Ever since Donald Trump has moved into the White House for a second term, there has been turmoil across the world. One of the issues that has been of concern is ‘tariffs’. Trump is keen to reduce United States’ trade deficit through import tariffs.Since the mid-1990s, the US has been importing drugs from across the world largely tariff-free, and its drug imports have risen consistently. In 2024, the US imported US$ 213 billion worth of medicines, which was more than two and a half times the total of its drug imports ten years back.Until recently, it seemed like the administration would spare the
pharmaceutical sector. But at a fundraiser dinner held for the Republican Party last week, Trump said: “We're going to be
announcing very shortly a major tariff on pharmaceuticals”. The
pharma tariffs, he said, would be “at a level that you haven’t really seen before”.The US is the largest consumer of pharmaceuticals globally, accounting for 45
percent of global sales. Given the nature of the global pharma industry, ‘major tariffs’ would have far-reaching impact. PharmaCompass
studies the likely impact of tariffs on drug
imports into the US, and whether they would serve the purpose they
intend to.Cost of import tariffs, setting up domestic capacities
will be borne by US consumersThe Trump administration has two key objectives
behind implementing drug import tariffs.
One, it wants to secure US drug supply chains by onshoring
drug production. Two, it wants to create more manufacturing jobs in the US. Will tariffs be successful in achieving these objectives?Importers generally pay the tax and pass it on
to the consumer. Bernstein analyst Courtney Breen estimates that in the
worst-case scenario, tariffs could result in an extra US$ 53 billion in costs paid for pharmaceutical imports. According to economist Ernie
Tedeschi, “costs for prescription drugs
would rise by an average of around US$ 600 per year per household” in the US. Not all of that would be ‘out-of-pocket’, and families may “end up paying higher insurance premiums [and] higher co-pays”.Many drugmakers may want to avoid that cost, and shift manufacturing to the US. Though American drugmakers Eli Lilly and Johnson & Johnson have
announced mega investments in the US, it’s difficult to say if other
drugmakers will find it viable to set up capacities. Having
said that, just this week Novartis
announced a US$ 23 billion investment in the
US.Overall, resources
are expensive in the US. Due to heavy reliance on imports, the country does not
have industrial plants needed for large-scale production. Factors like labor regulations, high cost of living, mandatory benefits etc, have made the workforce quite expensive. It’s puzzling how any drugmaker will overcome these challenges and create manufacturing jobs. Even if they do, the high costs of manufacturing will translate into costlier drugs.According to a recent report undertaken
by RAND, prescription drug prices in
the US are on an average 2.78 times those seen in 33 other nations. With
tariffs, that gap will widen further.Drug supply chains are complex; moving capacities to
US costly, time-consumingAccording to the US Food and Drug Administration (FDA), as of August
2019, only 28 percent of the facilities producing APIs for the US market were
located domestically. The remaining 72 percent were overseas, with nearly half
of its generics coming from India.The US is also highly dependent on drug imports for critical therapies. In 2024, the European Union supplied US$ 127 billion worth of high-value branded medicines to the US.The pharmaceutical supply chain is complex. There are a series of chemical steps involved in making any drug, with each step often being performed in different locations.The supply chain is determined by a variety of factors, such as
availability of cheap labour, tax rates, supply of raw materials etc. For
instance, Ireland has a very low corporate tax rate. Therefore, it has emerged as a hub for the production of APIs used in blockbuster medicines, such as Lilly’s Zepbound and Merck’s Keytruda.Moving production to the US will take five to seven years per plant.
Each plant will cost US$ 2 billion or more. And it will have to go through several checks to meet America’s high regulatory standards. It is a long, arduous and unnecessary exercise, when
capacities, expertise and cheaper labor is already existing in other countries.Europe also plans to onshore, leading
to turbulent shift in trade dynamicsLike the US, Europe
too is heavily reliant on China
and India, and is working towards reducing its
dependence. Over the
years, Europe has moved significant resources into the US, especially in R&D. American drugmakers like Pfizer and Johnson & Johnson, on the other hand, manufacture many of their drugs in Europe and export them back to the US. Tariffs, therefore, will impact European exports
in a big way. Drugmakers confronted
European Commission President Ursula von der
Leyen soon after Trump spoke about the pharma tariffs. These drugmakers, led by Novo Nordisk’s CEO Lars Fruergaard Jørgensen, asked for a “rapid, radical policy change” so that R&D and manufacturing doesn’t get directed towards the US.According to these drugmakers, up to 85 per cent
of capital investments (about €50.6 billion, or US$ 56 billion) and up to 50 per cent of R&D expenditures (about €52.6 billion or US$ 58 billion) are potentially at risk. These figures
are taken from a total of €164.8 billion (US$ 182 billion) worth
of pharmaceutical investment planned
in the EU during 2025
to 2029.Tariffs will test low margins of
generics, may put a pause on dealmakingTariffs will have a different impact on generics. According to a Brookings
report, while tariffs will “provide a strong incentive for increasing US manufacturing of brand-name drugs”, it will not be incentive enough for older, off-patent generic drugs, which “represent over 90 percent of the volume but only a small share of spending”.It will be difficult for generic drugmakers to onshore due to high
capital expenditures and low and uncertain returns on investment. In fact,
tariff pressure will test the wafer-thin margins of generic drugmakers in both
the US and overseas. This could lead to product discontinuations or drastic
cost cutting, which in turn could erode product quality.In the end, as Arthur Wong, senior director of corporate ratings, healthcare, at S&P Global Ratings, puts it, all this
chaos is going to “put a pause [on] or distract” from another key pharma function: dealmaking. The time for executing M&As was now. But we can’t expect dealmaking to return until the second half of 2025.
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