Healthcare sector under pressure

The healthcare sector, long considered a defensive stronghold in turbulent markets, is facing a rare convergence of headwinds. From action on drug pricing to the looming threat of new trade tariffs under a second Trump administration, the industry is navigating a period of uncertainty that is reshaping investor sentiment and strategic planning.

Why the sector is underperforming

Healthcare equities have lagged broader indices in 2025, with the MSCI World Healthcare Index trailing the S&P 500 by nearly 8 percentage points in the year-to-date. This underperformance is driven by a mix of regulatory uncertainty, pricing pressures, and investor rotation into higher-growth sectors such as technology and artificial intelligence (AI).

One of the key drags on performance has been concerns over drug pricing reforms and patent cliffs. The Biden-era Inflation Reduction Act (IRA) allowed Medicare to negotiate prices on select drugs. Signed into law in 2022, the IRA granted Medicare – for the first time – the authority to negotiate prices for certain high-cost prescription drugs. This long-contested provision aims to curb federal spending and reduce out-of-pocket costs for millions of Americans.

The policy has not gone unchallenged. Pharmaceutical giants, including AstraZeneca, launched legal battles claiming the law infringes on constitutional rights and threatens innovation. However, in a landmark ruling in May 2025, the 3rd US Circuit Court of Appeals upheld the law, dismissing AstraZeneca’s claims and reinforcing the government’s authority to implement cost-containment measures.

Despite its limited scope, the IRA is widely seen as a foundational shift in US drug pricing policy. Analysts suggest it could pave the way for broader reforms, especially if the courts continue to uphold the government’s negotiating power. The new prices will take effect from January 2026.

Policy uncertainty continues

So, the IRA continues to cast a shadow over drug pricing, and the potential for further regulatory shifts under a second Trump administration has added to this uncertainty. Indeed, President Trump signed an executive order in April 2025 that expands Medicare’s negotiating power and introduces a controversial “most favoured nation” pricing model.

Under the new directive, drugmakers are being pushed to match the lowest prices paid by peer countries – or face federal intervention. “Big Pharma will either abide by this principle voluntarily, or we’ll use the power of the federal government,” Trump declared during a May press conference.

The administration’s plan includes:

• Mandated price negotiations for high-cost drugs under Medicare.
• Caps on insulin and epinephrine prices for low-income and uninsured patients – some as low as $0.03 plus a small fee.
• Standardised Medicare payments for certain drugs, regardless of care setting, potentially slashing costs by up to 60%.
• Expanded drug importation programmes to help states access cheaper medications from abroad.

The White House argues these measures will bring “radical transparency and competition” to a market long criticised for opacity and profiteering. Pharmaceutical benefit managers (PBMs) are also under scrutiny, with new rules requiring disclosure of broker fees and incentives.

Industry groups argue that pegging US prices to international benchmarks could stifle innovation and lead to drug shortages if companies pull out of less profitable markets. Still, the Trump administration appears undeterred.

Potential Trump tariffs

Adding to the sector’s woes is the spectre of new tariffs from the Trump administration, which is advancing plans to impose sweeping tariffs on imported pharmaceuticals, framing the move as a matter of national security and economic sovereignty.

In April, the US Department of Commerce launched a formal investigation under Section 232 of the Trade Expansion Act – a rarely used provision that allows the president to restrict imports deemed a threat to national security.

President Trump has long criticised the US reliance on foreign drug manufacturing, particularly from China and India, and has pledged to bring pharmaceutical production back to American soil. “We will no longer allow foreign nations to control our medicine,” Trump said during a recent rally in Ohio. “We’re putting America first – especially when it comes to our health.”

The proposed tariffs could apply to a wide range of products, including:

• Finished prescription drugs (both generic and branded).
• Active pharmaceutical ingredients (APIs).
• Medical countermeasures and critical raw materials.

The administration argues that foreign price manipulation and supply chain vulnerabilities have left the US exposed, especially in times of crisis. The tariffs are also seen as a bargaining chip in broader trade negotiations and part of a larger strategy to pressure drugmakers into offering “most-favoured-nation” pricing to American consumers.

However, the move has sparked concern among healthcare providers and policy experts. Critics warn that tariffs could exacerbate drug shortages, raise costs for patients, and disrupt access to essential medicines. Industry groups are lobbying for exemptions and warning of unintended consequences, particularly for generic drugs that are already in short supply.

The Commerce Department is expected to issue its recommendations later this summer, with tariffs potentially taking effect by early 2026.

Despite the current turbulence, analysts remain cautiously optimistic about the long-term fundamentals of the healthcare sector. Aging populations, rising chronic disease burdens, and technological innovation continue to underpin demand. However, in the short to medium term, the outlook is mixed.

Big Pharma is expected to face continued pricing pressure, especially if President Trump follows through on plans to deregulate Medicare drug negotiations. However, biotech innovation – particularly in gene therapy, oncology, and AI-driven drug discovery – remains a bright spot. M&A activity is also expected to pick up, as large companies seek to replenish pipelines and diversify revenue streams. A wave of strategic acquisitions is likely.

Conclusion

The healthcare sector is at a crossroads. Share-price underperformance, policy uncertainty, and the threat of tariffs have created a challenging environment for investors and operators alike. Yet the sector’s long-term drivers – demographics, innovation, and global demand – remain intact.

As the Trump administration’s trade and healthcare policies take shape, the coming months will be critical in determining whether this is a temporary setback or a structural shift. For now, caution – and close attention to Washington – remain the order of the day.