Trump’s pharma tariffs would spare richest drugmakers while punishing some small ones

Donald Trump likes to talk about taking on the biggest pharmaceutical companies and bringing manufacturing home. But with his long-awaited announcement on Sept 25 to impose tariffs of 100 per cent on imported brand-name medicines, the US President appeared to have given many of the richest companies a reprieve.

Giant companies that make brand-name drugs do a significant majority of that manufacturing in either the United States or Europe. Among the best known are Botox, formulated in Ireland, as well as popular weight-loss drugs, produced in Denmark, Ireland and the United States.

Mr Trump’s 100 per cent tariff, expected to go into effect on Oct 1, would not apply to drugs imported from the European Union. Instead, most of those brand-name products from the EU are expected to be hit by a tariff of up to 15 per cent secured as part of a trade deal over the summer. It was not immediately clear when that will take effect.

However, big drugmakers like Roche, Novartis and AstraZeneca do some manufacturing in their home countries of Switzerland and Britain, which are not part of the EU. To avoid paying tariffs of 100 per cent on those products, they would most likely need to tell the Trump administration they plan to move some of that production to a factory they are building in the United States.

The highest tariffs could also apply to some brand-name manufacturing in countries like Singapore, China and India, which account for a relatively small share of the brand-name drugs Americans take.

The president announced the tariffs in a social media post on the night of Sept 25, and many of the details remained unclear. An administration official on Sept 26 said that a formal proclamation detailing the policy was likely to follow next week.

Mr Trump’s social media post said that companies would be exempted from the tariffs if they were constructing factories in the US. But the administration official said that the manufacturing exemption would not automatically apply to all of a company’s products, only for the drugs that are being manufactured in the US.

The administration official said companies would also be able to obtain an exemption from the tariffs for drugs while they were building new factories in the US. For example, if a company makes its heart disease drug in Ireland but is building a factory in North Carolina to make that drug there, it can apply to the Commerce Department for an exemption from the 15 per cent tariff during the five years it will take to shift that production.

The result is that many industry titans may mostly avoid having to pay 100 per cent tariffs, although they will probably soon have to pay up to 15 per cent on at least some of their drugs imported from Europe.

The outcome mirrors other major exemptions the president has offered to wealthy and influential companies, including his decision to exempt Apple and other tech firms from certain global tariffs, at least for now.

The tariffs on European imports could result in modest price increases for some brand-name drugs, reflected in higher out-of-pocket costs for some Americans.

Generic drugs, which account for a vast majority of Americans’ prescriptions, will be exempt from the 100 per cent tariffs and from the 15 per cent-or-less tariffs in Europe, the administration official confirmed on Sept 26.

While many raw ingredients used to make drugs come from China, the tariffs will apply to where steps later in the drug-making process were performed. Factories in India and China focus on making generic drugs, though there is also a smaller amount of production of active ingredients for brand-name drugs in those countries.

In anticipation of tariffs, the largest drugmakers have begun pouring billions of dollars into constructing or expanding factories in the US.

Big companies like Johnson & Johnson, Eli Lilly, Merck, Gilead Sciences, Roche, GSK, AstraZeneca and Novo Nordisk have recently started construction on new factories in North Carolina, Indiana, Delaware, California, Pennsylvania and Maryland.

“Overall, we think this is a win for Pharma,” analysts at Wall Street bank Jefferies wrote in a note to investors on Sept 26. Big drugmaker stocks were generally flat or up slightly that day.

For months, Mr Trump’s threats of drug tariffs have fuelled fears that American patients would be harmed by higher prices and shortages of vital drugs. But with the much more limited tariffs he announced on Sept 25, it is not clear how much of an effect Americans will see for many of the most well-known and bestselling medicines.

In particular, the tariffs could harshly punish a different kind of company: certain smaller manufacturers of brand-name drugs. These companies are unknown to most Americans and make drugs in countries like Canada or Mexico or in the Middle East. They cannot afford to spend billions of dollars on new factories in the US.

In a statement, John Crowley, president of the Biotechnology Innovation Organisation, a trade group that represents biotech companies and most big drugmakers, said the tariffs would hit “small and mid-sized” companies.

Experts said they were concerned about the potential for disruptions and higher prices for some lesser-known products made by smaller companies that manufacture overseas and cannot afford to build new US factories.

“It’s likely that the companies that will be affected are certain smaller companies that are making more niche products,” said Dr Aaron Kesselheim, a professor of medicine at Harvard Medical School and Brigham and Women’s Hospital. “That could be problematic for those particular patients.”

Giant pharmaceutical companies often have large profit margins from making the biggest blockbusters, like the world’s bestselling drug, the cancer medication Keytruda, produced and sold by Merck.

That is not always the case for smaller companies.

Facing a 100 per cent tariff, a company manufacturing its brand-name product in Canada, Mexico or the Middle East could potentially opt to discontinue those sales or sell the drug to another company.

“A smaller niche brand-name drug that does not have as high of profits as the Keytrudas and GLP-1 drugs of the world might feel more pressure,” Dr Kesselheim said, referring to the hugely popular class of weight-loss drugs. “There is the possibility that that would lead to shortages and disruptions in the supply.”

For a smaller brand-name company suddenly facing a 100 per cent tariff that cannot afford to absorb the hit, the next step is clear.

“You have to account for these tariffs and raise the price,” said Mr John Maraganore, a former CEO of a midsize drug company, Alnylam Pharmaceuticals, and a former chair of the Biotechnology Innovation Organisation. “Especially if it’s a single-product company that depends 100 per cent on that one product, that’s what you naturally do, which of course doesn’t help the American consumer.”

Mr Peter Kolchinsky, a biotechnology investor in Boston, said Mr Trump’s tariffs “might leave smaller American biotech companies at a huge disadvantage to big multinationals”. He added: “Hopefully, the final language gives them time to contract to build in the US, or we’ll lose a lot of American jobs in innovation.”

The pharmaceutical industry has a powerful, well-connected lobby in Washington. Before the tariffs, the industry aggressively lobbied to seek exemptions like the ones it secured in Mr Trump’s announcement on Sept 25.

Big drugmakers, though, are still facing other major threats from the Trump administration. Earlier on Sept 25, the administration signalled plans to try to force drugmakers to cut some US prices to the lower levels in Europe. Administration officials have also said they plan to push a regulatory change that could take drug ads off TV.

Despite their investments in new US factories, the biggest companies have no plans to stop making many of their drugs overseas. Even if they move some production to the United States, drugmakers still value having manufacturing in Europe, one of its most important markets. And now they can save billions of dollars that they had feared they would have to spend paying much higher pharmaceutical tariffs. NYTIMES