25% Donald Trump tariff likely to weigh on pharma margins: Analysts

If pharmaceutical exports from India to the US come under a 25 per cent tariff bracket, the impact on earnings before interest, tax, depreciation and amortisation (Ebitda) could be around 5 per cent, felt analysts. This is after assuming that about 75 per cent of the tariff would be passed on. 

Kotak Institutional Equities said that assuming a 25 per cent tariff on Indian pharma firms and baking in a nil pass-through, there could be a 0-27 per cent earnings per share (EPS) impact on generic drug exporters. 

The impact on innovator contract research, development and manufacturing organisations (CRDMOs) would be relatively lower. 

Speaking to Business Standard, Krishnanath Munde, associate director, healthcare, India Ratings & Research, said, “Indian pharma remains exempt from its newly-expanded tariff regime under Executive Order 14257. However, even if there is an exemption, there could be targeted tariffs for Indian pharma in future if the US finds a trade or security reason to justify them.” He added that generics export is a low-Ebitda margin business for most pharma companies — in the range of 10-20 per cent. “If there is a 25 per cent tariff in future, then 60-75 per cent will pass on to end consumers depending upon products and their competitive intensity in the market. The impact on Ebitda could be to the tune of 5 per cent or so,” Munde said. 

India exported drugs worth $10.5 billion to the US in FY25 — 34.5 per cent of its total pharma exports. 

Analysts felt that a 25 per cent tariff could significantly disrupt the economics of generic drugs especially because they already run on thin margins. “This could lead to supply exits or shortages in lower-profit segments. Branded players may weather the impact better initially, but sustained tariffs would likely translate into higher long-term drug costs. If not, then nothing changes but the overhang of potential tariff action still casts a shadow on investment and supply chain decisions for global pharma exporters,” said Nirali Shah, pharma analyst, institutional research, Ashika Group. 

Kotak analysts highlighted that unlike generics, where the US has a very high dependency on India, the US is not as dependent on India for biosimilars. So, this will make it difficult to pass on higher tariffs. 

“Compared to US generics, Sun Pharma’s specialty portfolio could be more impacted as existing elevated price points could make it challenging to pass on the higher costs. On the other hand, limited substitutes for Sun Pharma’s specialty products could prove to be a safeguard. For innovator-focused CRDMOs, we expect tariffs to be at least partially passed on to clients,” they said. 

High tariffs in pharma, particularly generics, are unlikely to sustain as those will drive higher outlays for US patients and drug shortages. Supply risks could be partially mitigated if the US comes out with an incentive scheme like India’s production-linked incentive (PLI) scheme. 

“The scheme would provide financial incentives to companies, thus encouraging capital investments in the US and increasing domestic production. It is estimated that the US relies on India for 45 per cent of its generics supplies and 10-15 per cent of biosimilars by volume. Such a scheme would significantly benefit Indian companies, given their already existing presence in the US, and help curb chances of higher drug shortages in the US,” the Kotak analysts added. 

But, on the other side, if tariffs are not rolled back, companies would be forced to prune their US portfolio (exit in some cases) after exhausting other avenues like passing on higher costs. While it is a low-probability scenario, if pharma tariffs are applied to all countries, Indian companies could have an edge given their cost advantage and may be the last one standing. 

With several molecules in the US generics portfolios of Indian firms already yielding minimal margins, companies could be forced to stop selling them in the US. This is particularly true against the backdrop of the prevailing pricing erosion. 

Given the gestation period involved in setting up a manufacturing facility in the US (policies could change by the time a facility comes up) and the elevated cost structure, Kotak analysts do not expect any major effort by Indian companies

to add manufacturing facilities in the US. 

They said, “In the worst-case scenario of companies significantly pruning their US generics portfolio, we do not rule out a domino effect. Indian companies could be forced to be significantly more aggressive in chasing growth in India and European Union (EU)/rest of world (RoW), leading to price wars.”