The US government’s proposal to impose tariffs on pharmaceutical imports has ignited a complex debate, intertwining economic, healthcare, and geopolitical considerations. While the initiative aims to bolster domestic manufacturing and reduce reliance on foreign supply chains, it also raises concerns about drug affordability and availability, and has broader implications for the healthcare system.
Much of the global manufacture of pharmaceuticals takes place in low tax and/or low-cost jurisdictions, meaning the US imports much of its supply – more than $200 billion worth in 2024. So, what might tariffs mean for the sector and consumers? And what are the implications for investors?
The impact of a flat tariff on imports
Increased drug prices – The cost of the tariffs would need to be borne by either the customer or the manufacturer. Although price rises are limited though certain channels – for example, Medicare price hikes are limited to the rate of inflation – companies looking to protect their profitability could look to pass as much of the tariff as possible through to the consumer.
Disruption to the supply chain for generics – Generic medicines – those whose patents have expired – account for around 90% of prescriptions filled. These medicines are manufactured and sold with very low margins. Unless the cost of the tariffs is passed directly to the consumer, there would be a very high risk of market exits and drug shortages.
Pharmaceutical industry’s response
In the short term it is likely that pharmaceutical manufacturers will look to import as much product as possible ahead of possible tariffs (Figure 1). This would postpone the impact, possibly towards the end of the year when they can renegotiate higher prices for 2026.
In theory, pharmaceutical companies have some flexibility to adjust how much profit is reported in the US when selling imported drugs, through transfer pricing. However, there are tight limits under US and international tax law that constrain this. Reporting higher profits in the US would mean paying higher taxes. However, this could be economically worthwhile depending on the tariff rate.
Avoiding this entirely would require building the infrastructure to produce drugs for the US in the US. This could only be achieved over the longer term, certainly longer than the term of the current administration. To what extent this happens remains to be seen, though the industry has been very vocal about the dollar amounts they plan to invest in the US in the coming years.
Figure 1: Exponential increase in drug inventories
US pharmaceutical imports by NAICS commodities
Source: United States Census Bureau, as of 31 May 2025. NAICS: North American Industry Classification System. This is used by federal statistical agencies to classify business establishments for the purpose of collecting, analysing, and publishing statistical data related to the US business economy.
The crux of the issue
The main imbalance for the industry isn’t really where the drugs are manufactured, but rather how much consumers pay for them. For branded pharmaceuticals, the list price in the US is often a multiple of what other countries pay. It is ironic that using tariffs to try and address the trade imbalance would likely only raise the price for US consumers.
Reducing prices and flattening this differential would be a real win politically. Branded pharmaceutical manufacturers are keen to point out that they only receive around 50% of the list price in revenues; the rest is taken by the system, hence the focus on targeting industry ‘middlemen.’ The other solution would be for the rest of the world to pay more, though this would be a politically difficult and sensitive issue. President Trump’s recent executive order on ‘most favoured nation’ pricing looks to move the conversation in this direction, but how this would be implemented remains unclear.
The bottom line
Whatever the final tariff plans look like, this is a multifaceted issue with significant implications for the economy, healthcare system and international trade relations. While the goal of enhancing domestic manufacturing and reducing foreign dependency is commendable, careful consideration must be given to the potential adverse effects on drug affordability and availability, and the broader healthcare infrastructure.
Collaborative efforts between policymakers, industry stakeholders, and international partners will be crucial in navigating this complex landscape to ensure that the intended benefits do not come at the expense of patient care and global cooperation.
As investors, the changing landscape and increasing headline risk can make for a bumpy ride. Focusing on the pharmaceutical businesses with the best product portfolios and development opportunities will continue to be the best starting point for successfully picking winners, regardless of the political backdrop.
