E198 | Why Are US Drug Prices 5-10x Europe's? The US Drug-Pricing Trap and the Secret Behind Pharma's Rise
Summary
Trump’s May 12 “global lowest price” executive order looked more like a political shock than an executable policy, and pharma stocks rising instead of falling showed that the market saw the legal limits. A 2003 amendment barred the government from negotiating drug prices directly with pharma; Trump first called on Truth Social for 70%-90% cuts, while the actual document only asked for voluntary reductions of 30%-80%, with neither clear legal authority nor an operational enforcement plan. 郭霆’s joke was that in areas where Congress has granted no authority, “the actual power of the US president may be equivalent to that of a bureau-level or division-level official.”
US drug prices are not a single number but an underwater system of list prices, confidential net prices and channel-specific discounts. GLP-1 list prices run about $1,000/month, while insurers may actually pay only around $500; Medicare Part B, Part D, commercial insurance and cash-pay channels all receive different discounts, and large pharma companies also negotiate through bundle prices. Because companies recognize revenue at the net price while outsiders typically see only the gross price, investors struggle even to infer patient volumes and true unit prices.
Pharma can price rare-disease drugs at $400K-$500K and Zolgensma at $2.12M per dose because pricing reflects more than production cost: it also captures life-saving value, exclusive supply and tiny patient pools. The industry’s standard R&D accounting assumes roughly $1B on average to produce one successful drug, including the cost of “nine failures for every 10 drugs”; for insurers covering tens of millions of people, a few hundred million dollars from a small patient population is relatively easy to absorb. What truly alarms payers is mass-market demand like GLP-1s: “10,000 people versus 100 million is a 10,000x difference,” so even a 10x lower unit price can produce a 1,000x larger total budget.
The claim that US drug prices are 5-10x Europe’s is valid for some categories such as GLP-1s, but cannot be extrapolated to all oncology and rare-disease drugs. US GLP-1 list prices are around $1,000, with net prices trending below $500, while Denmark, the UK and Germany may pay only €50-€100; for the overall cross-category gap, however, 郭霆 estimates Europe is closer to 30% cheaper. China uses volume-based procurement to push down generic prices and “soul-crushing bargaining” to reset innovative-drug prices, with new oncology drugs typically priced at RMB150K-RMB200K per year before insurance coverage.
Biden’s IRA was the first to pry open federal drug-price negotiations, but the difference between small molecules entering negotiation after 9 years and large molecules after 13 years could directly reshape pharma R&D portfolios and return curves. Pharma argues that its highest profits come in the final years, after a market has matured; cutting prices early lowers project NPV and could disrupt the stepwise development of oncology drugs from later-line to first-line use. Trump’s document proposed reconciling the two timelines; 郭霆 personally thinks the answer will most likely land at or near 13 years, but the final number remains unknown. The fine print of “this year” may not show its real consequences for 5-10 years.
US life-science leadership is not driven by high drug prices alone, but by a closed loop of a high-paying market, roughly $40B in annual NIH basic research, FDA regulatory science and a deep biotech ecosystem. The US accounts for less than 5% of the world’s population but may generate 35% to 70%-80% of large pharma companies’ global revenue; the FDA demands highly granular preclinical materials while also using what 郭霆 describes as a form of implied permission—clinical trials can proceed if the agency does not object within 60 days—making the system “both strict and permissive.” The clinical value is tangible: average survival for first-line lung-cancer patients has improved from less than a year roughly 20 years ago to about 4 years today.
Drugs account for only 10% of roughly $1.8T in US federal healthcare spending, yet their poor public image makes them the easiest target; the real issues to watch are PBM spreads and patient out-of-pocket reform. Systems tied to CVS Health, UnitedHealth Group and Cigna together control roughly 80% of the prescription-drug market, and much of the 30%-70% list-to-net-price spread on some drugs flows to PBMs and other intermediaries, although simply eliminating PBMs would also sacrifice purchasing power. More realistic options include rebate disclosure, direct procurement by large buyers such as Walmart and Amazon, and using the IRA to cap annual Medicare Part D out-of-pocket spending at $2,000.
Deep dive
1. Trump’s “global lowest price” created a shock first, but lacked an enforcement path
泓君 opened with the May 12 executive order: the document asked drugmakers to voluntarily cut prices on major drugs by 30%-80%, while Chinese-language reports made it sound nearly “a done deal”; she could find no detailed legal basis and no clear mechanism for the government to force compliance.
郭霆 remembered Trump first taking to Truth Social at around 6 p.m. ET on Sunday, “aggressively” accusing drug companies of stuffing money into Congress and promising to bring US drug prices down to the lowest level globally, with cuts of 70%-90%. “Everyone in the industry may have had their phones explode,” because that would have been a devastating shock.
The order released the next day was far weaker than the preview, with no clear pricing formula or enforcement route; pharma stocks nevertheless closed higher. The market’s conclusion was that the president had created a headline but had not obtained powers sufficient to alter cash flows.
泓君 added critical political context: just hours before the executive order, House Republicans proposed a reform package cutting roughly $700B from Medicaid over 10 years, while refusing to include provisions directly limiting drug prices. The apparent bipartisan consensus on lower prices evaporated as soon as direct government negotiation entered the picture.
2. The US refusal to bargain prices directly reflects property-rights philosophy, political donations and industrial policy
In 2003, the US established nationwide prescription-drug coverage for seniors for the first time and amended the Social Security Act to bar the US government from negotiating drug prices with manufacturers. 郭霆 explained that as long as the law remains in place, a president without congressional authorization would find it “difficult, perhaps even impossible” to force pharma to cut prices.
郭霆 first qualified this as “a personal observation, which may not be right or complete”: in the US, forcing a drug priced at $10K to sell for $6K is viewed as close to the “de facto expropriation” of private interests. Outside an emergency, that would run into the country’s strong legal tradition of protecting private property.
In practical terms, drug companies have long been major political donors, while lawmakers and officials have repeatedly absorbed the industry’s narrative that attacking drug prices could weaken America’s position as a medical-innovation hub. The argument is not baseless, but it is deeply entangled with the industry’s own interests.
Industrial policy provides a third rationale for protection: the US has less than 5% of the world’s population but contributes roughly 35% to 70%-80% of large pharma companies’ global revenue, supporting hundreds of thousands of R&D, manufacturing, clinical and sales jobs. Once a drug has been developed, the marginal cost of selling it to more countries is low; biopharma is also treated as a strategically important sector with national-security implications.
3. New drugs anchor to old ones first; efficacy and competition determine whether prices rise or fall
郭霆 used Eli Lilly’s tirzepatide to explain the starting point for pricing: before approval, a drugmaker studies historical peers, efficacy, safety and the competitive landscape. If it is “a little better” than semaglutide across these dimensions, it gains some pricing power; if it arrives later with similar efficacy, it will usually price slightly lower, while a product that falls far short may never be commercialized.
First-generation weight-loss drugs were not priced at roughly $1,000/month out of thin air. GLP-1s had already been used to treat diabetes for more than 10 years, with prices in the hundreds of dollars; semaglutide first secured a diabetes indication and then pursued weight loss at the higher 2.4-mg dose, allowing the company to argue that it “should not be cheaper than 2 mg.”
泓君 asked whether drugmakers might design trials to clear the old dose threshold and support a higher price. 郭霆 answered clearly that dose design is purely scientific and that the FDA regulates it closely, with pharmaceutical evidence required at every stage; he nevertheless considers the pricing rationale for the weight-loss indication reasonable.
This creates an upward price ladder: better new drugs anchor to the launch product and generally maintain or raise prices while competition is absent; only sufficiently strong competitors force drugmakers to offer deeper discounts.
4. Multiple channels hide beneath one list price, leaving the true transaction price underwater
Drugmakers publish a uniform list price, or “gross wholesale price,” but patients and insurers actually pay the net price after discounts and rebates. For GLP-1s, the list price is around $1,000 and the net price may be about $500, with competition pushing it lower each year.
Most of these net prices are confidential: companies report net revenue, while outsiders generally know only the gross price, making it difficult to determine how many patients there are or how much revenue each patient generates. 郭霆 said the entire process takes place “underwater,” which is not friendly to Wall Street modeling.
Commercial insurance negotiations are not product-by-product. Large pharma companies use broad product portfolios to set bundle prices: a strong new product can concede less while older products carry the discount; only when competitors arrive are drugmakers forced to offer deeper discounts to secure formulary access and patient volume.
Medicare Part B mainly covers drugs administered on the spot in hospitals or clinics, while Part D covers drugs taken home or self-injected. A substantial portion of Part D services is outsourced to insurers, making it closer to a commercial negotiation; Part B is less outsourced and discounts are better protected. But 郭霆 cautioned that ultimate profitability still depends on efficacy, competition, supply and demand, so it is too simple to say Part B is always more profitable.
5. Rare-disease drugs can sell for millions, but payers truly fear mass-market demand
When Biogen acquired Reata in 2023, Reata owned an oral drug for a genetic disease affecting only a few thousand people nationwide; untreated patients could die prematurely in their 30s or 40s. Exclusive supply and immense moral pressure allowed the drugmaker to set an initial price of $400K-$500K even with Part D negotiations.
Novartis’s gene therapy Zolgensma carries a list price of $2.12M per dose, with the debate reduced to the question of “what is a life worth.” The industry’s R&D accounting says a successful drug costs roughly $1B on average, including failed projects; a single program may cost $100M-$300M from start to finish, with “nine failures for every 10 drugs.”
If the US has only around 10,000 treatable patients, even charging $10K per patient would not cover the full risk-adjusted cost. Insurers covering hundreds of thousands or even tens of millions of people can absorb a few hundred million dollars from a rare-disease drug in a year, while also advertising their willingness to cover a $2M-$3M gene therapy, so they are often “very willing to reimburse.”
GLP-1s triggered payer anxiety as soon as they launched, as if one-third of the population were looking for obesity, fatty liver or sleep-related reasons to see a doctor and obtain a prescription. 郭霆’s budget math was blunt: “10,000 people versus 100 million is a 10,000x difference”; even if the unit price differs by 10x, the total can differ by 1,000x.
6. Not every European drug is 5-10x cheaper; the gap depends on disease priority
US GLP-1 list prices are around $1,000/month, with net prices moving below $500; in Denmark, the UK and Germany, payer prices may be only €50-€100, producing a genuine 5-10x gap. The US Department of Health and Human Services subsequently set its reference range as OECD countries with per-capita GDP at least 60% of the US level.
European payers weigh the trade-off this way: an older GLP-1 already treats diabetes to “75 points”; is a new drug that raises the score to “90” and also produces weight loss worth paying 5x more? With limited resources, many governments say no. But for cancer, acute illness and life-saving drugs such as Zolgensma, willingness to pay a high price is stronger.
That is why many oncology drugs have relatively small price gaps between the US and Europe, while rare-disease drugs can still be expensive; Zolgensma’s price difference between Europe and the US is also small. 郭霆’s industry estimate is not 5-10x but roughly 30% cheaper for Europe after comparing categories and manufacturers, though he stressed this was only a broad “feel.”
Price opacity is itself part of the system’s design: drugmakers do not want low prices leaking out and prompting other countries to demand the same price. 郭霆 said China was the first major-country government to seriously and broadly collect global product prices, with health-insurance officials bringing extensive cross-country data into negotiations and making “soul-crushing bargaining” more credible.
7. China uses volume procurement to cut generics and reimbursement negotiations to reset innovative-drug prices
Because patents run from application rather than approval, a drug often has only 7, 8 or 9 years of protection left after approval; longer cases may have 12, 13 or 14 years. Once a patent expires, US generic prices typically fall by dozens of percentage points rapidly. China’s old system, however, limited in-hospital competition through “one product, two regulations,” allowing generic prices to remain stable or even rise for years.
Volume-based procurement changed that equilibrium: the national payer can offer roughly 70% of potential national volume and have multiple generic manufacturers bid against one another, sending prices down rapidly. 郭霆 sees this as a commercially rational and fair negotiation, but excessive competition can also raise quality concerns; the public controversy over “anesthetic that doesn’t anesthetize” was a warning sign.
Fifteen years ago, China had almost no domestic innovative drugs. Foreign oncology drugs that cost around RMB100K-plus in the US could sell for RMB600K in China, with most excluded from insurance and patients paying out of pocket; the demand for Indian generics depicted in Dying to Survive came from precisely this access gap.
Reimbursement negotiations for innovative drugs began 7 or 8 years ago and gave drugmakers a choice: accept a price cut in exchange for insurance coverage and volume, or preserve a high price with limited reach. With local competitors typically following within 2 or 3 years, new oncology drugs now generally cost RMB150K-RMB200K per year before insurance offsets the bill, substantially expanding access.
8. The IRA opened federal negotiation for the first time, with 9 and 13 years rewriting the return curve
郭霆 believes the US has in recent years been “learning this system from China in every respect.” Since 2023, the Biden administration’s IRA mechanism has allowed Medicare to negotiate annually over roughly 10-20 long-marketed products: small molecules enter the scope after 9 years on the market and large molecules after 13 years, based on the logic that “they’ve been selling for this long—haven’t they made enough money?”
泓君 argued that an average investment return a little above 20% is already substantial. 郭霆’s rebuttal was that the research suffers from survivorship bias: the many failed, loss-making and vanished companies never make it into the sample. An investor backing only 3 companies could see all 3 fail and still needs a risk discount for the volatility of the individual portfolio.
Drugmakers care more about the back end of the revenue curve: early after launch, a product still has to educate doctors and patients, while the highest profits come in the final years after volume ramps. If the government cuts prices at precisely that point, both project NPV and early R&D decisions change, which is why the industry wants small molecules extended to 13 years as well.
Trump’s document said only that the two timelines would be “reconciled”; it did not promise to make both 13 years. 郭霆 personally believes the result will most likely be 13 years or close to it, but left the uncertainty open: “Whether they both end up at 13 years or both at 12 years, we don’t know.”
9. A single negotiation clock could determine whether oncology drugs target later-line or first-line treatment first
The same oncology drug can be developed separately for first-line lung cancer, last-line treatment and other indications, each requiring its own clinical program. Last-line patients have few alternatives, so showing some efficacy can clear a relatively low FDA approval bar; first-line treatment must clearly outperform the existing standard, requiring larger trials and carrying greater risk.
The traditional commercial path is to start with later-line treatment, secure approval and revenue, gather efficacy data, and then invest in first-line use. A first-line Phase 3 program often takes 3-5 years from design through completion and FDA filing; approval of the first indication does not automatically cover all lung-cancer patients.
If the 9-year clock starts at initial approval for a small molecule, a company may have less than 3 years left before Medicare negotiation by the time first-line development is complete. “Something this fine-grained” could alter a large number of clinical plans; 泓君’s summary was that a policy enacted this year may not show its impact for 5 or even 10 years.
郭霆 pointed to clinical outcomes as the meaning of innovation returns: cancer treatment has been “turned upside down” over the past 15 years. China sees roughly 800,000 new lung-cancer cases each year; average survival for first-line patients is now commonly around 4 years, versus less than 1 year roughly 20 years ago.
10. Gilead priced on the savings after a cure, exposing a timing mismatch in healthcare financing
Gilead produced the first drug that cured hepatitis C at a rate close to 100%. Before that, patients could carry the virus for 10-20 years, with some progressing to cirrhosis, liver transplantation or liver cancer. The company priced the drug not only against manufacturing cost but also against future medical savings and the value of adding “quality-adjusted life years.”
After health-economic calculations, the initial course was priced at roughly $70K-$80K: 12 weeks, or about 3 months, of treatment cost around $80K. Related sales exceeded $10B in 2014, earning the drugmaker the nickname “the money printer of the pharmaceutical industry” and drawing protests, congressional hearings and a Senate investigation.
泓君 pressed the profit debate, while 郭霆 gave pharma’s full defense: without the drug, patients might need a liver transplant or develop cancer, leaving the healthcare system with a higher bill. But insurers assess their financial statements annually and do not want to absorb a one-time spike today merely because it may save money 10 or 20 years later.
Some states and insurers therefore restricted access to patients with severe liver fibrosis, cirrhosis or similar conditions. Patients viewed the virus in their bodies as a “ticking time bomb” and sued, with many cases decided in their favor. After AbbVie’s competing product launched, prices fell; within a few years, the existing patient pool was rapidly cured and the sales peak faded with it.
11. Shkreli and Valeant turned legal pricing power into scandal, pushing drug prices onto the campaign agenda
Hedge-fund manager Martin Shkreli discovered that some exclusive legacy drugs, decades old, still sold for only $50 or $100, while the government was barred from negotiating their prices. After acquiring an old HIV drug, he raised its price by roughly 50x. Commercial and legal mechanisms could not stop him at the time, but the optics were disastrous.
Shkreli responded to criticism by going online and on television to taunt his critics: “That’s what I’m doing—what are you going to do about it?” Another specialty drugmaker, Valeant (described as “violent” in the original), also raised prices through acquisitions of old products. Its increases were less extreme than 50x, but accounting problems later turned the company into a scandal that ensnared several star fund managers.
Gilead’s high prices, patient lawsuits, Shkreli and Valeant piled up until “why can’t the government negotiate the price of an old drug?” became a 2016 campaign issue. After the 2016 election, Trump also tried MFN and most-favored-nation pricing, but the effort failed because Congress would not amend the law; years of accumulated controversy eventually opened the door through Biden’s IRA.
12. Global differential pricing expands access, while MFN pricing could push drugs out of low-price markets
After securing a high price in the US, Gilead could sell to other countries at lower prices because the marginal cost of subsequent sales was low. 郭霆 remembered that during China’s 2020 insurance negotiation, a Sovaldi course cost “the high thousands to just under RMB10K,” roughly RMB10K, or about 3% of the US price; Egypt, India and other markets received prices in the hundreds of dollars.
This kind of differential pricing is rational for drugmakers too: failing to obtain the US price does not mean giving up all revenue or all patients in a local market. But once a major market starts referencing the global lowest price, previously isolated pricing systems can be breached.
South Korea is often a low-price market among developed countries for historical reasons, and its population is relatively small. After China cited Korean prices in negotiations, some drugmakers even withdrew products from South Korea. Trump’s proposed OECD reference range includes South Korea, so the market must watch whether drugmakers exit low-price countries or demand higher payments from Europe.
Trump’s logic was not simply that the US should pay less, but that other countries were not “paying their fair share.” 郭霆 described the next stage as “a contest to see who can be tougher”: refusing to sell a life-saving drug is politically ugly, but governments also struggle to justify refusing reimbursement; if drugmakers blame US rules, pressure on European governments will intensify.
13. The US life-science moat is a closed loop of market, NIH, FDA and industry
Europe is not “completely out of the game”: Novo Nordisk remains strong, and Germany produced Young Tech in mRNA vaccines. But many European drugmakers locate their R&D headquarters in the US because the US controls both upstream science and downstream payment, naturally organizing the ecosystem in between.
The US pharmaceutical market is roughly 2x China’s and more than 2x Japan’s, accounting for around half of most drugmakers’ global revenue. Upstream, the NIH contributes roughly $40B a year to university life-science research; corporate funding, donations and other sources add to that base, creating a global concentration of leading basic research.
郭霆 acknowledged that research funding is “not very efficient”: output is concentrated in the best laboratories, while mid-tier projects have room for improvement. But he declined to say whether recent cuts aimed at top schools such as Harvard would reach the level of “destruction,” saying only that there would certainly be an impact.
The FDA has thousands of medical doctors reviewing drugs and decades of regulatory science covering endpoint design, dosing, safety and animal models. It is meticulous in reviewing every required material, yet it also uses what 郭霆 describes as a form of implied permission for first-in-human trials: if the agency does not object within 60 days, trials can proceed. The result is “both strict and permissive,” helping the US sustain its large volume of clinical research and patient participation.
14. PBMs and intermediaries sit inside the price spread; reform is about transparency and an out-of-pocket cap
The US federal government spends roughly $1.8T a year on healthcare, with drugs accounting for only about 10%; the rest goes to doctors, diagnostics, equipment, long-term care and a vast labor system. The Johns Hopkins hospital system is said to account for 3%-4% of Maryland’s working population; healthcare workers are both a voting bloc and highly respected, making the 90% outside drugs much harder to touch.
The commercial logic of PBMs is aggregate demand: they pool the needs of hundreds or thousands of small insurers to create bargaining power resembling a “private Medicare,” while also handling parts of distribution and temperature control. Systems tied to CVS Health, UnitedHealth Group and Cigna together control roughly 80% of the prescription-drug market.
The problem is vertical integration: these systems are already combined with insurers, pharmacies and other entities, intensifying potential conflicts of interest; much of the 30%-70% gap between list and net prices on some drugs flows to intermediaries. 泓君 cited the summary that PBMs “do not make drugs or write prescriptions, yet control which drugs enter formularies,” and asked why PBMs were not being targeted directly. 郭霆 did not confirm each element of that summary, instead first explaining that pharma’s image had been badly damaged by a series of incidents, making it the outlet for public anger over high healthcare prices.
Eliminating PBMs outright could leave small insurers without purchasing scale and force them to pay more. 泓君’s practical path was direct procurement by large companies such as Walmart and Amazon, alongside rebate and spread disclosure requirements in California and New York; the IRA then caps annual Medicare Part D out-of-pocket spending at $2,000, because without the cap, even a $300K drug with only 10% coinsurance would leave the patient paying $30K.