Tariffs Hit Pharma Hard

The Trump administration's proposed tariffs on a wide variety of imports from China include a lengthy list of chemicals used in the specialty chemical, fine chemical, and pharmaceutical industries. The proposed tariffs apply directly to some common drugs like lidocaine and insulin, and vaccines for human and veterinary use. They also apply to a broad range of specialty and fine chemicals used as starting materials, and chemicals used in prescription drug manufacturing.

Many APIs are produced in China Exclusively

Approximately 90 percent of all prescriptions written are for generic drugs. For years, downward pricing pressure on generic drugs has precipitated a move to outsource production to other parts of the globe where labor savings can be achieved. India and China have been the primary beneficiary of this movement although quality problems at facilities in India have led to a greater reliance on active pharmaceutical ingredient (API) manufacturing in China. In many cases, Chinese manufacturers have become the sole global supplier of many APIs used in over-the-counter (OTC) products, such as headache and cough and cold remedies.

Tariffs on Specialty Chemicals and Fine Chemicals Add to Pain for Pharma Sector

While APIs present a major cost factor for all generic medicines, they are by no means the only cost driver. Excipients, binders, coatings and a variety of other specialty and fine chemicals are needed as starting materials in pharmaceutical manufacturing processes. Tariffs on these chemicals will only add to cost factors and will force increases in prescription and OTC retail drug prices.

Finding New Suppliers Outside of China Will Be Costly and Time Consuming

For chemical manufacturers finding new suppliers can be a challenge, but finding suppliers, qualifying the new supplier facility and raw materials in the pharmaceutical sector can also be very expensive and time consuming. The highly regulated nature of this industry requires that all such changes in suppliers receive prior approval from the FDA and other world regulators.  Revising or initiating new Drug Master Files and amending Abbreviated New Drug Applications to document these changes can easily cost hundreds of thousands of dollars and take months to years to accomplish. New quality agreements with new suppliers will need to be put into place. FDA reviews, approvals and inspections will also add to the time it takes to shift production to new suppliers. The time required to make these changes will almost certainly lead to short-term and possibly long-term drug shortages for some of the drugs impacted by these proposed tariffs.

Tariffs on Specialty Chemicals and Drug Substances Don't Protect U.S. Industries

Most U.S. drug manufacturers don't directly compete with foreign-made (mostly China and India) generic drugs, especially those drugs most impacted by the proposed tariffs, and thus will not benefit from the "protectionism" the tariffs are meant to impart.  Most U.S. API manufacturers generally choose to compete in specialty drug manufacturing, where the increased manufacturing costs in the U.S. are offset by other cost factors.  Thus, the proposed tariffs will not benefit the U.S. drug manufacturing industry and will simply lead to an increase in costs of generic and OTC drugs paid for by U.S. consumers.

The Bottom Line

If the proposed tariffs on chemicals and pharmaceuticals are ultimately enacted there will be an impact on the consumer marketplace. Increased costs associated with costlier ingredients will surely be passed along to consumers. In cases where more bulk APIs become cost prohibitive, pharmaceutical companies will reevaluate the profitability of many drugs. If generic drug manufacturing becomes cost prohibitive we can expect to see further industry consolidation, potential off-shoring, and an increase in drug shortages. With drug pricing already an important issue facing U.S. consumers, new tariffs could pose a significant impediment to bringing drug costs down for U.S. patients.

If the proposed tariffs are truly just a ploy in negotiating more favorable trade practices with China consumers may ultimately reap broad economic benefits. If not, there will be considerable pain ahead for those in the pharmaceutical industry and more costly prescription and OTC drugs for U.S. consumers.

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