Trump says ‘major’ tariffs on pharmaceuticals are imminent, manufacturing to return to US
Despite getting a reprieve from reciprocal tariffs announced last week, President Donald Trump on Tuesday doubled down on his threat to target the pharmaceuticals industry with tariffs meant to bring drug manufacturing back to the U.S.
“We’re going to be announcing very shortly a major tariff on pharmaceuticals,” Trump said on Tuesday night at a National Republican Congressional Committee dinner. “And when they hear that, they will leave China. They will leave other places because they have to sell — most of their product is sold here — and they’re going to be opening up their plants all over the place in our country.”
Trump in his remarks also noted the high prices for prescription drugs in the U.S. compared to other countries. In some cases, he said Americans are paying 10 times more for the same drug “made in the same factory by the same company.”
With his tariffs on pharmaceuticals, Trump predicted that drug manufacturers “will come rushing back into our country because we’re the big market.”
Adding fuel to the fire, Reuters reported European pharmaceutical companies warned European Commission President Ursula von der Leyen at a meeting on Tuesday that Trump’s tariffs would expedite the industry’s shift away from Europe toward the U.S.
However, BMO Capital Markets analysts in a Wednesday note to investors said that tariffs “will likely do little to shift manufacturing back to the U.S.,” given that there is currently “robust” existing domestic infrastructure. “We do not expect the industry to make any major changes,” according to BMO.
Despite Trump’s push for tariff-driven reshoring, Leerink Partners analysts argue “regionalization is a stronger theme” in the current trade environment, with global pharma players “designing supply chains for local-for-local execution” in Asia Pacific, Europe, and North America. For years now, they say large pharma companies and contract development and manufacturing organizations (CDMOs) have put in place strategies for regional redundancy and capacity distribution to deal with the threat of such tariffs.
During a Tuesday morning webinar on tariffs, William Blair analyst Max Smock said that pharmaceutical companies have “been moving that way” for quite some time now. However, Smock thinks the reshoring narrative is “very real” and a potential tailwind for global CDMO Lonza “given its significant presence in available capacity in the U.S.”
Smock noted Lonza’s acquisition last year of Roche’s large-scale mammalian drug substance biologics facility in Vacaville, California. “We believe the company is very well-positioned to benefit from increased demand for U.S. manufacturing capacity moving forward,” he said.
While Eli Lilly and Johnson & Johnson have recently announced significant manufacturing investments in the U.S., Smock said reshoring “will not happen overnight” and will take potentially years to build up domestic capacity.
Smock said if Trump’s recent threats of 25% or higher pharma-specific tariffs are imposed there will not be a “material direct” impact on most pharmaceutical outsourcing and services companies.
At the same time, he made the case that “since tariffs would pressure margins for commercial drugs and likely make developing drugs more expensive, the taxes could potentially discourage investments in research and development, which in turn would lead to a more challenging demand environment.”
Negative potential impacts on the horizon
During Tuesday’s webinar, Smock pointed to an interview last week in which Eli Lilly CEO David Ricks said pharmaceutical companies will “have to eat the cost of the tariffs” and make tradeoffs. “Typically, that will be reduction in staff or reduction in R&D spending. I predict R&D will come first — that’s a disappointing outcome,” Ricks told the BBC.
While Lonza will be somewhat negatively impacted by a slowdown in R&D spend, Smock said that the CDMO generates most of its revenue from commercial drugs and the company would be “relatively insulated” from tariffs on pharmaceuticals.
Smock noted that although Lonza’s Capsules & Health Ingredients (CHI) business has “some direct exposure to tariffs already rolled out” by Trump, which represents about 15% of total revenue, the company “manufactures most of the product” in the U.S. and Mexico “which are tariff-free.”
Ricks in last week’s BBC interview said that while Trump’s tariffs on pharmaceuticals may potentially encourage some drug companies to reshore manufacturing to the U.S., whether it raises hundreds of billions in additional revenue for the Treasury remains to be seen.
“It’s a complicated analysis to say the government will collect more money,” Ricks said.
Smock contends that the “brunt” of the impact of pharmaceutical tariffs will likely be felt by Big Pharma but said “it would also add to a large pile of unsettling news creating uncertainty around biotech funding and ultimately demand for smaller innovators.”
When it comes to biotechnology, a final report to Congress was released on Tuesday by the bipartisan National Security Commission on Emerging Biotechnology (NSCEB), which found that the U.S. lacks biomanufacturing capacity to ensure it maintains global dominance over China in the biotech industry.
To help bolster domestic biomanufacturing capacity, NSCEB’s report recommended the U.S. government invest a minimum of $15 billion over the next five years in America’s biotech sector.
Testifying in a Tuesday hearing before the House Armed Services Committee, Sen. Todd Young (R-Ind.), chair of NSCEB, said biotech “will reshore supply chains and revitalize our manufacturing sector, creating American jobs for American workers creating American products here in our country.”
However, Jefferies analyst Michael Yee in a Tuesday note said investors are struggling to decide whether NSCEB’s report — and any legislation that Congress might propose based on its recommendations — is good or bad for the U.S. biotech industry.
“We [continue] to think (+) incentives (lower corporate tax rates, longer patent lives, longer time to IRA negotiation etc) could be a part of future legislation but acknowledge there could be tough times ahead for biotech companies with dependency on China-based CDMOs/CMOs if legislation requires onshoring manufacturing to promote supply chain independence,” Yee wrote.