BREAKINGVIEWS-Big Pharma has partial immunity from Trump tariffs

By Aimee Donnellan

LONDON, April 9 (Reuters Breakingviews) - The $1.7 trillion revenue prescription drug industry has a relatively robust immunity to tariffs. Last Wednesday, when U.S. President Donald Trump unveiled a raft of duties on countries and industries he held back on hitting pharmaceuticals. He followed up on Tuesday by saying he would soon announce a “major” tariff on pharmaceutical imports. But the industry’s complex supply chains and the risk of deaths caused by shortages mean they may emerge less damaged than carmakers or brewers.

Trump has good reasons to take on Big Pharma. While the U.S. is the biggest and most lucrative market globally for prescription drugs and generic products, or those that have come off-patent, the country ships most of these in from overseas, with drugs imports reaching $213 billion in 2024, more than two and a half times the total 10 years earlier. Whacking up tariffs might in theory help bring business back onshore.

Trump would first, however, have to grapple with the pharmaceutical sector’s complex supply chain, which relies on workers and ingredients in many different countries. During the Covid-19 crisis, cracks in this intricate system appeared when life-saving chemotherapies, penicillin to fight infections and paracetamol were in short supply. The reason was many drugs depend on basic ingredients made in India and China. In 2023, only 4% of the building blocks – known as Active Pharmaceutical Ingredients – of life-saving drugs, including asthma and diabetes medications, were produced in the U.S. Some 82% came from China and India, according to data from US Pharmacopeia’s (USP) Medicine Supply Map.

Companies like GSK GSK.L, AstraZeneca AZN.L and Pfizer PFE.N don’t just rely on China or India. They will typically manufacture medications across a sprawling global network including Ireland, Germany, Canada, the UK and the U.S., often shipping the products on again for the final “fill and finish”. This network has become a lucrative business for many European countries. Pharmaceuticals account for around 60% of Ireland’s exports to the U.S.

Trump would therefore need drugmakers to upend a complex, expensive manufacturing system. But analysts and pharmaceutical companies have told Breakingviews it can take up to 10 years to build and kit out a factory in the U.S. The delay is due to stiff regulatory requirements from the U.S. Food and Drug Administration (FDA). Drug plants need to be inspected at every stage of the building process. Even when a factory is up and running, inspectors will typically conduct lengthy tests on products before they can be distributed.

The near immovable system means that tariffs would likely backfire in two ways. Companies that make best in class medications may be able to avoid swallowing tariffs by increasing the price of, say, a breast cancer treatment. That extra cost would then be passed on to hospitals, insurance companies and, ultimately, U.S. consumers. However, companies that make more run of the mill or generic drugs could be less lucky. They already face fierce competition and so are less likely to be able to raise prices and may instead be forced to cut exports to the U.S., shrink production, or even declare bankruptcy. The sector’s fragility was highlighted in 2023 by the bankruptcy of New York-based generic drugmaker Vyera Pharmaceuticals, which cited increased competition, as well as litigation costs.

Trump’s Liberation Day tariffs show he has a high tolerance for higher prices. But factory closures that lead to drug shortages could cost lives. This helps explain why the U.S. president initially spared Big Pharma from his so-called reciprocal tariffs. Instead, the administration is considering launching a Section 232 investigation which would examine how tariffs might impact the sector. Critical minerals are also likely to be the subject of such investigations. This, pharma companies hope, will take as long as nine months, and show how tariffs may raise prices or even lead to drug shortages, especially if generic drug makers go bust.

Trump’s comments on Tuesday suggest he may decide to push ahead with tariffs right now. That may be why investors are punishing industry giants like $286 billion Novo Nordisk NOVOb.CO, $206 billion AstraZeneca and $719 billion Eli Lilly LLY.N. The sector as a whole is down 8% since last Wednesday, according to the MSCI World Pharmaceuticals, Biotechnology and Life Sciences Index.

However, there is one way Trump could make good on his promise to both whack Big Pharma and avoid the worst fallout. He might apply tariffs in a phased way, ratcheting up over several years, and thus incentivise companies to shift manufacturing to the U.S. over time. That could also include some exemptions for raw ingredients made in, for example, India. Such an upheaval would still cost money and involve hiring more expensive U.S. workers. But it would allow the sector to spread the cost over several years and, more importantly, it would save lives. Compared with many sectors, Big Pharma has a relatively robust anti-Trump pill.

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CONTEXT NEWS

U.S. President Donald Trump on April 8 said the U.S. will soon announce a “major” tariff on pharmaceutical imports. Speaking to an event at the National Republican Congressional Committee, Trump said the tariff will incentivise drug companies to move their operations to the U.S.

Trump on April 2 imposed a 10% tariff on most U.S. imports, as well as much higher levies on dozens of rivals and allies alike. He temporarily exempted some goods, including pharmaceuticals.