The potential imposition of steep US tariffs on pharmaceutical imports has raised concerns for Indian drug manufacturers, given their significant reliance on the American market. While a tariff of 25% or higher is being discussed, no official confirmation has been made. Analysts believe such high levies are impractical, but if implemented, they could force Indian companies to reassess their US portfolios, possibly exiting low-margin generic drugs. The impact would vary across different segments, with generics, biosimilars, and specialty drugs facing different challenges. Meanwhile, API and contract manufacturing firms may have some room to pass on the higher costs.
What is the current status of the proposed US tariffs on pharmaceutical imports?
The US government is considering imposing a 25% or higher tariff on pharmaceutical imports, with plans to increase it further over time. However, no formal announcement has been made yet. The proposal is part of broader trade policies aimed at reducing the US’s reliance on imports and encouraging domestic manufacturing.
How significant is the US market for Indian pharmaceutical companies?
India is a key supplier of pharmaceutical products to the US, with exports reaching $8.1 billion in FY2024. Indian firms dominate the generics segment, supplying affordable medicines that significantly contribute to the US healthcare system. The US market is crucial for several leading Indian pharmaceutical companies, generating a substantial portion of their revenue and EBITDA.
What are the current import duties on pharmaceutical trade between India and the US?
There is currently no import duty on Indian pharmaceutical products entering the US. In contrast, India imposes a 5-10% import duty on pharmaceutical imports from the US. If the US enforces tariffs strictly based on reciprocity, India would need to lower its duties on US pharmaceutical imports. This would result in a revenue loss of less than $50 million, which is considered manageable for the Indian government.
What could be the worst-case scenario if the US imposes a 25% or higher tariff?
If the US imposes tariffs of 25% or more, Indian pharmaceutical companies may be forced to scale back their US operations. Many low-margin generic drugs would become unprofitable, leading to companies stopping sales or exiting certain product segments altogether. This situation could worsen the ongoing drug shortage crisis in the US, as Indian companies play a critical role in supplying essential generics. Setting up manufacturing facilities in the US to bypass tariffs would be impractical, given the high costs and long gestation periods involved. By the time these facilities become operational, policy changes could make them redundant.
How could Indian pharmaceutical companies respond to high US tariffs?
If US tariffs make operations unsustainable, Indian pharmaceutical companies will likely shift their focus to alternative markets, such as India, Europe, and the Rest of the World (ROW). This redirection of efforts could lead to intensified competition in these regions, particularly in the Indian market, where companies would aggressively seek to replace lost revenue. The result could be price wars as firms compete for market share.
Which pharmaceutical segments would be most affected by these tariffs?
The generic formulations segment would face the most immediate impact, as Indian companies supply a large share of the US’s generic drug needs. If higher tariffs render certain products unprofitable, firms may discontinue or scale back their US generics portfolios, reducing the availability of affordable medicines in the US.
The biosimilars segment, where companies like Aurobindo Pharma (ARBP) and Biocon (BIOS) derive 45-50% of their EBITDA from the US, would also be impacted. However, unlike generics, the US is not heavily dependent on India for biosimilars. This means that Indian manufacturers may struggle to pass on tariff-related cost increases to US customers, making this segment particularly vulnerable.
For specialty drugs, companies like Sun Pharma could face unique challenges. Since specialty medicines are already priced at a premium, passing on higher costs to consumers may be more difficult. However, some of Sun Pharma’s specialty products have limited substitutes, which may offer a degree of protection against complete sales loss.
What about the impact on API and contract research, development, and manufacturing (CRDMO) businesses?
In the API and CRDMO segments, companies like Gland Pharma, which have high exposure to the US market, would be affected. However, because these businesses operate on a B2B model, they have a higher ability to pass on increased costs to their clients. Despite this advantage, there remains an indirect exposure to tariffs, as the companies purchasing APIs and CRDMO services will also face higher costs, which could reduce demand.
Would Indian pharmaceutical companies set up manufacturing plants in the US to counter tariffs?
It is unlikely that Indian pharmaceutical companies will establish manufacturing units in the US as a response to tariffs. The costs involved in setting up facilities are extremely high, and the process takes years. Given the uncertainty surrounding US trade policies, companies may be reluctant to make long-term investments that could be rendered ineffective by future policy changes.
Which Indian pharmaceutical companies are most vulnerable to the proposed US tariffs?
Companies with high reliance on the US market will be the most affected. Aurobindo Pharma and Biocon, which generate 45-50% of their EBITDA from the US, are particularly vulnerable. Sun Pharma’s specialty drug segment could also see a significant impact due to the difficulty in increasing prices further. Gland Pharma, operating in the API and CRDMO space, may have some ability to pass on costs but would still face indirect consequences.
Despite these challenges, what is the overall outlook for the Indian pharmaceutical sector?
Analysts remain positive on the sector and expect that tariffs exceeding 10% are unlikely, as they would be impractical given their potential impact on US drug availability. Even if tariffs are imposed, Indian pharmaceutical companies have a cost advantage over global competitors, which could help them maintain competitiveness.
