U.S. Tariffs May Affect Drug Pricing and Supply Chains
The U.S. has recently announced a national security investigation into the pharmaceutical industry, which could lead to tariffs on drug imports. This move is expected to have a significant impact on pricing, particularly for generic drugs that make up the bulk of prescriptions in the U.S. However, health insurers, which act as intermediaries between drugmakers and patients, may absorb some of the initial tariff costs.
Effect on Generic Drugs and Cost Pressures
Generic drugs, which are primarily produced in countries like India and China, represent over 90% of prescriptions in the U.S. but account for just 17% of the spending. A 25% tariff on imports from India could lead to an estimated 17.5% price increase on these essential drugs. Experts warn that such increases could burden patients and the U.S. government health programs, with the real risk lying in the lower-margin generics.
Impact on Research and Development
In response to potential tariff hikes, many pharmaceutical companies are expected to pass on some costs to consumers. However, a more significant consequence might be cuts in research and development (R&D). Eli Lilly CEO Dave Ricks mentioned that the higher costs from tariffs could typically lead to reductions in staff or R&D activity, which would slow innovation in the industry.
Pharmaceutical Companies’ Strategy
In light of the growing tariffs and increasing pressure on profit margins, several pharmaceutical companies, including Eli Lilly, Novartis, and Johnson & Johnson, are expanding their U.S. manufacturing presence. However, these efforts are expected to take years to bear fruit, and the move is partially a response to tax advantages in countries like Ireland and others within the European Union.
U.S. Pharmaceutical Market’s Dependence on Exports
The U.S. remains the largest market for prescription drugs globally, accounting for half of worldwide pharmaceutical revenue. However, American consumers pay significantly more for brand-name drugs compared to other high-income nations. In 2022, U.S. health plans paid more than three times the amount for brand-name medications than countries with lower pharmaceutical prices.
Long-Term Impact of Tariffs on Drug Pricing
The looming tariffs and trade restrictions may push pharmaceutical manufacturers and health insurers to negotiate on prices, as the administration continues to target high drug costs. While tariffs alone are unlikely to resolve pricing issues, they may act as a catalyst for industry-wide discussions on how to address the disparity in drug prices between the U.S. and other countries.
