By Gina Shaw
The sweeping tariffs on all U.S. trading partners announced by the Trump administration on April 5 are likely to have a significant impact on the country’s pharmaceutical supply chain, particularly in the generic space, and could exacerbate existing drug shortages, experts say. The order imposes a 10% tariff on all countries, as well as individualized reciprocal higher tariffs on the countries “with which the United States has the largest trade deficits.”
“We’ve had a lot of calls from pharmacy leaders asking about what we anticipate, and what we think they could be doing to prepare,” said David Hager, PharmD, the managing director at Visante. “It’s been challenging for health systems to know at what level of concern to place this. How worried should they be, particularly from a drug shortage perspective? Many experts are saying that we should expect some supply chain impact, particularly in the injectable generic product space, because it doesn’t take much disruption for there to be an effect. We’ve seen that with notable natural disasters impacting singular production facilities.”
The administration announced a 90-day “pause” on some of the tariffs on April 9, but on April 10 reported that tariffs on China alone would be 145%, not the 125% it had previously indicated. And that unpredictable state of affairs has made things even more challenging, Dr. Hager added. “The situation on the ground is constantly changing, so it’s hard to act in this space. The one consistent thing that we’re seeing is that the pace of change is causing health systems more concern; they don’t know where things are going next.
Sector-specific tariffs for pharmacy were not included in the April 5 order, which Trump claimed the authority to impose under the International Emergency Economic Powers Act of 1977, and which specifically included pharmaceuticals under a list of products that would not be subject to the reciprocal tariffs. However, that exemption only applies to finished dosage forms and active pharmaceutical ingredients (API), said Tom Kraus, MHS, JD, the vice president for Government Relations at ASHP. “Reciprocal tariffs will still apply to key starting materials, like the bulk chemical stock that form the foundational ingredients of API, as well as the excipients, the inactive components of the medications that are used in their manufacture. Those are not exempt.”
For branded drug manufacturers, tariffs could increase their costs by a small amount, but those core base ingredients don’t contribute substantially to the overall cost of making a given drug. (There’s also some ambiguity about whether finished dosages and API are still covered by the across-the-board tariffs, Mr. Kraus noted.) “Generic manufacturers, on the other hand, have a very low margin, and the price of a generic drug very closely follows the cost of its production,” Mr. Kraus said. “That means they will be much more sensitive to these increased costs; a brand manufacturer might be able to absorb those, but a generic manufacturer can’t do that because they don’t have the margin, particularly in sterile injectables.”
When a significant cost increase—such as a tariff—hits a generic manufacturer, it will likely need to increase its prices to pass that cost on. “But they are somewhat boxed in, because in the U.S., we have inflation penalties. At least in the Medicaid program, if you increase your drug cost faster than the rate of inflation, you must pay a penalty to the government,” Mr. Kraus explained. “You may also have GPO [group purchasing organization] or distributor contracts that limit you on price for some period of time.”
This means, he continued, that “your costs go up, but you may not be able to raise your prices, so your choices are to lose money on those drugs or exit that market. That’s what we’re particularly concerned about: For certain generic manufacturers whose profitability of a given drug is close to the edge, this is the kind of thing that can push them over the edge and cause them to cease manufacturing that drug.”
Generic pharmaceutical manufacturers are very concerned about the impact of the tariffs, agreed Milena Sullivan, the senior vice president and head of healthcare policy practice at Avalere Health. “Generic drug companies have more complicated supply chains and source a lot of their ingredients outside the U.S., in particular India and China,” she said. “Given all the challenges that they have already been experiencing, including some that started during the pandemic and were never fully resolved, as well as pricing pressures from U.S. market dynamics, many manufacturers were forced to leave the market and left the supply focused on a smaller subset of companies. Adding tariffs on top of that will certainly further exacerbate the situation.”
At least one leading dispenser of generic drugs has warned that tariffs will mean price hikes on many generic drugs. “If we have a high tariff on drugs coming from India, we won’t have a choice but to pass those costs on to consumers,” said Mark Cuban, whose Cost Plus Drug Company sells generic medications at a fraction of the retail price, speaking on the “Somebody’s Gotta Win with Tara Palmeri” podcast.
‘The Pressure Will Continue’
The broader pharmaceutical industry is also not necessarily breathing a sigh of relief just because it was carved out of the April 5 reciprocal tariff announcement, Ms. Sullivan added. “They do expect that the pressure will continue to be on.”
Indeed, at a National Republican Congressional Committee dinner on Tuesday, April 8, Trump doubled down on earlier pledges to impose heavy tariffs on imported pharmaceuticals: “We’re going to be announcing very shortly a major tariff on pharmaceuticals,” he said. “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,” he claimed. And a fact sheet issued to accompany the April 5 tariff order noted, “The need to maintain a resilient domestic manufacturing capacity is particularly acute in advanced sectors like autos, shipbuilding, pharmaceuticals, transport equipment, technology products, machine tools, and basic and fabricated metals, where loss of capacity could permanently weaken U.S. competitiveness.”
Retaliatory export restrictions from countries on whom the United States relies for pharmaceutical supplies, such as India and China, could also contribute to increased drug shortages, Mr. Kraus added. “We have seen China use export restrictions in rare earth metals, so if they did something similar in pharmaceuticals, that could be very problematic.”
ASHP strongly supports domestic manufacturing of API, prescription drugs and medical supplies as essential to a strong medical supply chain, Mr. Kraus noted. “We actually do think there is a national security risk in being so dependent on other countries, particularly China, for these products. There’s a real need to diversify supply chains. But we believe that is better achieved through carrots rather than sticks, such as grants and tax credits to create incentives for domestic manufacturing rather than penalizing foreign manufacturing.”
Dr. Hager agreed. “Many health-system pharmacy leaders that I've talked to throughout the years have said more domestic production, particularly of generic API, would be good for stability and good for patients. But the question is whether tariffs are the best vehicle to drive that.”
The sources reported no relevant financial disclosures.