Trump’s Executive Order to Reduce Prescription Drug Prices

Is this an attempt to reduce prices domestically, or is it partially motivated by the strategic need to counter China’s growing dominance in pharmaceutical innovation, or it is more?

US President Donald Trump announced his intention to sign an executive order aimed at reducing prescription drug prices in the US by aligning them with the prices paid by other high-income countries. This policy, described as a "most favoured nation" pricing or international reference pricing approach, seeks to address the long-standing issue of the US paying significantly higher prices for prescription drugs compared to other developed nations. The announcement, made via a post on Truth Social, has sparked significant discussion about its potential impact on the pharmaceutical industry, healthcare costs, and American patients.

So what are the context, implications, and challenges of Trump’s proposed executive order?

The US has long been an outlier in the global pharmaceutical market, with prescription drug prices often 2-3X higher than those in other developed nations. This disparity has placed a heavy financial burden on American patients and the healthcare system, with the US spending over $400 billion annually on medications. Trump’s executive order aims to close this gap by ensuring that the US pays the same price as the nation with the lowest drug prices for comparable medications.

In his announcement, Trump claimed this could reduce prices by 30% to 80%, a significant reduction that could translate into substantial savings for consumers and taxpayers. The concept of international reference pricing is not new to Trump’s agenda.

During his first term, a similar proposal was introduced but was ultimately blocked by a court, preventing its implementation. That earlier plan was projected to save taxpayers over $85 billion over seven years, underscoring the potential fiscal impact of such a policy. The reintroduction of this approach signals Trump’s continued commitment to addressing high drug prices.

The pharmaceutical industry has already voiced strong opposition to the proposed executive order. PhRMA, the leading lobbying group for US drug companies, has argued that government price-setting, in any form, is detrimental to American patients. They used the same lifelong bogey of innovation saying that lowering prices could stifle innovation by reducing the revenue that drugmakers rely on to fund research and development. Yawn!

In my opinion, it is a necessary step toward achieving fairness and affordability in healthcare. By expanding the scope of price controls, Trump’s executive order could amplify these savings, potentially benefiting millions of Medicare beneficiaries and reducing the overall cost of healthcare for the US government.

Impact on Indian generic companies

This could have significant implications for the Indian generic pharmaceutical industry, which has long benefited from the price arbitrage in the US market. The US market is highly attractive for Indian manufacturers due to its high drug prices, which allow generics to be sold at a premium compared to other markets. This price arbitrage has fuelled the growth of India’s pharmaceutical exports, with the US being a key market. Despite the potential challenges, several factors suggest that demand for Indian generic medicines in the US would persist. Indian companies have cost advantage from economies of scale. They also have a fairly established market presence and supply chain integration. This makes it difficult for other players to come in. While Indian generic manufacturers are likely to retain a foothold in the US market, they will face challenges adapting to a lower-price environment.

Is Trump’s drug pricing policy a response to Chinese pharmaceutical innovation?

As I wrote in the past, China’s pharmaceutical sector has undergone a remarkable transformation in recent years, positioning it as a formidable global player. China has led global patent filings in pharmaceuticals since 2019, with over 1.4 million patent applications in 2023 alone, dwarfing the US's approximately 600,000. Chinese researchers also dominate scientific publications, contributing nearly 30% of global biomedical papers in 2024. In biologics and biosimilars, China has introduced over 50 new products since 2020, compared to the US’s 30.

This rapid innovation, coupled with cost advantages, poses a “clear and present danger” to the US pharmaceutical industry, which has historically relied on high domestic prices to fund R&D. China’s ability to innovate at lower costs threatens to disrupt this model. Chinese drugs, particularly generics and biosimilars, are increasingly penetrating global markets, including Europe and developing nations, and could gain traction in the US if price barriers are lowered. This shift challenges the US's dominance in pharmaceuticals and raises strategic concerns.

At first glance, Trump’s executive order appears focused on domestic concerns. However, the broader geopolitical context suggests that the policy could also be a response to the competitive threat posed by China’s pharmaceutical rise. By normalizing US prices to levels closer to those in other high-income countries, the policy could help US manufacturers compete more effectively against Chinese generics and biosimilars, which often undercut Western prices.

Big Pharma argues that high prices are necessary to sustain R&D, which costs an average of $2.6 billion per new drug. However, China’s ability to innovate at a fraction of this cost—often $500M or less per drug—threatens to erode the US’s R&D advantage. By lowering domestic prices, Trump’s policy could force US drugmakers to streamline R&D processes, adopt cost-efficient practices, and compete more directly with China’s lean innovation model. This could be seen as a pre-emptive move to prevent Chinese firms from dominating the global market.

Furthermore, Trump’s policy coupled with tariffs enforcement could indirectly encourage domestic production by reducing the profitability of imported drugs, including Chinese ones, thereby incentivizing US investment in local manufacturing. Lower prices might also spur demand for US-made generics and biosimilars, reducing reliance on Chinese supply chains.

One scenario, which is less likely to happen, is that by pressuring other high-income countries to raise their prices to align with US levels (as a response to being used as reference points), the policy could indirectly increase the global price floor for drugs. This would make Chinese drugs less competitively priced in Europe and other markets, limiting China’s ability to outflank US manufacturers through low-cost exports.

Or it could all just turn out that high drug prices are a longstanding political issue in the US, and Trump’s announcement aligns with his campaign promises to lower healthcare costs. The policy’s ability to prevent Chinese medicines from outflanking US drugs is uncertain. On one hand, lower US prices could make domestic drugs more competitive and reduce the appeal of Chinese imports, particularly if paired with incentives for local manufacturing. By narrowing the price gap, the policy might also encourage US firms to adopt more cost-efficient R&D models, better positioning them to compete with China’s lean innovation.

Trump’s proposed executive order to reduce US drug prices could be partially motivated by the strategic need to counter China’s growing dominance in pharmaceutical innovation, or it is more likely driven primarily by domestic political pressures. Either way, it is by no means a comprehensive strategy in itself, to counter China’s rise in the global pharmaceutical arena. There has to be more.