Pfizer (PFE 6.77%) stock was trading 3.6% higher as of 12:01 p.m. ET Tuesday after The Washington Post reported that the Trump administration had struck a deal with the pharmaceutical giant under which it will sell some drugs to Medicaid patients at reduced prices.
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Why would Pfizer cut drug prices?
President Donald Trump signed an executive order in May ordering the government to negotiate new pricing with U.S. drugmakers, such that they charge no more to U.S. customers than they do to patients in other wealthy nations. Step one of the plan that order laid out involves attempting to get drug companies to lower prices voluntarily -- with the implication that step two might involve the government imposing mandatory price cuts.
In remarks last week, Trump complained: "We pay much higher for drugs than the rest of the world. We subsidize the rest of the world [and] we're not doing that anymore."
Pfizer apparently didn't like the sound of that, so it decided to go the voluntary route. In so doing, it both handed Trump a win, which may limit his future criticism of the company, and also retained some control over how far it will reduce prices -- somewhat preserving its profit margins.
So there's upside for Pfizer in Tuesday's news, alongside the obvious downside that charging less for those medications will result in slimmer profit margins.
Is Pfizer stock a buy?
Priced at just 12.6 times trailing earnings and an even cheaper-sounding 10.9 times free cash flow, Pfizer stock looks very cheap if the company can achieve any profit growth at all.
Getting on Trump's good side, and potentially becoming a preferred provider of drugs to Medicaid, could be one way for Pfizer to rev up its growth engine.
