Concerns are mounting within the Indian pharmaceutical industry as U.S. President Donald Trump contemplates implementing tariffs on imported drugs. This proposed move, while primarily targeting Ireland and China, threatens to disrupt Indian pharmaceutical companies that supply a significant portion of generic medications to the U.S. market. With potential tariffs looming, these companies face tough decisions regarding cost management and pricing strategies.

Impact of Tariffs on Indian Pharma

If the tariffs are enacted, companies like Zydus Lifesciences and Dr. Reddy’s Laboratories, which derive around 45% and 43% of their revenue respectively from the U.S., could be significantly affected. The foreign brokerage firm Jefferies predicts that any reciprocal tariffs would likely be capped at 10%, urging companies to consider how to navigate these financial pressures.

• Retailers and Distributors: These entities in the U.S. supply chain, alongside formulation manufacturers and API suppliers, will need to adapt to the potential cost increases.

High-Risk Companies in the U.S. Market

Jefferies highlights that generic drug manufacturers and contract manufacturing organizations (CMOs) are particularly vulnerable due to their reliance on U.S. sales and intense competition.

• Zydus Lifesciences: With a major focus on oral solid dosage formulations, they could feel the impact of tariffs keenly.
• Dr. Reddy’s Laboratories: With over 25% of sales coming from injectables, any pricing pressures could hurt revenue.
• Gland Pharma: As a CMO, Gland Pharma’s U.S. client contracts could be affected by increased costs.
• Biocon: Although its direct generic exports are below 30%, any hike in costs could hinder competitiveness.

Moderately Affected Firms with Diverse Offerings

Companies that boast a varied product range may weather the storm better, as their exposure to pricing competition is more limited.

• Lupin: With 35% of its U.S. revenue from inhalers, this company is better positioned due to higher margins.
• Sun Pharmaceutical Industries: As more than 50% of its U.S. revenue flows from patented drugs, its exposure to tariffs is minimized.
• Cipla: With a significant portion of sales from inhalers, Cipla has a diversified portfolio that could shield it from severe pricing pressures.

Lower Risk Companies: Cost-Plus Models

Firms utilizing cost-plus pricing or contract research services may experience fewer repercussions from tariffs, as they often have built-in cost management strategies.

• Syngene International: Operating mainly on a fee-for-service model, Syngene’s sales structure provides some protection against tariff impacts.
• Piramal Pharma: With a sizeable portion of manufacturing overseas, Piramal is less exposed to Indian tariff repercussions.
• Divi’s Laboratories: Its focus on cost-plus contracts offers insulation from potential tariff shocks.

The Challenge of Absorbing Costs

If tariffs come into effect, Indian pharma companies are likely to attempt to shift costs to U.S. distributors and retailers. However, given the price sensitivity of the generic drug market, many may struggle to do so. Absorbing these costs could lead to squeezed profit margins, especially for companies heavily reliant on the U.S. market.

Looking Ahead: Potential Outcomes

The overall value of India’s pharmaceutical exports to the U.S. stands at approximately $8.7 billion. Jefferies believes that if tariffs are imposed, they will likely remain at 10%, reflecting India’s own import duties on U.S. drugs. Recent statements from President Trump indicate a serious intention to impose tariffs, specifically targeting firms that utilize Ireland for tax advantages and have substantial manufacturing operations there.

While the situation remains fluid, the possibility of the generic industry being insulated from these tariffs exists, as generics account for a mere 13% of total U.S. drug spending but make up 90% of prescriptions. The coming months will reveal the full impact of these proposed changes on the Indian pharmaceutical landscape.