US-UK drug deal BLOWS up the global pharma game

Key Concepts

• US-UK Pharmaceutical Deal: A new trade agreement between the Trump administration and Britain concerning tariffs on pharmaceutical products and medical technology.
• Tariffs: Taxes imposed on imported goods.
• Cost-Effectiveness Appraisal Threshold: A metric used to determine the value of medicines based on their cost and effectiveness.
• National Savings: The difference between a nation's income and its consumption.
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Fiscal Sustainability: The ability of a government to meet its financial obligations over the long term.
• Section 301: A provision in U.S. trade law that allows the President to take action against countries that engage in unfair trade practices, such as intellectual property theft and subsidization.
• Artificial Intelligence (AI): The simulation of human intelligence processes by computer systems.
• Research and Development (R&D): Activities undertaken to discover new knowledge and use it to create new products or processes.

US-UK Pharmaceutical Deal and Tariff Implications

The Trump administration has reportedly secured a new deal with Britain that involves zero tariffs on British pharmaceutical products and medical technology. In exchange, Britain is expected to increase its spending on American medicine and revise its valuation of these drugs. Specifically, Britain will raise the net price on drug spending by 25% and increase the cost-effective appraisal threshold for medicines by $5,000. This exchange is framed by administration officials as a win-win for both nations.

Market Reaction to Pharmaceutical Deal

The stock market's reaction to this news has been mixed. AstraZeneca and Eli Lilly saw slight declines, while Merck experienced an increase. This suggests that not all American companies are fully aligned with President Trump's tariff plans.

Legal Challenges to Tariffs

Costco is among a growing list of companies planning to sue the Trump administration to seek refunds if tariffs are eventually struck down by the Supreme Court. This legal challenge highlights concerns about the administration's tariff policies.

CEO Perspectives on Tariffs

Despite legal challenges, an analysis of company earnings calls by The Wall Street Journal indicates that CEOs are not experiencing as much financial pain from tariffs as initially anticipated.

Governor Nygren on Tariff Revenues and Inflation

Governor Stephen Nygren, in a discussion with Maria, shared his perspective on the importance of tariffs. He noted a shift in public sentiment from initial panic over tariffs in April to a more measured approach as decisions are awaited. Nygren stated, "if the tariffs go away we're not to pay back $200 billion we need the tariffs in place."

He believes that concerns about a material spike in inflation due to tariffs have not materialized, as people have been adjusting their expectations throughout the year. From a monetary policy standpoint, Nygren argues that tariffs are expected to increase national savings, which in turn has delayed concerns about the Treasury and bond markets, as well as fiscal sustainability. This increase in national savings has also helped to reduce what he calls the "new jewelry of policy," allowing for slightly lower interest rates due to international savings flowing into investment. Nygren emphasized that tariffs have been important for generating revenues that calm financial markets.

Tariffs and the Financial Health of the US Government

The discussion touched upon how tariffs have altered the dynamics for American companies while simultaneously contributing to the overall financial status and health of the U.S. government. Nygren suggested that in theory, tariffs offset government spending. He believes that 10-12% tariffs are manageable, with the costs spread across consumers, importers, and potentially stores, though major retailers like Home Depot and Walmart have not significantly raised prices. This widespread manageability, he posits, is why tariffs do not feel as detrimental as initially feared.

Low Gasoline Prices and Tariffs

A point of contention raised was the lack of credit President Trump receives for low gasoline prices. The "drill baby drill" policy has reportedly kept oil prices below $60 for months, resulting in gasoline prices at a two-year low. However, the focus, according to the speaker, remains on tariffs.

Supreme Court and Future Trade Policy

Cheryl highlighted the Costco lawsuit as a potential turning point, noting that the Supreme Court's questioning of tariffs, particularly the administration's justification of levying them on all countries for national security reasons, could be concerning for the administration.

Administration's "Plan B, C, D, and F"

If the Supreme Court rules against the administration, it is stated that the administration has contingency plans. These include utilizing Section 301 of trade law to target unfair trade practices, such as subsidization and intellectual property theft, with a particular focus on countries like China. These options are presented as ways to continue the "American First" agenda without arbitrarily raising tariffs that could increase prices. The agreement with Britain is cited as an example of trade deals leading to lower costs for Americans on certain goods, providing a political advantage.

Alternative Revenue Streams

Scott Bessent is quoted as saying that there are other plans to generate revenue or handle adverse decisions.

Pharmaceutical R&D and Tariffs

The conversation returned to the drugmakers and the zero-tariff agreement. This move is seen as significant for President Trump's agenda to lower drug prices for Americans. While it grabs headlines, it's noted that generics already benefit from a zero-tariff policy, yet everyday prices don't always reflect this.

Tariffs and Carve-outs

The existence of numerous "carve-outs" on tariffs for items like avocados, pineapples, beef, flat-panel TV screens, and auto parts is mentioned as a reason why the impact of tariffs hasn't been as severe as initially predicted. The speaker suggests that the initial 10-12% tariffs might effectively become zero on many of these items due to these exceptions, indicating a "steady walking back" from the initial announcements.

R&D Spending Concerns

A counterargument regarding pharmaceutical companies' R&D spending was raised, questioning if they have sufficient funds to continue investing in research and development. The speaker acknowledges that significant money is being spent on AI development, which is crucial for both developing AI and drugs, necessitating continued investment.