By David Wainer

The past two years have been punishing for the biotech and pharma space.

As Wall Street chased the artificial-intelligence boom, drugmakers were left behind, with pharma stocks trading at a major discount to the broader market. The SPDR S&P Biotech ETF, meanwhile, was basically unchanged last year despite huge gains for innovation counterparts in the tech sector.

Politics hasn't helped. After decades of wielding significant influence in Washington, the pharma lobby suffered a major blow when the Biden administration pushed through Medicare's drug-price negotiation law.

Now as Donald Trump takes office, the industry is cautiously optimistic that its fortunes might finally begin to shift -- or at least not get any worse. At last week's annual JPMorgan Healthcare Conference in San Francisco, industry executives pointed to Trump's promises to cut taxes and to crack down on pharmacy-benefit managers as evidence that his policies might benefit the industry as a whole.

While Trump's victory and his decision to name Robert F. Kennedy Jr. as his top health official initially unsettled executives and investors, many are now warming up to the new administration. No one is betting that Trump will suddenly fall in love with big pharma. During his first administration he repeatedly railed against the industry and tried to pass a rule linking some Medicare drug prices to international drug prices. But at this point an unpredictable leader, some argue, is better than a predictably unfriendly one.

During a lunch with reporters in San Francisco, Pfizer Chief Executive Albert Bourla was particularly blunt, describing the previous administration as heavily influenced by progressive priorities on everything from taxes to antitrust. By contrast, Bourla noted that the Trump administration appears more inclined to address misaligned incentives for PBMs, which act as drug middlemen, rather than pursuing sweeping drug-pricing legislation.

"He doesn't like, of course, that here people are paying a lot for their medicines compared to Germany," said Bourla, who dined with Trump at Mar-a-Lago last month. "But he appreciates that here there is the middleman that is inflating the out-of-pocket [cost] disproportionately."

While Bourla's optimism may reflect a degree of wishful thinking, it was widely shared by many at the conference. The relative optimism is grounded in a harsh reality: For the pharma industry, it is hard to imagine an administration more challenging than Biden's. Just Friday, the Biden administration announced 15 additional drugs, including Ozempic/Wegovy, that will face Medicare price negotiations under the Inflation Reduction Act (IRA). Together, these drugs represent $41 billion in annual Medicare spending, with officials touting the potential for significant savings.

It isn't clear whether the Trump administration will ease up on the IRA negotiation process, said Shawn Maree Bishop, a former top health adviser to the Senate Finance Committee. But members of the industry are hopeful that the White House could work with Congress to modify the IRA. For instance, noted Bishop, now a senior adviser at Akin Gump Strauss Hauer & Feld, the industry may be hoping for a pause in negotiations altogether or for changes to what they call the law's "pill penalty," a provision that requires small molecules to face negotiation four years sooner than biologics.

Concerns about the incoming administration remain, however, particularly given Robert F. Kennedy Jr.'s rhetoric on vaccines and drugs more broadly. But even on that front, the thinking in some corners is that Kennedy's more extreme impulses could be somewhat tempered. Last week, The Wall Street Journal reported that two vaccine skeptics who had been advising RFK Jr. have been sidelined by Trump transition officials. Some believe he might be steered toward focusing on other issues, like food safety or fluoride, while more industry-friendly voices could play a larger role in shaping policy.

The NYSE Arca Pharmaceutical Index isn't exactly a screaming bargain at 14.6 times forward earnings, according to FactSet. But that is a discount to its five-year average of 15.2 times, and well below the S&P 500's lofty 21.7 times. Trump's policies are unpredictable on many fronts; at least in healthcare some pessimism is already priced in.

Write to David Wainer at david.wainer@wsj.com

(END) Dow Jones Newswires

January 20, 2025 07:00 ET (12:00 GMT)

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