Drug prices may rise in US if Indian pharma firms pass on Trump's tariff

The US administration has not made announcements yet on sector-specific tariffs

Generic medicines may cost more in the United States (US) if Indian pharma companies pass on any tariff imposed by President Donald Trump's administration.

 

While Washington has placed India in the 26 per cent reciprocal tariff category, pharmaceuticals have been kept off that basket. However, the industry may see a 10 per cent tariff or none given the critical importance of the sector and it is awaiting clarity in this matter.

 

India imports pharma products worth around $800 million from the US annually and charges a duty of 5-10 per cent. It exports medicines worth $8.7 billion to the US, accounting for 47 per cent of the generic medicine supply in that country.

   

A recent report by brokerage firm Jefferies said that the pharma sector may escape serious action by the Trump administration owing to fears that it would increase drug prices in the US. Analysts have said the US may impose a 10 per cent tariff on Indian medicines and the rise in costs may be passed on to the consumer. However, if costs are not passed on, the entire supply chain of retailers, distributors and formulation makers may be forced to absorb the hit.

 

Furthermore, currency fluctuations will also play a major role in determining the cost of raw materials which India buys from China.

 

Reflecting such sentiments, the Nifty Pharma index ended the day in green on Wednesday. Stocks of export sector companies like Aurobindo, Dr Reddy's Laboratories, Sun Pharmaceutical Industries, Zydus will be in focus on Thursday after Trump's tariff announcement.

 

As such, there is scope for the supply chain in the US to reduce its margins and absorb some of the price rise. A senior industry executive recently told Business Standard: “We have been monitoring the situation closely. No business or strategic decisions can be taken until there is clarity, but we are trying to understand how the value chain will adapt to this move.” He said that if an Indian exporter sells a drug at $1 to a distributor, by the time it reaches pharmacies, the price is already $10, with the final retail price even higher. “There is a substantial distributor margin, and whether the US will look at reducing that is something we will have to watch.”

 

Indian pharma is yet to decide whether it should pass the tariff burden on to US buyers. A decision will depend on the magnitude of the tariff increase. An industry veteran said that not all exporters may adopt the same approach.

 

“Each company will act in its own best interest,” he said, implying that some manufacturers may absorb the tariff or optimise costs to maintain competitive pricing.

 

As such the US is facing drug shortages and shifting manufacturing base to that country is not easy, and supply disruptions may arise in the medium-term.

 

According to the American Society of Health-System Pharmacists (ASHP), the number of drug shortages in the US in the third quarter of 2024 was around 271. That was down from an all-time-high of 323 in the first quarter. Manufacturing delays caused by repercussions of Hurricane Helene resulted in 12 new product shortages of critical and life-saving fluids, said ASHP. Nearly half of all active shortages (48 per cent) began in 2022 or earlier.

 

“Patients are forced to skip doses or use less than prescribed doses as a result. The situation is worse in injectables, and some old generics. Several US manufacturers have stopped production of generics due to low prices and tight margins. Manufacturers failing to meet FDA quality standards is another reason which is causing supply disruption,” said a Gujarat based mid-sized exporter earlier, referring to the US Food and Drug Administration.

 

There are around 640-650 USFDA approved pharma manufacturing sites in India. The exact number of sites that Indian companies have in the US could not be immediately estimated. Major Indian companies like Sun Pharmaceutical Industries, Cipla, Lupin, Biocon have sites in the US, but shifting larger chunks of manufacturing and commercialising to those facilities will take at least four or five years.

 

At a recent industry summit, Umang Vohra, managing director and global chief executive officer of Cipla, had said, "Our strategic decisions should not be solely driven by current tariff structures, which are subject to change. A long-term perspective is necessary as by the time a manufacturing facility is established in the US, the existing tariffs may no longer be in effect. Furthermore, the financial impact of these tariffs is not very significant."