Global pharma faces growing pressure

This week we take a closer look at the global pharmaceuticals sector, which has experienced a turbulent year.

The chart below shows the performance of the global pharmaceutical sector compared to global equities overall. The sector has underperformed sharply since this time last year, when investors began to price in a second Trump presidency.

What’s been behind this move? Looking at expected earnings, we don’t see a significant shift. Pharmaceutical companies in aggregate haven’t grown their earnings as fast as overall global equities, but they’ve done ok and, if anything, we’ve seen that trend in earnings accelerate since mid 2024.

But valuations tell a different story. The forward Price/Earnings ratio for Global pharmaceutical stocks has fallen sharply over the past year, while the forward P/E for global equities overall has generally moved higher.

How should we view this? We can think about a forward Price/Earnings ratio as a vote of confidence in the future. If investors are optimistic about the future prospects for a business or a sector, that’s often reflected in a higher multiple. Similarly, if investors are less hopeful, we often see the Price/Earnings ratio fall well before we see any concern in the companies results.

Today, investors seem pretty pessimistic about the pharma sector. They aren’t willing to pay the same multiple for pharma earnings that they were a year ago, even though, at first glance, those earnings haven’t moved very much. How pessimistic are they? The chart below compares the Forward P/E of pharma compared to global equities. On that metric, global pharma is the lowest it’s been in thirty years.

What’s behind all this? There are a couple of points to make. A lot of this reflects political and regulatory pressure in the US. The current administration has expressed greater scepticism about the efficacy of vaccines and has reduced funding for MRNA vaccines in particular. The US also looks set to cut its investment in basic scientific research, which might impact drug discovery by global pharmaceuticals in the future. 

More importantly, the current US administration has been very focused on areas where the US has a potential supply vulnerability or where officials believe that US consumers have been unfairly treated. On those criteria, the pharma sector doesn’t look great.

On pricing, drug prices in the US look high at first glance. A report from the Department of Health and Human Services in December 2024 compared pricing on prescription drugs between the US and global peers. It found that in 2022, the average price per unit in the US was 5.5 times as high as in the OECD (a group of higher income countries). It also found that the US accounted for 50% of worldwide sales revenues for prescription drugs but only 13% of total volumes.

The second issue has been around drug manufacturing. The US imports a lot of basic pharmaceuticals. The chart below from Torsten Slok at Apollo Global Management shows the share of drug imports that come from China for certain key products. 

The administration has followed a familiar playbook. In July, the President sent letters to pharmaceutical CEOs calling for them to lower drug prices. In August, the President indicated that he would raise tariffs on imported drugs dramatically – up to 250%, but that he would give the sector at least some time to ramp up production in the US. 

To investors, the risk is that pharmaceutical companies will need to cut their prices, reducing their profits. At the same time, they might need to increase their capital investments in building factories in the US that they might not have done so. It all means potentially less cash for equity holders. Investors overall have been evaluating that risk since mid 2024 and have punished pharmaceutical stocks accordingly.

One interesting piece of news last week was the announcement that Eli Lilly would at least double the price of its popular GLP-1 drug, Mountjaro, in the UK to “address pricing inconsistencies compared to other developed countries”. It suggests that global pharmaceutical companies may look to raise prices outside the US to offset potential price cuts in the US. If we see this type of move become a trend, that could help support pharma profits. It might also feed into services inflation in other Developed Countries. 

Where does this get us? There are a few points to highlight. First, it’s a reminder that government policy can have a significant impact on specific sectors.

Also, we can see investors take a forward-looking view, downgrading the prospects for the sector well before we see a shift in actual company earnings. Sentiment towards the sector seems very low. Global pharmaceutical companies will look for ways to offset potential price cuts in the US, perhaps by raising prices elsewhere. That might support profits more than investors expect.

Finally, it’ll be important to follow the capex plans for these businesses, particularly whether they expand their production plants in the US to mitigate the risk of much higher import tariffs.