Key Takeaways
- Industry is waiting to find out if pharmaceutical imports will be included in a new wave of tariffs that the Trump Administration will announce on 2 April.
- Tariffs could be yet another negative hit to industry under the Trump administration while it grapples with big changes at the US Food and Drug Administration.
- Analysts said transfer pricing used by some drug manufacturers on imported goods could have particularly negative consequences when it comes to tariffs.
Industry anxiety is riding high as pharmaceutical manufacturers wait to hear from US president Donald Trump about whether or not drugs will be included in the next round of tariffs to be announced on 2 April.
Trump is expected to announce sweeping and immediate new “reciprocal” tariffs on products with trade partners during an event planned at the White House in the afternoon. Earlier rounds of tariff announcements on goods, like a 25% tariff on steel and on automobiles and auto parts, have roiled the global stock market for several weeks.
More recently, Trump has turned his attention to the pharmaceutical industry, which has been exempt from trade wars in the past due to the critical nature of medicines. In March, however, Trump told White House reporters that he would implement tariffs on imported pharmaceuticals and railed at the industry for offshoring drug manufacturing to countries like China and Ireland.
If tariffs are implemented on pharmaceutical imports, it will be another chink in the protective armor industry was hoping to get from the election of a Republican president and Congress, colliding with thousands of job cuts at agencies under the Department of Health and Human Services (HHS), high-profile leadership exits at the US Food and Drug Administration and the appointment of Robert F. Kennedy, Jr. as HHS Secretary.
Big pharma has tried appealing to Trump by promising investments in US manufacturing. Johnson & Johnson recently announced a $55bn investment in US manufacturing over four years, a 25% increase in investment over the previous four years. And Merck & Co. and Eli Lilly have announced similar manufacturing investments.
A report from Reuters on 1 April suggested the drug industry could get a reprieve on tariffs. The news organization, citing undisclosed sources close to discussions, said Trump may not announce pharma tariffs on 2 April but tariffs on drugs could still be phased in eventually at a lower percentage.
For now, the industry is in wait-and-see mode as companies and investors are left wondering what Trump’s 2 April tariff announcement will involve. Drug makers aren’t saying much, needing more details before determining what the financial impact of tariffs might be.
Risk Underappreciated - Analyst
Leerink analyst David Risinger, in a 30 March note, said the risks of tariffs are underappreciated.
“Tariffs could have a worse negative impact than many investors realize if the import value (or US landing price) extends to transfer pricing,” Risinger said. The transfer price is the price at which a company’s foreign entity sells products to its US entity, and that price is usually higher than cost of goods sold (COGS) to reduce the tax impact, he said.
“We believe sustained tariffs would drive up US drug prices for consumers, because even if companies were to redomicile manufacturing, it will take years and cost more than ex-US manufacturing,” Risinger added.
“Although corporations can make adjustments to mitigate the negative impact of tariffs, it could take some time given the complexities of global tax strategies and supply chains and uncertainty related to the durability of tariffs,” he added.
Bernstein analysts also pointed to high transfer prices as a concern for the pharma industry.
“High transfer prices may now expose companies to higher tariffs as these tariffs are applied ‘ad valorem’ to the value of the imported goods,” Bernstein analyst Courtney Breen said in a 31 March note.
“There is very limited visibility to be able to thread from company financials to tariff risk,” Breen said. The investment firm analyzed manufacturing locations, revenue, COGS, bill of landing (ocean shipping importation) data, tax-rate guidance and Senate Finance investigations to attempt to evaluate risk across companies.
Merck, AbbVie, Novo Nordisk, Sanofi and GSK were determined to be at the highest risk from tariffs due to the magnitude of imports and exposure to ex-US manufacturing, “increasing the likelihood for transfer-pricing to raise the cost-base that tariffs are applied to.”
Amgen, Pfizer and Merck are at high risk of having meaningful exposure to US revenue and imports, but the majority of imports come from external suppliers, where there is more incentive to minimize the costs paid. J&J, Lilly, Bristol Myers Squibb, Gilead, Novartis and Roche appear to face moderate risk from tariffs, the analyst said.
“Being in this category doesn’t mean that these companies won’t be hit with tariffs. However, given the available information, it seems that these companies may be in a better position to manage the tariffs than those in the other two categories,” Breen said.