How Pharma Tariffs may Unfold
And a few companies to consider
When the discussion of Tariffs first started, one of the reasons that we knew tariffs were not just a bluff was the idea of “National Security”.
During COVID, many countries realized, all too painfully, the downsides of globalization. Many critical goods were unavailable to countries because they were outsourced and had to be imported. With supply chains locking up, it was a disaster.
We all remember how GM was asked to start making ventilators and PPE in the US. It was ironic given that one of the largest PPE manufacturer is 3M, a US company, but didn’t have all their manufacturing in the US.
I’m not surprised that this is now a driving force behind the tariffs - securing critical goods through onshore manufacturing, and reducing dependency on volatile geopolitical supply routes - for the sake of National Security.
Pharmaceuticals and Healthcare fall within that mandate.
In this article, we examine:
The Tariffs
Conflicting Policy Goals
Longer-Term Outlook
Stock Picks
The Tariffs
In 2023, the US imported approximately $213 billion worth of pharmaceutical products. New tariffs are expected to raise costs by about $53 billion. These apply both at the country level—primarily targeting India and China—and at the product level, focusing on generic drugs and active pharmaceutical ingredients (APIs).
While the stated aim is to bring manufacturing back to the US, especially for high-end, advanced medications, the short-term outcome is quite different. Here's how the sector is likely to respond:
Inventory stocking - We’ve heard reports that some pharma players have already begun stockpiling imported drugs and APIs ahead of tariff enforcement. This strategy delays the margin impact and gives companies time to plan manufacturing transitions or renegotiate contracts.
Absorb the costs - A few big pharma companies have already agreed to absorb the cost in the short term. However, this definitely comes with other repercussions, such as temporarily cutting costs in other places. We think that this could lead to temporary drops in stock prices as well.
Negotiate to increase the prices (more on this below)
With state providers (Medicare and Medicaid) - While Medicaid already has a negotiated price on pharmaceuticals, Medicare negotiations are still in progress. There is also the possibility that phamaceutical companies lobby to change the set prices. Ultimately, the burden falls on the taxpayer because the funding for these programs come from tax revenues.
With insurance companies - Private insuance companies don’t usually cover 100% of prescription pharmaceuticals, anyway but an increase in prices could lead to overal increases in insurance premiums. It could also mean higher co-pays.
Passing on Costs to Consumers for Generics: Generic drugs—primarily imported from India and China—represent around 91% of prescriptions but just 17% of total drug spending. These medicines are produced on extremely thin margins, which leaves little room for cost absorption. As a result, much of the tariff burden is expected to be passed directly to US consumers.
Analysts estimate this could translate into 8–15% increases in out-of-pocket expenses for many patients. Despite the tariffs, it will still be more cost-effective for companies to produce generics overseas, particularly in India, due to significantly lower labor and infrastructure costs.
Relocating Manufacturing: Structural relocation of manufacturing to the US is beginning, though it is a long and costly process. Novartis has committed $23 billion to build or expand ten domestic sites. However, the ING report estimates it could take 7–10 years for generics producers to establish viable US operations.