How U.S. Tariffs Could Impact the Pharmaceutical Industry

The U.S. has proposed tariffs on pharmaceuticals that could hit the drugs in your medicine cabinet and the stocks in your portfolio.

President Donald Trump said his administration is considering “major” tariffs on imported pharmaceuticals, which were excluded from his April 2 tariff announcements.

The White House hasn’t detailed the size or scope of the potential tariffs, but Trump suggested they could run anywhere from 50% to 200%.¹ Precedent from the auto tariffs could put them closer to 25%.

This would represent a sharp break from recent decades. Thanks to international agreements designed to prevent drug shortages, the pharmaceutical industry has generally faced low or no tariffs. The proposed changes could ratchet up consumer prices and weigh on pharmaceutical firms’ financial results.

While much is still unknown, here are a few things investors should consider.

Why Is the U.S. Considering Pharmaceutical Tariffs?

Many of the world’s largest pharma companies keep their headquarters in the U.S., including eight of the top 20 by revenue.² Having a U.S. base offers considerable benefits, including:

• Strong legal protection for drug patents and other intellectual property.

• Robust access to private investment and public funding.

• A large market for pharmaceutical sales with fewer price controls than other countries.

Despite these advantages, about 78% of the “solid dosage” medications (e.g., tablets, capsules) sold in the U.S. are produced in other countries.³ For injectable meds, this figure is roughly 55%.

Policymakers worry that high levels of overseas production present a risk to U.S. patients. A massive disruption like a pandemic or war could scramble supply chains and cut off access to life-saving medications.

Drug manufacturing has moved offshore partly because of lower labor and production costs outside the U.S., but tax benefits are also a factor. Companies can often reduce their tax burdens by recognizing more of their profits in countries with lower tax rates.

According to one analysis, the six largest U.S. pharma companies by revenue will pay little or no U.S. corporate income tax for 2024. At the same time, these firms earned billions in domestic and foreign profits.⁴

Will Pharma Tariffs Increase Medication Costs?

Higher tariffs could mean higher prices for some of the most used medications in the U.S.

Generic or biosimilar drugs comprise roughly 90% of prescription medicines in the country.⁵ They lack patent protection and cost less than brand-name medications, which benefits consumers.

However, generics and biosimilars also face more exposure to tariffs because they’re made mostly outside the U.S. Other countries produce about 88% of the active pharmaceutical ingredients (APIs) used in generics taken by U.S. patients.⁶ (APIs are the molecules that give drugs their intended effects.)

These medications also tend to have thinner profit margins. As a result, generic drug makers may be less able to absorb the cost of higher tariffs. The Association for Accessible Medicines, a trade group for generics, said tariffs would “significantly increase” prices.⁷

Higher tariffs might also affect pharma companies that make branded or “on-patent” medications. Even if they can absorb tariff costs, doing so could pressure their margins.

How Drugmakers May Adapt to U.S. Tariffs

We believe that pharma companies could implement several measures in response to tariffs.

1. Expand U.S.-Based Drug Manufacturing

Pharma firms might try to moderate or prevent tariff costs by onshoring production in the U.S. Several companies have recently announced billion-dollar expansions.

In early May, Trump signed an executive order designed to speed up new domestic pharma manufacturing.¹⁵ The order directs federal agencies to streamline reviews and offer other help to companies that are bringing new factories online.

Some companies might also be able to tap into unused production capacity at their existing U.S. plants. A 2022 survey from Washington University found that U.S.-based makers of generic drugs operated at roughly half their maximum capacity.¹⁶

However, obstacles stand in the way of rapidly onshoring pharmaceutical manufacturing.

• It takes time to set up new plants and expand capacity in existing ones. Companies may encounter technological and regulatory challenges if they choose this option.

• Certain APIs are only produced in other countries, forcing the U.S. to import those essential ingredients.

Pharmaceutical companies may be making a tradeoff by onshoring drug manufacturing in the U.S. While doing so might reduce their exposures to tariffs, they would pay higher U.S. production costs in exchange.

2. Reshore Pharmaceutical IP

U.S. pharmaceutical companies have transferred ownership of their patents to a subsidiary or similar entity in another country for years.

This foreign subsidiary charges other subsidiaries fees for using the patent, enabling them to benefit from the lower corporate income tax rates in the country where the patent is held.

Tariffs may encourage these companies to return their patents and other intellectual property (IP), along with the associated revenues, to the U.S. Even if doing so increases their tax burdens, higher corporate taxes might cost less than tariffs.

Bringing IP to the U.S. might become more attractive if the country shrinks its corporate income tax rate. During his re-election campaign, Trump proposed cutting the corporate rate from 21% to 15%.

3. Cut Back on R&D

Some companies may be unwilling or unable to increase drug manufacturing in the U.S. For example, price caps in various countries could prevent them from raising prices.

Instead, the firms may end up absorbing the cost of higher tariffs, at least partially. To make up for this, these firms could spend less on R&D, even if that slows the creation of new and better medications.

4. Take No Action

Finally, companies might avoid sweeping operational changes, especially if any tariffs end after Trump’s term.

Doing nothing could also make sense if other countries introduce countermeasures to U.S. tariffs.

A coalition of pharma companies is lobbying the European Union for “rapid, radical” changes, including streamlined drug reviews and more generous IP protections.¹⁷ Otherwise, the companies said that the EU runs the risk that billions in R&D and manufacturing will migrate to the U.S.

Companies could take other steps to mitigate tariff costs, allowing them to defer changes to their operations. For example, they could use transfer pricing to allocate more of their goods’ costs to the U.S. portion of their supply chain. The value of their imported goods would decline, reducing the size of any U.S. tariffs.

What’s Next for U.S. Pharma Tariffs?

The exact impact of any pharmaceutical tariffs will be hard to assess until the Trump administration releases its plans. Because there are so many moving parts, we continue monitoring government policy developments and companies’ responses.

However, we think pharma firms could experience higher costs and impaired earnings.