Trump's Drug Tariff Impact Varies by Manufacturer

Impact of Potential Tariffs on U.S. Pharmaceutical Companies

President Donald Trump has signaled the possibility of imposing tariffs on pharmaceuticals imported into the United States, a move that could significantly affect drugmakers. The exact nature and scope of these tariffs remain uncertain, but analysts are already assessing which companies might be most impacted.

According to TD Cowen analyst Steve Scala, certain companies may be better positioned than others based on their manufacturing locations. AbbVie, Bristol Myers Squibb, and Eli Lilly appear relatively well-prepared due to their larger U.S. manufacturing footprints compared to their international operations. In contrast, Novartis and Roche are seen as more vulnerable. This assessment is based on factors such as where active pharmaceutical ingredients are sourced, the location of manufacturing plants, and the overall global supply chain structure.

Trump has indicated that low-level pharmaceutical levies could begin as early as August, with potential increases in the next year or so. He has also threatened to impose up to 200% tariffs on imported drugs, though it remains unclear whether this will happen. The uncertainty makes it challenging for analysts to fully evaluate the risks to individual companies.

In addition to the tariff risk, domestic drug manufacturing is expanding. Several companies have announced significant investments in new facilities, aiming to build goodwill with the administration. However, these projects are expected to take several years before becoming operational.

Key Players and Risk Exposure

Analysts have estimated the potential impact of tariffs on different companies. For example, Jefferies analyst Michael Yee highlighted Amgen and Biogen as having the greatest exposure among biotech firms. Gilead and Vertex Pharmaceuticals, on the other hand, are likely less affected.

Biogen clarified during its first-quarter earnings call that it expects minimal exposure to Trump’s tariffs. This is because a large portion of its U.S. revenue comes from products manufactured domestically, and its current global inventory positions further reduce the risk.

Scala noted that tariffs could significantly affect companies' free cash flow for at least the first two years after implementation. He referenced an unnamed former pharmaceutical CFO who suggested that while drugmakers may raise prices, doing so enough to offset tariffs would be politically difficult given existing affordability issues. Companies might also consider cutting R&D spending, but major reductions are unlikely due to the importance of innovation for long-term growth.

The expert warned that tariffs above 50% could be problematic for the industry, forcing companies to bring manufacturing back to the U.S. and potentially making substantial R&D cuts necessary.

Industry Responses and Concerns

Some pharmaceutical CEOs have criticized the potential tariffs, arguing they could hurt R&D and lead to fewer treatments for patients. Health policy experts have also raised concerns about the complexity of the pharmaceutical supply chain, suggesting that tariffs could drive up drug prices and exacerbate shortages.

Roche, one of the companies identified as being at higher risk, emphasized its robust U.S. presence, including 15 research and development sites and 14 manufacturing facilities. The company also highlighted its $50 billion investment plan in the U.S. Roche advocates for exemptions for pharmaceuticals and diagnostics, stating that such measures would protect patient access and innovation. However, the company claims it is prepared for any potential levies and confident in its ability to manage impacts through strategies like inventory adjustments.

Other companies mentioned by analysts as being at risk did not immediately respond to requests for comment.

Manufacturing Footprints and Global Strategies

Drugmakers operate complex global networks, sourcing active ingredients from multiple locations and managing intricate intellectual property rights. These factors contribute to varied tax and pricing strategies, making tariff analysis challenging.

Scala outlined key metrics used to assess risk, including the number and location of manufacturing plants, facility utilization, source of active ingredients, and patent locations. He noted that AbbVie, AstraZeneca, Eli Lilly, Merck, and Pfizer have the largest disclosed U.S. manufacturing networks, with 10 major plants each. However, only AbbVie, Bristol Myers Squibb, and Eli Lilly have more U.S. plants than abroad.

Companies like Daiichi Sankyo, Novartis, and Zoetis have the fewest U.S. FDA-registered sites for active ingredient manufacturing. Roche and Novo Nordisk also have low percentages of U.S. active ingredient sites relative to their global operations.

GSK has the largest foreign manufacturing network, with 31 major plants. However, the company plans to close some of these facilities. Other companies with extensive international manufacturing include Pfizer, Sanofi, Zoetis, and Elanco. Some firms, such as Merck, Roche, and Takeda, have not disclosed the number of major plants outside the U.S.

Ireland has emerged as a particular concern, as Trump has targeted the country for luring U.S. drugmakers with low corporate tax rates. AbbVie and Merck have the most FDA-registered manufacturing sites in Ireland, producing pharmaceuticals distributed in or imported to the U.S. In contrast, GSK, Novartis, and Roche have no Irish FDA-registered sites.

Yee pointed out that Amgen benefits from manufacturing operations in Ireland and Singapore, which lowers its tax burden by 6%. Biogen's operations in North Carolina and Switzerland provide an 8% tax break. In comparison, Vertex and Gilead are less reliant on such international tax advantages.

Mitigation Strategies

When asked about mitigating cost increases from tariffs, companies have considered options such as sourcing active ingredients from non-European locations or exploring contract manufacturing in places like Puerto Rico. These strategies could help reduce the financial impact of potential tariffs.