Pharma companies likely to pass on costs in US as fresh levy looms

Brokerages also felt that the pharma companies will aim to pass on the tariff hike to payors

Indian pharmaceutical companies expect to largely pass on the impact of new US tariffs to customers, minimising pressure on margins.

 

But the markets remain spooked by US President Donald Trump’s warning that pharma tariffs shall be imposed at “levels you haven’t really seen before”. The Nifty Pharma index slipped more than 4 per cent on Friday.

 

Industry insiders are hopeful that India will push for zero import duties on pharmaceuticals in bilateral trade negotiations with the US. If successful, Indian drug exports to the US could be exempt from reciprocal tariffs.

 

The Indian Pharmaceutical Alliance has already requested that the government consider cutting the current 5–10 per cent import duty to zero; the country imports drugs worth $800 billion while exporting $8.7 billion worth of pharmaceuticals.

 

Trump has signalled that the tariffs will be announced “in the near future.”

 

Even if tariffs are imposed on imports from India, our products will remain competitive. We can pass on the tariffs to US buyers — no other country matches us on cost and quality for generics,” said a senior industry executive involved in government discussions. He added that chances of relocating part of their manufacturing to the US remain “limited”.

 

If a drug costs $1 per dose in India, producing it in the US — where labour costs are about 10 times higher — would drive prices up four to five times,” he said. 

 

At a recent pharma summit, Dilip Shanghvi, Sun Pharmaceutical Industries’ chairman and managing director, said for any manufacturing operation to work well, one needs to have “some minimum volume and consistent production”. “If you don’t get that, you cannot achieve the same level of efficiency. I see multiple challenges in localisation of manufacturing (in the US),” he said, adding that most India-made products are priced between $1 and $5, which doesn’t justify relocation.

 

HDFC Securities echoed that view, calling manufacturing relocation to the US economically unviable due to high operational costs (multi-million dollars worth of investments) and lengthy construction and regulatory timelines (3-5 years to operationalise a plant). 

 

Brokerages expect Indian pharma companies to pass tariff costs to American “payors”. With Indian firms already operating on slim margins in the US generics market, analysts say absorbing the cost without passing it on to consumers would be challenging.

 

Kotak Institutional Equities (KIE) warned in a recent note that steep tariffs on pharma items, particularly on generics, may prove unsustainable, potentially leading to increased health-care costs and drug shortages in the US.

 

If proposed tariffs aren’t rolled back, brokerages felt, Indian companies may be forced to trim or even exit parts of their US portfolios after exploring other cost-passing options. HDFC Securities said higher tariffs would push up US generic drug prices, stoke health-care inflation, and trigger rationalisation of low-margin products by Indian firms — raising the risk of shortages.

 

On the flipside, if pharma tariffs are applicable to all countries, Indian pharma companies could have an edge, given their cost advantage, and could very well be the last ones standing. All in all, several outcomes are possible, with near-term uncertainty being a certainty,” the KIE report noted.

 

The US supply chain has sufficient distributor and retailer margins to absorb some cost escalation, according to pharma industry insiders.

 

The managing director of a leading Indian exporter explained that while a pharma firm may sell a drug at $1 per dose, it ultimately reaches patients at nearly $10. “We’ll negotiate with US supply chain partners to absorb some of the increase. But 90 per cent of wholesale and distribution is controlled by a handful of players, leaving limited room for talks,” he said. Multiple stakeholders — manufacturers, pharmacy benefit managers, wholesalers, retailers, and both public and private insurers — complicate the pass-through process.

 

Brokerages have modelled various scenarios. HDFC Securities estimates that if Indian firms bear 100% of tariffs, FY27E Ebitda (earnings before interest, taxes, depreciation, and amortisation) could fall 3–45 per cent for companies like Aurobindo, Dr Reddy’s, Lupin, Sun Pharma, and Zydus. A 50 per cent pass-through would reduce Ebitda by 2–22 per cent, and a 35 per cent impact would translate to 1–16 per cent erosion.

 

Companies with differentiated portfolios are better positioned to manage the shock. KIE analysts said Sun Pharma’s specialty drug portfolio may face more pressure due to already high price points, but the limited availability of substitutes could serve as a buffer.

 

One Mumbai-based analyst noted that even if tariffs of 26–30 per cent are absorbed, the impact on Sun Pharma’s Ebitda margins may be limited to 4–5 per cent, thanks to its specialty business, which accounts for about 55 per cent of US sales.

 

Aurobindo and Biocon have the highest Ebitda exposure to the US. Unlike generics — where the US heavily depends on Indian supply — biosimilars are less exposed, making it harder to pass on costs in that segment.

 

Indian generics account for about 47 per cent of drug imports into the US, totalling $8.7 billion in FY24. HDFC Institutional Research noted that exports to the US have grown at an 8 per cent CAGR from FY15 to FY24. Key Indian players — including Zydus, Dr Reddy’s Laboratories, Lupin, Aurobindo, and Sun Pharma — derive 30–50 per cent of their revenues from the US market.