How to think about Trump’s pharma tariffs — before they hit

Stat News – Friday, April 18, 2025
By Ed Silverman

For weeks, President Trump has made it clear that tariffs are going to be slapped on pharmaceuticals. But that is about the only thing that is clear.

For the moment, his administration has opened a formal investigation that would determine the extent to which importing these products represents a national security risk — and then decide the scope of the tariffs and how they will be applied. Meanwhile, the pharmaceutical industry, investors, and consumers are left wondering what to expect — and how much more the tariffs may cost them.

There are various possibilities to unpack, such as the origins of active pharmaceutical ingredients and the types of medicines more likely to rise in price than others. There are also the maneuvers drug companies can make — from pricing strategies to moving production around — in order to mitigate the impact and there is the extent to which some drugs, namely generics, may remain available.

Here are some key questions to consider.

What exactly has the Trump administration said, so far, about levying tariffs on pharmaceuticals — and what is a 232 investigation?

More than once, Trump has made clear that pharmaceuticals — broadly speaking — will not escape tariffs, despite behind-closed-doors pleas from industry executives, who averted tariffs during his first administration. For a brief while, though, there appeared to be an exemption carved out for the industry when Trump announced his sweeping tariff proposals on April 2. But that was a short-lived hope.
The day before, the U.S. Department of Commerce had quietly launched what is known as a 232 investigation, which is used to determine whether products being imported in the U.S. — in large enough quantities or under certain circumstances — would threaten national security. The Trade Expansion Act of 1962 gives the president the ability to impose restrictions on such imports.

The concern over national security for some pharmaceutical imports is actually not new. For example, health policy experts for years have pointed with alarm to antibiotics, which are needed to combat a wide array of infections, since the export share of antibiotic ingredients from China increased from 9% in 2002 to 44.5% in 2021, according to a study in Globalization and Health.

Although the world’s second-biggest economy is responsible for producing just 8% of the total volume of all active ingredients, there is case-by-case evidence of significant dependence on China for key starting materials, which are the building blocks for these ingredients, according to a report from U.S. Pharmacopeia, an independent organization that develops standards for medicines.

Meanwhile, only 15% of ingredients used in brand-name drugs are made in the U.S. By contrast, 43% come from the European Union. As for generics, 35% come from India and 18% from the European Union. The U.S. produces just 12%. The U.S. share of both ingredients would be higher, though, if IV fluids were included in the analysis, the organization acknowledged.

Why are active pharmaceutical ingredients important in sorting out potential tariffs?

A key issue is whether the administration imposes a blanket tariff on all pharmaceutical products — key starting materials, active ingredients, and finished-dose medicines — or takes a piecemeal approach. The decision can have enormous consequences, explained Lynn Fischer Fox, a former Commerce Department Deputy Assistant Secretary for Policy and Negotiations under President Barack Obama.

She noted that a tariff rate would typically be applied based on the country of origin for the active ingredient. For instance, a finished drug imported from Italy may contain an ingredient made in India. This creates a challenge for determining national security risks, since it is not unusual for some medicines to rely on different components or production activities from different countries.

As a result, pharmaceutical tariffs are “less amenable to a one-size-fits-all” approach, said Fischer Fox, who is now a partner at the Arnold & Porter law firm. “The most alarming scenario would be an across-the-board approach with a prohibitively high tariff on all pharmaceuticals, which would have devastating effects for patients because it could cause shortages and price spikes.”

So will tariffs cause prescription drug prices to rise?

There is, generally, an assumption that prices will indeed rise, but the rate at which they may rise is expected to vary among drugs. This is the proverbial hot potato for the pharmaceutical industry, given ongoing anger over the cost of prescription medicines. Brand-name drugmakers may be more willing, at least initially, to absorb the added cost of a tariff because margins on these products — generally, 90% or more — can make it possible to do so.

Another factor may be existing contracts the companies have with group purchasing organizations and pharmacy benefit managers, which may discourage steep hikes in the short term. Then there are Medicaid and Medicare penalties for raising prices above the inflation rate. Drug companies that do so must pay the difference in the form of a rebate to the government health care programs.

That said, some consumers may become vulnerable once various contracts expire because health plans are more likely to pass along higher drug costs in the form of larger out-of-pocket expenses. Eventually, consumers could also face bigger insurance premiums as health insurers seek to compensate for those higher prescription drug costs.

More immediately, prices for generic medicines are forecast to climb. To a great extent, the outcome reflects the concentration of the generic industry in India, which is responsible for 62% of all generic pill production, according to Marta Wosińska, a senior fellow at the Center on Health Policy at The Brookings Institution, citing data from U.S. Pharmacopeia.

Moreover, Indian companies obtain most of their raw materials and ingredients from China. This matters since approximately 90% of the prescriptions written in the U.S. are for generic drugs. But the margins on generics are usually razor thin, which means some manufacturers will attempt to pass along the increased costs stemming from tariffs, but others may find they have little room to do so.

This is likely to result in shortages if some generic manufacturers decide to halt production of particular medicines, leaving fewer suppliers, which suggests yet another round of price hikes. The Association for Accessible Medicines, a trade group for generic drug companies, is vociferously warning that tariffs could exacerbate existing shortages and create new supply problems.

So what might pharmaceutical companies do in response?

Already, several of the largest drugmakers — Novartis, Eli Lilly, and Johnson & Johnson — have announced plans to build or expand facilities in the U.S. to appease Trump, who wants to revive American manufacturing and generate more jobs. But building new production plants takes time and is unlikely to compensate for foreign production for a few years. This may give some companies pause.

“Building a plant can take three to five years and cost north of $1 billion, not including tariffs on steel and other items,” said Wosinska, who studies pharmaceutical supply chains. “It’s a whole different thing if you have a situation where you ask if tariffs will be here a month from now. Will I get a return on a $1 billion investment in U.S.? It makes it a really difficult calculus for a company.”

A different tactic may involve shifting production to the U.S. Pfizer, for instance, has indicated it may do so. Of more than 30 manufacturing sites around the world, 10 are located in the U.S. Along these lines, drug companies could opt to use contract manufacturers with operations in the U.S. as a way to satisfy the Trump administration, at least temporarily.

Yet another consideration is to revamp pricing and tax strategies, such as transfer pricing, which refers to the way a company values the sale of its medicines between its own entities. For instance, a drug company can shift profits to a country with a lower tax rate, such as Ireland, by setting a higher transfer price when selling a medicine to its entity in the U.S., which has a higher corporate tax rate.

However, a high transfer price increases the value of medicines being imported to the U.S. and is subjected to a higher tariff. To lower the tariff exposure, a drug company can lower the transfer price, although this may increase its taxes. Assuming the math is favorable, one way to rework this formula is to shift the intellectual property for the medicine back to the U.S.

Why? The Irish subsidiary would now effectively serve as a contract manufacturer and sells the medicine back to the U.S entity with a mark-up above production costs. But the U.S. entity no longer has to compensate the Irish subsidiary for the value of the intellectual property. As a result, the sale price — or transfer price — can be lowered.

This is a simplified version of a highly complicated dance that pharmaceutical companies and Wall Street analysts are furiously sorting out over the past few weeks. For one thing, it can take months to shift the intellectual property, according to Daniel Hemel, a New York University law school professor who specializes in intellectual property matters.

Leerink Partners analyst David Risinger offered an example. Let’s say a U.S.-based company imports a drug from its Irish subsidiary, which holds the intellectual property rights valued at $800. The cost of goods sold is $200. A 25% tariff on transfer pricing would result in a $250 tariff, since the total value of the medicine is $1,000

Now compare this with a scenario in which the U.S.-based company imports the same drug from the Irish subsidiary, which transferred the intellectual property. The relevant cost of goods sold for the drug is $200, but the value of the intellectual property held by the Irish subsidiary is now zero. So a 25% tariff on the $200 transfer price would be just $50, or 25% of $200.

The explorations are happening for good reason. As Risinger pointed out in a recent note to investors, the “immediate tariff hits could be very significant, since U.S. prices [paid to subsidiaries] for products with property [housed in foreign subsidiaries] typically represent a high percentage of U.S. net revenue.”

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