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The potential imposition of tariffs by the United States on imported pharmaceutical products has sent ripples of concern through the Indian pharmaceutical sector. India is a major global supplier of generic drugs, with a significant portion of its exports destined for the US market. President Trump's proposal, while primarily aimed at countries like Ireland and China, casts a shadow of uncertainty over Indian pharma companies that have substantial exposure to the US. The core issue revolves around whether these companies will be able to absorb the added costs associated with tariffs or if they will be forced to pass them on to consumers in the form of higher drug prices. This decision has significant implications for both the companies themselves and the overall accessibility of affordable medications in the US. India currently levies import duties of up to 10% on drugs imported from the US, with some drugs enjoying a lower duty of 5%, while approximately 150 drugs are exempt from such duties. This existing tariff structure forms the backdrop against which the potential US tariffs are being considered. Foreign brokerage firm Jefferies suggests that any reciprocal tariffs imposed by the US on Indian medicines would likely be capped at 10%. The firm anticipates that pharmaceutical companies will attempt to pass on any tariff increases to various stakeholders within the healthcare payment system. However, if these costs cannot be successfully passed on to end patients, the entire supply chain will be forced to absorb a portion of the impact. This supply chain involves key players such as retailers, distributors, formulation manufacturers, and suppliers of active pharmaceutical ingredients (APIs) or key starting materials (KSMs). Jefferies further categorizes different segments within the pharmaceutical industry based on their vulnerability to potential tariffs. They believe that generic formulation players and contract manufacturing organizations (CMOs) are at a higher risk due to intense competition in these segments. Conversely, other segments like contract development and manufacturing organizations (CDMOs) and contract research organizations (CROs) are deemed less vulnerable because of their cost-plus business models and the nature of their fee-for-service arrangements, respectively. The report specifically highlights Zydus Lifesciences and Dr. Reddy's Laboratories as companies with the highest exposure to potential risks. These companies derive approximately 45% and 43% of their sales from the US market, respectively, making them particularly susceptible to any negative impact resulting from tariff implementation.
The Jefferies report provides a detailed breakdown of how different Indian pharma stocks could be affected by the imposition of US tariffs. The report categorizes companies into high-risk, moderately affected, and lower-risk groups based on their business models, US sales exposure, and product portfolios. High-risk stocks primarily include generic drug manufacturers and CMOs. These companies are particularly vulnerable due to the intense pricing competition within the generic drug market and their significant reliance on US sales. Zydus Lifesciences, with 45% of its sales coming from the US, is identified as being at high risk due to its major revenue stream derived from oral solid dosage (OSD) formulations in the US market. This makes it significantly exposed to potential tariff impacts. Dr. Reddy's Laboratories, with 43% of its sales from the US, faces particular challenges because over 25% of its US sales are from injectable drugs, a segment where pricing pressures could intensify. Gland Pharma, as a CMO with 54% of its sales from the US, is also classified as high-risk. A significant portion of its revenue comes from manufacturing products for US-based clients, which would be directly impacted if tariffs increase costs. Biocon, with 50% US sales, is deemed high-risk even though its direct generics exports from India to the US are lower than 30%. Any cost increases could significantly impact its competitive positioning in the US market. Moderately affected stocks are those with more diversified business models, encompassing specialty pharma, biosimilars, and inhalers. These companies are seen as better positioned because of the limited competition in their specific segments. Lupin, with 35% US sales, has a significant portion of its US revenue derived from inhalers, which typically have higher margins and face lower competition. Sun Pharmaceutical Industries, with 30% US sales, has over half of its US revenue coming from patented drugs manufactured by contract manufacturing organizations outside India, thus reducing its exposure to Indian manufacturing-related tariffs. Cipla, with 28% US sales, benefits from a more differentiated product mix, with more than 15% of its sales coming from inhalers, which could help mitigate pricing pressure. Lower-risk stocks include CDMOs and API vendors. These companies typically operate under a cost-plus model or provide contract research services, which allows them to pass through cost increases. Syngene International, with 68% US sales, operates primarily on an FTE-based model, with a significant portion of sales derived from cost-plus contracts, making it less vulnerable to direct tariff impacts. Piramal Pharma, with 41% US sales, has about 50% of its manufacturing done outside India, which lowers its exposure to tariffs related to Indian manufacturing. Divi’s Laboratories, with 17% US sales, as a CDMO, is somewhat insulated from tariffs due to its cost-plus contracts.
The article also explores the potential ramifications of these tariffs on the broader pharmaceutical landscape. If tariffs are imposed, pharmaceutical companies will likely attempt to pass on the increased costs to various stakeholders in the US healthcare system, including distributors, retailers, and insurance payors. However, the cost-sensitive nature of the generic drug market makes it difficult to consistently pass these costs along. The alternative, which is absorbing the costs, could significantly squeeze profit margins, particularly for companies with high exposure to the US market. Establishing manufacturing facilities in the US as a means of bypassing tariffs is not a viable short-term solution. This option would require significant capital expenditure and would be subject to regulatory approvals, which can take upwards of 5-6 years. According to Jefferies, India's overall pharma exports to the US amount to $8.7 billion. Any reciprocal tariff imposed by the US would likely be capped at 10%, mirroring India's existing import duty on US drugs. Jefferies analysts have examined President Trump's statements and believe that he has a strong intent to impose tariffs on pharmaceutical imports into the US. However, his concerns are primarily focused on pharmaceutical companies that are using Ireland as a tax haven and on the large amounts of drug manufacturing taking place in both Ireland and China. It is possible that the generic industry could be spared from these tariffs. Jefferies notes that spending on generic and biosimilar medicines represents only about 13% of overall US drug spending but accounts for approximately 90% of all prescriptions. This suggests that policymakers may be hesitant to impose tariffs that could significantly increase the cost of these essential medications. In conclusion, the potential imposition of US tariffs on pharmaceutical imports presents a significant challenge for the Indian pharmaceutical sector. The impact will vary depending on factors such as the company's exposure to the US market, its business model, and its ability to pass on costs. While some companies may be able to weather the storm, others, particularly those with high US sales and a reliance on generic formulations, could face significant pressure on their profit margins.