What to expect from pharmaceutical tariffs

The on-again, off-again tariffs on imported goods imposed by the Trump administration are dominating the news.¹ And although imported drugs have so far been excluded from new tariffs, the pharmacy world needs to pay close attention, because tariffs could be coming to imported drugs very soon.²   

There are two initiatives in play here:

1. The first is (or will be) sector-specific tariffs on imported pharmaceuticals.³ 
2. The second (already announced) aims to facilitate moving drug making plants back to the U.S. by streamlining the regulatory requirements that govern these projects.⁴ 

We can think of these policies as working in tandem toward the same goal. First, when implemented, the drug tariffs would make it harder for drug makers to import foreign drugs at a profit. Then, the deregulation incentives would make it easier for pharma companies to build new plants here in the U.S.⁵ 

There’s no question that the U.S. imports a lot of foreign-made drugs and drug precursors. Nor is this a new concern. The federal government has been actively trying to restore the domestic drug manufacturing base for years, especially in the wake of the Covid-19 pandemic.⁸ 

In 2024, the U.S. imported $213 billion worth of medicines, including $127 billion from Europe, $7.8 billion from China, and $4.3 billion from India.^{9, 10} But the simple dollar figures vastly understate our reliance on foreign drugs.

For example, about 91% of all prescription drugs used in the U.S. are generics. But out of the top 100 generic drugs, 83 have no U.S.-based source for their active pharmaceutical ingredients (APIs).¹¹ 

Of course we don’t know yet whether or how high the administration will raise tariffs on imported drugs. But looking at past statements, we do know that the president has repeatedly referenced a 25% tariff on pharmaceuticals.¹²

If 25% is indeed the number, a recent study from Ernst & Young found that it would increase U.S. drug costs by nearly $51 billion per year. And while tariffs are only one component of drug prices, the report calculates that prices could increase by nearly 13% if the tariffs were all passed on to plan sponsors and consumers.¹³ 

There are other practical effects that would stem from higher tariffs, with different effects for brand versus generic drugs. Let’s look at generic drugs first.

Generic drugs

The most important thing to know is that the generic drug market is a highly competitive, low margin space. This makes generic manufacturers uniquely vulnerable to higher tariffs. 

For example, a bit less than half of the generic drugs prescribed in the U.S. come from India. If India is hit with a 25% tariff, all the additional cost would have to be passed on to plan sponsors and patients, since the thin profit margins for generics makes it impossible for them to ‘eat’ any additional costs.¹⁴  

In addition, just given the cost of labor and materials, the cost to build a new facility in the U.S. would be much higher than in India or China. Don’t forget, there is already a new 50% tariff on imported steel and stainless steel, which are critical for these plants.¹⁵ 

Now consider the on again/off again nature of the tariff announcements in terms of the 3-5 years it can take to construct a new plant. Generic manufacturers may well wonder whether tariffs will last long enough to make their investment pay off.¹⁶ 

The net result is that it’s unlikely that generic manufacturers will build new capacity in the U.S. just because of tariffs. However, they may leave the U.S. market because of their inability to pass through the costs of tariffs.¹⁷   

Brand-name drugs

The situation is different for brand-name drugs. With no generic competition, branded drugs have a lot of pricing power – and the profit margins that come with it. Since the cost of materials is so low relative to price for branded drugs, there’s little reason to make them in China or India.¹⁸ That’s why, as we’ve seen, more than half of branded drugs are already made in the U.S.  

However, countries like Ireland have made it their business to offer attractive tax regimes for pharmaceuticals.¹⁹ Consequently, we import more than three times the value of drugs just from Ireland as from China and India combined.²⁰ 

In theory, assuming a blanket 25% tariff, a $10,000 drug that uses an active pharmaceutical ingredient made in Europe could owe a $2,500 tariff. But in general, analysts do not expect to see that translated into dramatically higher prices for branded drugs over the short to mid-term.²¹ 

There are several reasons why a manufacturer might be prevented from or might choose not to pass on that extra cost.  

For example, there are already Medicaid and Medicare inflation rebates, where manufacturers must refund the government if their prices rise faster than the consumer price index (CPI). Competition is another factor, even for patent-protected drugs, if another drug performs similarly.²²

As a practical matter, drug makers see little cause to think that new manufacturing plants will be ready any time soon. One simple reason why is that most of the regulations that govern new drug plant construction are local and state laws – not federal. So the new onshoring executive order will have little effect.²³   

Also, at least some manufacturers are connecting the dots between the mass layoffs at the U.S. Food and Drug Administration and the multitude of inspections and sign-offs required to launch a new drug factory. (These are the inspections related to producing the drugs, as opposed to just building the plant.) 

As the CFO from Novo Nordisk recently remarked "…clearly we're noting the downsizing of the FDA".²⁴

While the tariffs being proposed create additional costs for importing products, they do not address the cost of relocating or building pharmaceutical manufacturing capacity in the U.S. These costs can range well above $1 billion per plant.^{25, 26} 

Previous administrations have tried to address this with various incentive plans. And analysts believe a balanced approach to onshoring will require thoughtfully designed incentives, in addition to tariffs.²⁷

A Brookings Institute study concludes that we may well see significant onshoring in branded drugs. But generic drugs, thanks to their very different economics, almost certainly will not.²⁸  

For generics, higher tariffs may prove so burdensome that manufacturers will either leave the U.S. market, stop making certain low-demand drugs, or cut corners on quality to a dangerous degree. New or worsening shortages for things like sterile solutions or injectable chemotherapies are very possible.²⁹   

We have seen a flurry of announcements from pharmaceutical makers saying that they are now planning to invest billions in U.S.-based manufacturing capacity. Just since February, major drugmakers have promised more than $200 billion worth of new investments in the U.S.³⁰ 

However, things may not be as they appear. For example, the Swiss firm Roche Pharmaceuticals recently announced plans to spend $50 billion on new U.S. manufacturing plants and other facilities. But shortly after the new Most Favored Nation executive order on drug pricing was issued, Roche said that policy could weaken their financials and cause them to cancel their plans.³¹ 

Therefore, we may need to wait until there are actual bulldozers moving dirt to see how many of these plans are real. Before then, observers believe that at least some of the announced investments are intended more as a tool for companies that hope to negotiate their way out of tariffs.³² 

The real question is this: How much of the U.S. drug supply needs to be made here? Some of it? All of it? 

As noted, this is a long-standing issue. Many people who have studied the matter believe that if we want a resilient and reliable drug supply, a mix of foreign and domestic manufacturing provides a level of redundancy and flexibility that just one or the other can’t.^{33, 34}

This is a situation that calls for the full range of capabilities that only a full-service pharmacy benefit manager (PBM) can offer. Plan sponsors need a broad, flexible portfolio of seamlessly connected strategies and solutions to drive better outcomes and lower total cost. 

Optum Rx will partner with you to figure out the right approach, identify savings opportunities and manage costs in a way that meets your unique needs, and those of your members. 

For example, your Optum Rx representative can help you leverage predictive analytics to model potential cost increases, define drug utilization trends and flag high-cost therapies in your plan. They can guide strategic discussions around benefit design, for example tiered formularies, that may offset some costs. 

At the same time, you can expect Optum Rx to explore relationships with manufacturers that may be less exposed to tariffs, to help stabilize supplies. Finally, we can help educate members about generic drug options, therapeutic alternatives, or patient assistance programs that can help members keep their medicines affordable. 

Contact your Optum Rx representative to learn more.