Drug tariffs are a sideshow. Trump’s next move could hit pharma harder.

It’s becoming increasingly clear that pharmaceutical companies can live with President Trump’s tariffs. What the industry can’t live with is uncertainty on drug prices.

The sector has long traded at a discount to the broader market, but that gap has widened to its largest in decades as investors fret over Trump’s policies—ranging from tariffs and price controls to the unpredictable influence of Health and Human Services Secretary Robert F. Kennedy Jr.

Some risks now look less pressing. Drug approvals are still moving through the Food and Drug Administration without major disruption, and this past week brought relief on tariffs. Trump announced a 100% levy on pharmaceutical imports from companies not building U.S. plants. In practice, that was close to a best-case outcome, notes Bernstein analyst Courtney Breen. Most big drugmakers are already expanding U.S. manufacturing, which should shield them from steep duties. Altogether, they have pledged more than $350 billion in domestic investments by the end of the decade.

Wall Street wasn’t yet ready to pop the Champagne on Friday: The NYSE Arca Pharmaceutical Index, which consists mainly of large-cap drugmakers, closed up a modest 1%.

That is because the bigger risk is drug pricing, and investors fear it could come to a head as soon as this coming week. Proposals being contemplated to tie U.S. prices to those in other wealthy nations would cut into the industry’s most reliable profit source.

Drugmakers have tried to appease the administration by offering direct-to-patient prices that circumvent middlemen while launching new products overseas at higher prices. But on the issue that matters most—the level of discounts to U.S. prices—they have made little headway.

In July, Trump set a Sept. 29 deadline for companies to lower U.S. prices to the lowest charged in other developed markets, warning that if they didn’t, the government would “deploy every tool in our arsenal to protect American families from continued abusive drug pricing practices." Reports this week suggest the White House is weighing pilot programs under the Centers for Medicare and Medicaid Services Innovation Center to benchmark some Medicare and Medicaid prices closer to global levels. This resembles ideas from Trump’s first term, efforts that sparked industry lawsuits and are likely to do so again.

Investors are also worried about how Trump might use the drug-pricing powers created under the Biden administration. The Inflation Reduction Act allows Medicare to negotiate prices on top-selling medicines. Negotiated prices for the next list of 15 drugs subject to discounts in 2027 are due to be released in November. Analysts fear the Trump administration could apply the law’s framework more aggressively than the Biden administration, seeking discounts of 30% to 50% on products such as Novo Nordisk’s Ozempic and Teva’s Austedo, according to J.P. Morgan’s Chris Schott.

For Wall Street, the problem isn’t simply lower prices on some drugs. Targeted cuts on a handful of drugs can be absorbed by an industry where the biggest players still run net profit margins in the midteens, well above the corporate average. What unnerves investors is the lack of clarity. They don’t know exactly which drugs will be targeted, how deep the discounts will be and how quickly they will take effect.

Some hit to margins now looks inevitable, but much of that risk is already priced in. The NYSE Arca Pharmaceutical Index trades at just 13.6 times forward earnings, versus 23 for the S&P 500—a discount of more than 40%. That gap suggests the sector could rally once investors know the size of the pain.

Big Pharma is learning to live with the Trump administration. But Wall Street won’t celebrate until investors can see the full price tag.

Write to David Wainer at david.wainer@wsj.com