Pharma companies on edge over Trump tariff tantrum: ‘Will he, won’t he?’

While pharma was exempted initially, Trump’s subsequent statements point out that the pharma sector would also face tariffs. The White House release dated 2 April, announcing tariffs, mentions pharma as a focus sector.

Still, the delay in imposing tariffs reflects the complex dynamics of the sector, including the risk of drug shortages getting aggravated. “All in all, several outcomes are possible, with near-term uncertainty being a certainty," said Kotak Institutional Equities. For instance, if tariffs are applied at a fixed rate across all the countries, Indian pharma companies could have an edge because of their cost advantage.

India accounts for about 50% of generics imported by the US. So, higher tariffs would mean a bigger impact on Indian generic drug makers. But since generic companies are operating at thin margins, they would be forced to stop selling generics in the US if they are not able to pass on the cost. This would pose the risk of a drug shortage in the US, as seen during the covid-19 pandemic.

However, the threat of tariff imposition is higher for formulations/ biosimilars as, unlike generics, the US does not have a very high import dependency for these. “Our base case (ditto for companies and investors) is that any high tariffs in pharma, particularly for generics, are unlikely to sustain, as those will drive higher outlays for US patients and drug shortages," said Kotak in a report dated 3 April.

In case the US goes ahead with a 26% tariff levy, Kotak estimates FY27 Ebitda hit of 13% on Biocon Ltd and Aurobindo Pharma Ltd and 10% on Dr Reddy’s Laboratories Ltd. Sun Pharmaceutical Industries Ltd, the largest domestic pharma company, is expected to see an impact of only 3%, despite 15-20% expected Ebitda contribution from the US, because of limited availability of substitutes for its specialty products.

Also Read: Indian pharma turns to home remedy as tariff malady looms

Pills and politics

The White House document pins hope on building domestic manufacturing capacity and may want global drug makers to set up base there. However, it may not be easy because of higher cost of production in case of generics and a time-consuming process for patented drugs.

“For generic drugs, the cost of manufacturing a plain vanilla product in the US is 2-8x more expensive as per the interactions we had with the companies," said a Nomura Global Markets Research report dated 4 April. This limits the incentives for generic companies to invest in the US.

In the case of branded patented drugs, setting up manufacturing plants and gaining regulatory approval usually take 3-4 years. With an estimated 70% of total patented drugs losing protection in the next 10 years, shifting production to the US would not be economically viable for these products, the report adds.

In this backdrop, shares of pharma companies have taken a hit. Since 2 April close, shares of Biocon and Aurobindo have lost about 10% and 8.6% whereas the stock of Dr Reddy’s is down 4.9%. Sun Pharma is relatively unscathed, down 3.6%. Investors would keenly watch for the US government's tariff decision on the pharma sector for further cues.

For now, the 90-day pause brings short-term relief. But uncertainty looms. “We expect uncertainty to prevail not just till the formal announcement on pharma but also post that, as then the focus will be on trade treaties and subsequent timing/extent of any rollback," said Kotak.