFN bill getting through Congress are low. It already failed once, and we think a broad program like this still looks like it has a relatively low probability (perhaps less than 10%) of getting through,” Andersen says. “The most likely outcome is that drug firms work with the Trump administration to help build more direct-to-consumer sales, bypassing middlemen (pharmacy benefit managers) so that discounts can go directly to patients.”
Andersen continues: “This can’t be easily done for all drugs, but most chronic treatments that patients can self-administer, such as pills or pens/auto-injectors. This would be a way to cut spending without cutting the prices of innovative drug firms. Companies can also launch new drugs at similar prices in other countries (some already do) and refuse to market drugs in countries that won’t pay a high enough price to keep benchmarks for US pricing high.” Andersen notes that some drug companies have already set up direct-to-consumer platforms, including Pfizer, Lilly, and Novo. Pfizer and Bristol have announced plans for direct sales of the cardiovascular drug Eliquis, for example.
Pharma Stock Performance and Valuations
Among the 17 firms that were sent letters, 13 are covered by Morningstar analysts. There’s a wide range in performance among the group, with Novo posting the worst returns so far this year. The stock is down more than 40%, as its blockbuster obesity drug Wegovy has suffered from competition from cheaper, generic versions.
“With tariffs set to pressure pharma drug costs and the Trump administration’s focus on drug pricing potentially hitting the top line, investors seem nervous about prospects for growth in biopharma,” says Andersen. “Overall, after digesting potential tariff hits, we think many companies are trading at a discount to their fair values. We’re not ready to assume most-favored-nation pricing is realistic, apart from some smaller pilot programs, so that’s not part of our valuations. While pharma investing always needs to take into account individual firm exposure to patent expirations and strength of individual pipelines, we think policy concerns have put many firms in undervalued territory.”
Among the 13 pharma stocks covered by Morningstar, seven are undervalued. Pfizer, GSK, and Roche are in 5-star territory, meaning our analysts consider them to be significantly undervalued.
Four companies are roughly in line with their fair value estimates: AbbVie, Amgen, Gilead, and Johnson & Johnson.
Only two are considered overvalued by Morningstar analysts. Novartis trades at an 8% premium to its fair value, while Lilly trades at a 14% premium.
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