Why Trump’s Obesity Drug ‘Deal’ Will Help Big Pharma Most Of All

Should the rooster get credit for the sun rising in the morning? Hardly. Yet in recent weeks, two companies received significant financial benefits for taking actions that market forces were likely going to bring about on their own.

The agreement between the Trump administration and Eli Lilly and Novo Nordisk will encourage expanded and more affordable coverage for drugs that treat obesity, which is a positive development. But upon closer inspection, the “deal” on GLP-1s looks less than meets the eye, an agreement that uses the long arm of government to intervene in markets — and provide largesse to pharmaceutical companies in the process — when sheer capitalism may have done the trick, and at less cost.

Direct-to-Consumer Marketing

The White House’s announcement trumpeted the fact that “the prices of Ozempic and Wegovy will fall from $1,000 and $1,350 per month, respectively, to $350 when purchased through TrumpRx,” a new direct-to-consumer website expected to launch next year. It went on to add that “the Medicare prices of Ozempic, Wegovy, Mounjaro, and Zepbound will be $245, less than half the prices proposed by the Biden Administration on such drugs.”

But a Wall Street Journal article dissecting the agreement’s effect noted that, as impressive as these discounts sound, the reality contains more nuance because the current “sticker prices” are inflated: 

The net price, which reflects what pharma companies take home after rebates and discounts to pharmacy-benefit managers and others, is much lower. Leerink Partners analyst David Risinger says the effective price is only about 20% to 35% below what Medicare currently pays for Mounjaro, which is prescribed for diabetes.

Eliminating the middleman and selling the drugs directly to consumers will provide the biggest benefits to buyers whose insurance does not currently cover GLP-1 drugs for obesity and therefore would have to pay the inflated “sticker” price. But the pharmaceutical companies themselves will at best take a relatively small “haircut” on the net revenue they receive.

New Pricing Strategy

Anyone thinking that Lilly and Novo put themselves in the poor house by taking this “haircut” should remember that companies have multiple ways to generate profits. Put simply, a company can make $1,000 in profits by generating $100 in profit from each of 10 customers — or generating $1 profit from each of 1,000 customers. Under the agreement, the companies effectively switched from the former to the latter strategy, expanding their customer base with White House announcements that Medicare would “cover Wegovy and Zepbound for patients with obesity and related co-morbidities for the first time,” and that state Medicaid programs could use a pilot program to utilize the agreement’s lower prices.

But the Journal noted that the companies’ switch gives them another strategic advantage: “By trading price for volume, they are also building a moat.” The lower prices will effectively protect them from new market entrants, who won’t have the ability to charge higher sums to offset the costs necessary to develop and manufacture competing GLP-1s. They may also squeeze out the compounding pharmacies that have made knock-off versions of the obesity drugs, several of which Lilly and Novo have sued in an attempt to stop them from selling their products.

Special Deal?

Wider coverage of more affordable obesity drugs will doubtless help many American households struggling with chronic disease. But a tougher question is whether the agreement the administration negotiated, which also included a promise of expedited review for oral GLP-1s that Lilly and Novo are developing and tariff exemptions in exchange for greater investment in American manufacturing, represents a better deal than the status quo.

The Journal noted that competition among GLP-1s had already brought effective prices (i.e., the net cost after rebate) of the drugs to well below the “sticker” amount. Other companies racing to develop their own obesity drugs had the potential to increase competition and bring prices down further still.

Given this environment, does it make sense to negotiate an agreement that gives Lilly and Novo added benefits and, in many ways, allows them to box out new competitors? The answer looks far from an unequivocal “yes.”

The details of the agreement provide another reminder that, whether it comes to the socialistic price controls enacted by Joe Biden and congressional Democrats or the Trump administration’s deal, getting the government involved in “negotiation” often has negative and unintended consequences. With the market for GLP-1s already exploding, Americans might be best served by a government that focuses on promoting competition to drive down prices rather than thinking federal bureaucrats can control the marketplace from Washington.