Eli Lilly And Novo Nordisk Could Face Policy Shifts As FDA Oversight, Tariff Risks Mount

Needham hosted Spencer Perlman, director of Healthcare Research at Veda Partners, an investment advisory and consulting firm with extensive expertise in government policy analysis. During the conversation, analyst Gil Blum discussed several topics of interest, including trade tariffs, recent personnel changes in the FDA/HHS, 503A/503B compounding related to GLP-1s, the FTC and their potential impact on healthcare equities.

At the moment, pharmaceutical companies are exempt from reciprocal tariffs. However, a fact sheet issued by the White House suggests that the administration may pursue tariffs through Section 232, which allows for imposing tariffs under specific circumstances, such as national security emergencies.

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If successful, these tariffs could command rates of over 25% and are typically more challenging to unwind, according to Blum.

President Trump leveraged Section 232 to impose a 25% tariff on steel imports in 2018, which remains in place today. Currently, investors perceive Pharma names as a relative haven.

Blum noted that generic drug manufacturers will be particularly negatively impacted by tariffs, given that most APIs are produced in ex-U.S. regions such as China and India.

Generics have a narrower margin than branded drugs, implying increased sensitivity to expected price hikes. Mr. Perlman noted that other industries, including health plans and CROs, remain relatively insulated at this time. He noted that tariffs, in general, will remain in place for the remainder of President Trump’s term in office.

Blum noted that the FDA will continue to run at a high level as intended. Recent layoffs will most impact non-reviewers, including those working in communications and other supportive roles.

Drug reviewers are paid through PDUFA user fees (~55% of the FDA budget) and, therefore, are less likely to be laid off. With fewer staff, there is a higher likelihood of delays in the review process and manufacturing site inspections.

Perlman noted that the FDA will try to protect review quality by moving slower if needed.

With Congress in control of the NIH budget, he doesn’t expect large cuts to be implemented soon.

Budget reductions could negatively impact future drug discovery; however, the effects likely won’t be felt in the near term.

Perlman acknowledged that it will not be easy to replace the former head of the Center for Biologics Evaluation and Research (CBER), who resigned last weekend due to a disagreement with HHS Secretary Robert Kennedy Jr. over vaccine safety and transparency.

However, Blum noted that the adverse market reaction to the news, particularly in the cell and gene therapy space, was likely to be overblown. He said that many competent professionals are still working in the agency, attempting to drive novel therapies to market. Blum warned that it may be challenging for whoever replaces Dr. Marks to have an independent viewpoint in the position for as long as Kennedy remains HHS Secretary.

Blum’s discussion covered the nuances of 503A and 503B compounding. 503A represents one-off, non-solicited instances where a patient requires a special accommodation to consume the molecule, while 503B is more pertinent to outsourcing and the broad manufacturing of compounds.

With 503A focusing on unsolicited receipts, Blum noted that the Hospital Information Management System (HIMS) may be a violation; if a company is advertising that it will accept an unsolicited receipt, Blum noted this alone represents solicitation. A response could come in the form of updated FDA guidance, which tends to start with draft guidance before being followed by rounds of public comments before final guidance is determined; under the Trump administration, processes can be expedited and jump to final guidance, which could result in faster than expected changes if the FDA pursues them.

Blum’s call highlighted various other items that likely rank higher in priority on the FDA’s near-term list. On the other hand, private industry could also take legal action. Blum noted that companies could have a basis on drugs not being approved through normal processes and vendors potentially violating 503A/503B regulations.

Injunctions are approved by the courts in cases involving the FDA or private companies. Given the lack of precedence, they remain a bit of a wild card.

In the interim, Blum noted the more HIMS could diversify its weight loss portfolio, as it has to an extent with oral offerings and generic liraglutide, the better. He noted the near-term catalysts for the stock to be any potential tariff extensions to pharma, as it will clarify the administration’s stance on the likes of Eli Lilly and Co LLY versus Novo Nordisk NVO and any announcements related proposed updates to FDA guidance on 503A/503B.

Perlman pointed out that every new administration has its priorities, including healthcare-related. What’s unprecedented is the extremeness of the projects being focused on. According to Blum, there is almost no question that Kennedy will continue to have a negative stance on vaccines and vaccine policy for the remainder of his term. It’s unclear whether this negative sentiment will prevent additional vaccines, such as the next version of the COVID booster shot, from being approved.

New FTC chair Andrew Ferguson will likely take a lighter stance on antitrust enforcement than former chair Lina Khan. Blum noted that chairman Ferguson will take more aggressive actions than historically seen under previous Republican administrations. Tech deals will likely continue to be under closer scrutiny than those in healthcare. Perlman also pointed out that the FTC cannot fully operate until replacements are found for the agency’s previous Democratic commissioners, who Trump fired in March.

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