It seems that there's no finish line for Donald Trump's tariffs.
The pharmaceuticals industry, which managed to get off lightly until now, eventually couldn't escape the arrow of fate.
From October 1, the US will start collecting 100% import duty on all branded or patented pharmaceutical products, though it's unclear if these prohibitive levies will be extended at a later date to apply to generic drugs and specialty medicines.
Branded drugs are patent-protected medications sold under a company's name, while generics are their equivalents made after patent expiry, and often cost much lower than patented drugs.
India is the world's pharmaceutical hub, thanks to its dominance in generics drug production. According to trade body Pharmexcil, the US market accounts for over 35% of our total pharma exports. In absolute numbers, the value stood at $10 billion in FY25. In fact, for several leading Indian drug makers, the US is one of the largest markets accounting for as much as 40-50% of their revenues.
In other words, if tariffs are extended to complex generics and specialty medicines, it'll have a significant impact on Indian companies.
For instance, 47% of the earnings of Dr Reddy's come from the US market, while for Sun Pharma its 37%. Others like Lupin, Zydus Lifesciences and Aurobindo Pharma report earnings above $ 1 billion from the US market alone.
Indian markets were already teetering on the trading range, and with Trump's announcement the fuse was lit. On Friday, major pharma companies like Sun Pharma, Cipla, and Dr Reddy's fell up to 5%, with some even hitting 52-week lows. This wasn't entirely unexpected.
For months, Trump has been dropping hints about imposing tariffs on the pharma sector in order to reduce prices of medicines. Just last month, he wheeled out the idea of levying up to 250% tariffs on all drug imports. Prior to that, he declared that the Most Favoured Nation policy, unveiled in May, will help reduce prices of prescription drugs by 1,000% or more.
A few weeks later, he reiterated that drug prices will likely reduce by 1,400 to 1,500%, though few see that happening simply because the math doesn't add up. If prices really reduce by 1,000% or so, consumers would get paid to buy medicines rather than paying for them.
Contrary to Trump's claims about lower prices, private surveys indicate that tariffs are doing exactly the opposite with inflation going up. They argue that inflation could be at least a third lower this year in the absence of tariffs. Moreover, Trump also insists that his trade strategy is bringing in a stonking trillion-dollar revenue, though in reality revenue stood at about $150 billion.
Unbelievably, it's the American consumer that's footing the bill, as exporters rarely absorb tariff hikes. To imagine otherwise is to be in denial, as tariffs are a form of tax on buyers and not sellers. As long as tariffs remain high, the path for prices remains upwards.
That said, the exorbitant levies are pressuring companies to invest in new or existing facilities. As with any other sector, the 100% import duty on drugs too is forcing pharma companies to ramp up production in the US and strengthen supply chains. In fact, the 100% duties, which Trump announced come with an essential rider—if the exporting company is ready to build a manufacturing plant in the US or commit new investments at its existing plants, it can avoid these punitive levies altogether.
Heeding Trump's demands, companies have already begun announcing crucial investments. For instance, Eli Lilly recently announced a $6.5 billion investment to set up a manufacturing facility in Houston, over and above its $5 billion plant near Richmond, Virginia.
Drugs have been exempt until now because of increased costs and to avoid the issue of medicine shortages. Though there's no clarity, it's widely believed that the incoming tariffs will not apply to generics, as it could lead to higher prices.
Interestingly, the US healthcare system is heavily reliant on Indian generics, which make up for 90% of prescription drugs covering key therapy areas such as hypertension, mental health, lipid regulators and others. According to estimates, four out of every 10 prescriptions filled in the US were catered to by Indian companies, including 47% of all generics and 15% of biosimilars.
As analysts reason, generic drugmakers operate on wafer-thin margins, and in the event of tariff hikes on drugs they manufacture, companies will be left with only two options—either to fold up operations, or pass on the hike to customers. The former will lead to drug shortages, and the latter will increase drug prices. Both are unnecessary, which is why trade bodies insist on maintaining a status quo on all generics exports.
