Trump’s indication to impose 25% tariff on pharmaceutical imports into the US sent the Nifty pharma index slumping 3% in early trade, although it recovered to close about 0.7% lower on Wednesday.
Stocks of large generic drug manufacturers also went on a downward spiral. Shares of Aurobindo Pharma, Dr Reddy’s, Zydus Lifesciences and Sun Pharma, which have strong presence in the US, slipped by up to 9.5%, 5.8%, 4.8% and 3.2%, respectively, in intra-day trading.
The uncertainty was fuelled by the heavy dependence on US exports for top Indian drug makers, which garner anywhere between 30% and 50% of their revenues (see chart) from the American market. Also, the US is India’s largest export market for pharmaceuticals. In FY24, of the country’s overall pharma exports of $27.9 billion, $8.7 billion or 31% were to the US, according to industry body Pharmexcil (Pharmaceuticals Export Promotion Council of India).
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Trump on Tuesday said he was considering imposing tariffs “in the neighbourhood of” 25% for automobiles and at least that for semiconductors and pharmaceutical products. He further indicated that tariffs would go “very substantially higher” for chips and drugs over the course of the year. While he said more details would be provided for auto tariffs after 2 April, he did not specify a timeline for pharmaceuticals.
“If levied, which we don’t hope for, [it] would result in value erosion of approximately $2.25 billion for all exporters selling fixed dose formulations in the US,” Namit Joshi, chairman of Pharmexcil, told Mint.
“Assuming that [manufacturers] are not able to pass on the tariffs to the final consumers or distributors, then they may have to be absorbed by them, which means there will be an impact on their profitability,” Shrikant Akolkar, vice president and pharma analyst at Nuvama Institutional Equities, told Mint.
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To be sure, there are a few factors in India’s favour. The US itself depends on India for almost half of its generic drug imports, and any gap created by a fall in imports is unlikely to be immediately met by local drug makers. Generic drugs are inexpensive versions of high-cost patented medicines innovated and manufactured by Big Pharma companies, which are mostly US- or Europe-based, and are crucial for people who cannot afford the expensive patented variety.
Plus, there is recognition that if 25% tariff is uniformly levied, it might harm other countries more than India since the latter has lower-cost manufacturing. “There is a level playing field when the tariffs are imposed across all the countries. So, the advantage will remain,” Akolkar said.
Industry experts are also hopeful that the recent warmth in India-US ties would help India’s case.
Likely impact
The US has historically been one of the most significant markets for Indian generics drugmakers. Over 45% of generics and 15% of biosimilars by volume in the US originate from India, given the country’s low-cost manufacturing that ensures affordability. (Biosimilars are similar but not identical copies of original biologic medicines, which are already FDA-approved.)
Should tariffs be imposed, Indian companies are expected to pass on the cost to the consumers, as indicated by India’s largest drugmaker Sun Pharma’s managing director Dilip Shanghvi recently at a media summit. He also said he was hopeful that generic products would be spared. “I’m not seeing a significant negative impact of the tariff on the industry…the competitive advantage that we have as a country is long term,” he said.
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While leading Indian exporters do have a manufacturing presence in the US, it is too small to have any significant impact. “It may not move a needle for them in terms of [avoiding] the tariffs,” Akolkar said. It would also be unviable for companies to move a larger chunk of production to the US, as this would significantly impact profitability.
Indian companies’ US facilities
Meanwhile, Indian manufacturers are banking on their facilities in the US to mitigate the impact, with many addressing this in earnings calls with investors in the past few weeks even before Trump’s statement came through.
“The last three years, we have been setting up facilities in the US,” Cipla managing director and global CEO Umang Vohra said. “There will come a time when we begin to understand the economics of shipping straight from India and having potential duties or whatever and the freight with it, linking up with what the cost of manufacturing and supplying from the US is. So, in some ways our model is de-risked to a large extent for our portfolio.”
Like Sun Pharma’s Shanghvi, Vinita Gupta, CEO of Lupin, is also hopeful that generic drugs would be exempted from the tariff. “If it’s otherwise, we’ll be looking at other ways and means of mitigating the impact with a combination of manufacturing in the US as well as wherever possible, from a cost perspective and otherwise,” Gupta told investors in a call last week.
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“There’s nothing that we believe is going to be a challenge for us,” Swami Iyer, CEO, North America of Aurobindo Pharma, said in the company’s Q3 earnings call. “We would continue to import from India and competitors would be in the same state as we are in,” he said, adding that the company has built up good infrastructure in the US not just as a mitigation strategy.
“We have a Dayton plant that’s coming up and we also have the Puerto Rico plant, which we can commercialize very soon with short notice. So, we believe that we are well geared up to meet any challenges that come up as far as the US market is concerned,” Iyer added.
US to be hit, too
There is not much appetite in the US for local manufacturers to pick up the slack if imports are hit and heavy tariffs would, therefore, be inflationary, according to a note by Prashant Nair, lead pharma and healthcare analyst at Ambit Capital.
While there would be no tariffs on domestic manufacturers in the US, there isn’t enough capacity to meet the country’s demand. Apart from Viatris, previously Mylan, there is no leading US player in the generics space.
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It would take a minimum of three years to set up production capacities and start manufacturing in the country, Akolkar added.
Ultimately, these tariffs would have a significant negative impact on American consumers and the healthcare system as well. Indian industry bodies are banking on this and the bilateral relations between the two countries to avoid the tariffs.
India-US ties
There is also hope that the recent warmth in India-US ties would help.
“India and the US share a long-standing, collaborative partnership in healthcare. We are confident that continued dialogue among stakeholders will help address the subject. Ensuring the continued availability of affordable medicines remains a shared priority for both nations,” Sudarshan Jain, secretary general of the Indian Pharmaceutical Alliance said in a statement on Wednesday.
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“India’s Union Budget has reinforced a reciprocal approach by extending basic customs duty exemptions on 37 life-saving medicines and PAPs (patient assistance programs), facilitating affordable access to critical therapies in India. In the same spirit, no new tariffs should be imposed on pharmaceutical products exported from India to the United States,” Pharmexcil said in a note.
