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Long-standing trade agreements have largely sheltered the pharmaceutical industry from tariffs but President Donald Trump’s goal of bringing manufacturing back to the United States has put the industry in the administration’s crosshairs.
Trump first floated the idea of imposing tariffs of as much as 25% on imported pharmaceuticals in mid-February. Since then, he has repeated the idea and hinted that details would arrive in early April. Now, however, it’s unclear whether an update will be forthcoming on Wednesday, when many expect reciprocal tariffs to be unveiled, or if a drug announcement lies further out.
If tariffs are put in place, it will be a big change for the industry. A 1994 World Trade Organization agreement eliminated levies on a whole swath of pharmaceutical products and the substances used to make them. This gave rise to companies pursuing a host of business strategies aimed at lowering tax rates.
“This is largely due to low tax rates in these countries,” Wells Fargo analyst Mohit Bansal said. “These companies pay lower overall taxes due to these manufacturing operations and oftentimes [intellectual property] is also domiciled in these countries, lowering taxes even further.”
Ireland has been a huge beneficiary of this practice, and that hasn’t been lost on Trump. Meeting with Michéal Martin, the Irish premier, at a St. Patrick’s Day event at the White House in mid-March, Trump said the Irish were “smart people.”
“You took our pharmaceutical companies and other companies. … This beautiful island of 5 million people has got the entire U.S. pharmaceutical industry in its grasps,” Trump said.
‘Underappreciated’ risks
Leerink Partners analyst David Resinger warned his clients on Sunday that tariff risks to the industry are “underappreciated.”
“Although corporations can make adjustments to mitigate the negative impact of tariffs, it could take some time given the complexities of global tax strategies and supply chains and uncertainty related to the durability of tariffs (since President Trump can change his mind),” Resinger wrote.
Analysts warn that it is difficult to fully assess the tariff risks based on the available information. However, Bernstein analysts led by Courtney Breen did try to connect the dots based on manufacturing locations, revenue, cost of goods sold, ocean shipping data, tax rate guidance and other data, and expects that Merck, AbbVie, Amgen, Pfizer are among the companies facing the highest risks. Eli Lilly, Gilead, Bristol Myers Squibb and Moderna have “more moderate risk,” she said.
Merck shares year to date
Breen expects Merck and AbbVie have more at stake due to their import volume and the likelihood that tariffs will result in a higher cost base. Bernstein rates both stocks market perform, the equivalent of a hold or neutral opinion.
Jefferies analyst Michael Yee called out Amgen and Biogen as having the greatest exposure in his coverage universe.
“AMGN has manufacturing operations in Ireland and Singapore, which results in a benefit to their effective tax rate of -6%,” Yee said. “BIIB also has a benefit to their effective tax rate of -8% due to taxes on foreign earnings.”
Amgen shares year to date
Vertex and Gilead would have less exposure to higher tariffs, he said. The two companies have the bulk of their intellectual property (IP) domiciled in the U.S., at a higher tax rate, according to analysts.
Both stocks have enjoyed a strong run. The pair are each up more than 20% year to date. While the majority of analysts rate Vertex a buy, the average price target suggests upside of only around 3%, according to LSEG. Gilead shares also may be fully valued, according to analyst price targets. The average target suggests shares could fall maybe 1%, as of Monday’s close.
Investors aren’t necessarily shying away from the stocks that appear most at risk from policy shifts. Amgen shares have outperformed the market, with a gain of just under 20% so far this year, while AbbVie is up about 18% through Monday’s close. But both Biogen and Merck are down 10% each over the same period.
‘Prevalent cross-border movement’
Geoff Meacham, an analyst at Citigroup who covers the large-cap pharma industry, doesn’t expect to see an outsized impact on any one company. His analysis showed eight of the 12 companies he covers have manufacturing in Ireland.
“Cleverly, the global manufacturing supply chain is highly leveraged with prevalent cross-border movement,” Meacham said. He created a table that shows the amount of revenue companies generate in different geographies, but warned it’s “unlikely to accurately portray the net impact” of changes in trade policy.
That’s because other details will factor into the calculations, analysts say.
“Key questions are what exactly the tariffs would apply to; assuming these would be on the low-cost drug substance being imported, the effects would likely be minimal given generally very high gross margins across the space, though tariffs pegged closer to drugs’ list prices and/or designed to offset offshore IP tax advantages could be more impactful,” said RBC Capital Markets analysts, led by Brian Abrahams. “Generally speaking, companies with more ex-U.S. IP and manufacturing would be more exposed.”
The JPMorgan U.S. BioPharma research team echoed this.
“On a simplistic level, the sector’s [cost of goods sold] average ~20% of sales and ~65% of sales are generated in the U.S — if tariffs are somewhat tied to actual manufacturing expenses, these should inherently be manageable for the sector,” analysts led by Chris Schott wrote in a research note.
A phased-in approach
On Tuesday, Reuters said that the pharmaceutical industry is pushing for any tariffs to be applied gradually. The report cited people who are familiar with the industry’s talks with the Trump administration.
Industry trade group PhRMA told the news service that it can take 5 to 10 years and $2 billion to open a new manufacturing plant in the U.S. Drug manufacturing has to meet various regulatory requirements, which can take time to clear, they said.
Some companies are ahead of the game, having recently announced plans to boost manfacturing capacity in the U.S., including Eli Lilly, Johnson & Johnson, AstraZeneca and GSK.
But Morningstar analyst Vikas Munjal said bringing production back to the U.S., in a process known as “reshoring,” may not be economical for all companies and products, especially low-margin generic drugs.
“Given the critical nature of these products and inelastic demand, we expect drug manufacturers to pass on most of these additional costs to end-users, which would mean patients, medical insurers and healthcare providers,” Munjal said.
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