Tariffs on Pharmaceuticals: Are Drug Prices Set to Rise?
Pharmaceutical manufacturers had a brief reprieve on April 2nd when the US President exempted medicines from the announcement of large ‘reciprocal’ tariffs. The exemption however, is expected to be short lived. Just this week, the US President at the NRCC Fundraiser Dinner announced:
"We’re going to be announcing very shortly a major tariff on pharmaceuticals. And when they hear that, they will leave China. They will leave other places because they have to sell—most of their product is sold here, and they’re going to be opening up their plants all over the place in our country.” [1]
The US President is correct in that the US market is the largest in the world, representing approximately 50% of global drug sales [2]. The impacts of this policy cannot be softened by simply shifting sales to other markets alone: strategies must directly address this problem.
The US administration has signaled it could launch a Section 232 investigation under the Trade Expansion Act of 1962, which allows the government to impose tariffs on national security grounds. While timelines for the conclusion of a 232 investigation vary, prior cases suggest that new tariffs could be announced within 6–12 months, and most likely sooner given the recent statements above.
The administration’s goal is to reshape the pharmaceutical manufacturing landscape, re-shoring production to the U.S. and reducing reliance on imports. The underpinning rationale is to improve US manufacturing’s contribution to the economy and national security.
This prompts whether manufacturing can be re-shored quickly, and if not will increases in costs caused by the tariffs be passed on to payers and patients?
Can Pharma Rebuild US Manufacturing—and at What Cost?
Rebuilding domestic manufacturing at scale is a long and costly endeavor, not a quick fix. Multiple hurdles stand in the way:
- Capital investment: Building GMP-compliant facilities for complex drugs often costs hundreds of millions of dollars per site. Committed investments in new production facilities would have to be unwound resulting in significant financial losses
- Termination of existing contracts with Contract Manufacturing Organisations: would result in significant losses for manufacturers
- Scheduling of new production runs: is usually made years in advance of actual production
- Workforce development: The US has a shortage of skilled biomanufacturing workers
- Regulatory approval timelines: Any new site or process must be validated and approved by the FDA and, if exports are involved, by regulators in other markets
Even once operational, US-based facilities are unlikely to reduce costs. In fact, one of the main reasons companies originally shifted production offshore was to access lower labor and overhead costs. Returning that manufacturing to US soil will likely increase the per-unit cost of drugs, especially when combined with tariff-related input costs.
Perversely, imposing tougher price barriers may also drive ex-US manufacturing to become even more cost efficient in order to stay competitive. Meanwhile, US domiciled manufacturing would be shielded from such competition through protective tariffs, resulting in longer term inefficiency and sustained higher prices.
Finally, and has been frequently commented by others, in order to commit to long term investments, companies require certainty and stability in trade policy. At present the levels of unpredictability of what tariffs may or may not be implemented makes predicting the return on investment practically impossible. Only when conditions start to stabilise will we see confidence to invest.
It's important to note that these dynamics are not exclusive to the pharmaceutical sector, but are common to many other sectors, as reported recently by ABC News. [3]
Impacts on Pharmaceutical Companies
We shall assume then that over the short to medium term, pharmaceutical manufacturers will not be able to re-shore at significant scale. During this period, companies face a tough choice: absorb higher costs and reduce margins or raise prices.
- Generic drug makers will be particularly vulnerable. Margins are thin, competition is intense, and the proportion of manufacturing cost (COGS) in the overall cost structure is high. High tariffs would cut deeply into profitability, forcing some companies to exit the market leading to supply shortages, ultimately affecting the health of patients. Should shortages become a reality, payers might be forced to accept higher prices in order to stabilise supply.
- Branded drug manufacturers will also be subject to intense pressure. It is likely they will absorb some of the cost in the short run. However, over time they may look to pass these costs on to payers and patients. In the US, we would expect this price pressure to become most evident in commercial plans, where there are fewer price restrictions. In the public Medicare and Medicaid programs we would expect to see more gradual price increases due to existing controls that restrict price increases above the rate of inflation.
It may be the case however that drug companies try to avoid raising prices by absorbing the costs themselves. David Ricks, CEO of Eli Lilly, was recently interviewed by the BBC about the US government’s desire for re-shoring and how this relates to the commitments that Lilly has already made to manufacturing outside of the US:
“We can’t breach those agreements, so we have to eat the cost of the tariffs and make trade-offs within our own companies. […] Typically, that will be in reduction of staff or research and development, and I predict R&D will come first. That’s a disappointing outcome.” [4]
Would drug prices increase in ex-US markets?
The global nature of pharmaceutical supply chains means that US tariff policy is likely to have a ripple effect across international markets. Retaliatory tariffs from major trading partners could make American-made pharmaceuticals less competitive abroad, reducing export volumes or forcing manufacturers to lower their prices and accept narrower margins.
Meanwhile, companies producing drugs outside the US may need to increase costs in order to cover the losses incurred from tariffs. In regulated markets such as the EU, where prices are tightly controlled through HTA, national level pricing negotiations and other pricing mechanisms, manufacturers may be unable to pass on these additional costs, leading to lower profitability or in the worst instance, product withdrawals. As mentioned earlier this could result in less investment in R&D. In less regulated markets, prices may rise modestly, but only if payers and patients are willing or able to absorb the increases.
In order to survive this policy shift, ex-US markets must dramatically improve their competitiveness. The European Federation of Pharmaceutical Industries and Associations (EFPIA) recently warned the President of the European Union:
“Unless Europe delivers rapid, radical policy change then pharmaceutical research, development and manufacturing is increasingly likely to be directed towards the US” [5]
The timing of this warning is of no surprise. Europe is in the process of revising its pharmaceutical regulations, and if the European Union plays its cards right, could help foster an attractive market that retains manufacturing within the region. Eliminating proposals for reductions in Regulatory Data Protection, reducing approval and reimbursement times, and improving incentives for R&D, specific drug categories and manufacturing could all contribute to encouraging companies to stay in Europe.
What strategies could biopharma use to manage the situation?
In addition to considering re-shoring activity, biopharma companies should be exploring:
- Optimizing existing supply chains, renegotiating existing agreements and scenario planning for sourcing most cost-effective solutions
- Revisit pricing strategies e.g., balance of list prices and rebates to maintain formulary positioning, timing of price increases and over which products
- Lobbying policy makers either directly or through industry associations, as we have already seen with PhRMA and EFPIA. Particular areas could include phasing in tariffs, and government incentives/subsidies to offset losses
- Build reserves of critical drugs to minimise supply disruptions
- Financial and accounting approaches e.g., transfer pricing
Conclusion
While the precise impact of pending pharmaceutical tariffs will depend on how they are structured and implemented, it is clear that trade policy is changing in a fundamental way. The combination of:
- Higher input costs
- Limited short-term supply chain flexibility
- Uncertainty in trade policy
- Longer term higher prices should manufacturing be re-shored
All point toward increased cost pressures that are unlikely to be absorbed indefinitely by manufacturers.
Whether the policy ultimately delivers on its intended goal of a more secure, self-reliant pharmaceutical supply chain remains to be seen. But in the near-to-medium term, higher prices are likely. Amongst the developed drug markets, we expect the US to experience the greatest sustained price increases, whilst other countries with stricter national level pricing controls will see limited or lower increases.
Contact
If you are interested in discussing any of the issues above, please contact me through my email address dniven@nivenbiopharma.com. Feel free to also visit my website at www.nivenbiopharma.com for more information.
Sources:
- Speech: Donald Trump Addresses an Republican Dinner in Washington - April 8, 2025, RollCall.com
- Comparing U.S. and International Market Size and Average Pricing for Prescription Drugs, 2017-2022, Office of the Assistant Secretary for Planning and Evaluation, Dec 2024
- Trump tariffs won't entice companies to expand US manufacturing, economic experts warn, ABC News, April 2025
- Tariffs 'hard to come back from', says US pharma boss, BBC, April 2025
- Pharma CEOs alert President von der Leyen to risk of exodus to the US, EFPIA, April 2025
