As the potential threat of a steep 200 per cent tariff on pharmaceutical imports hangs in the air, analysts and industry insiders feel that focus on exports to non-US regions as well as domestic market will increase as a long-term trend.
US President Donald Trump told CNBC’s Squawk Box in the first week of August that planned tariffs on import of pharmaceutical products to the US could eventually reach up to 250 per cent.
According to AP, US administration officials have suggested duties of up to 200 per cent on drugs as they invoked the national security provisions under Section 232 of the US Trade Expansion Act of 1962, arguing that America needs to boost domestic drug manufacturing.
India Ratings and Research (Ind-Ra) said they expect this exemption may be temporary due to changes in tariff policies and negotiations between several countries and the US government.
“Even with an exemption, India’s pharmaceutical sector might face targeted tariffs if the US identifies trade or security reasons.
"The US generic market is crucial for India, contributing about 35 per cent or $10.7 billion to its total revenue,” said an analyst.
Indian pharma firms have posted a 4.2 per cent CAGR (compound annual growth rate) in US sales from FY17 to FY25 due to price erosion, channel consolidation, and regulatory changes.
“With muted Ebitda margins and returns from the US, Indian pharma companies have been diversifying their operations to reduce the cash flow impact, focusing on expanding sales in non-US markets, emphasising high-margin branded generics, and boosting API manufacturing,” the analyst said.
Ebitda stands for earnings before interest, taxes, depreciation and amortisation, API represents active pharmaceutical ingredient.
Ind-Ra anticipates this trend to persist as the US market’s appeal diminishes compared to domestic and non-regulated export markets.
Indian pharma companies are shifting focus from the heavily competitive US generic market to developed markets such as Europe and Japan (increasing demand for generics), and other semi-developed markets, such as Africa, Latin America, and Southeast Asia.
Moreover, focus on the domestic market is rising.
The Indian pharmaceutical market (IPM) is crucial for domestic pharma firms, contributing 41 per cent to the sales for the selected coverage universe.
Despite challenges, the IPM has grown at a CAGR of 10 per cent over the past decade, and Ind-Ra projects IPM to achieve 8-9 per cent (Y-o-Y) growth in the coming years.
As of now, sheer volumes partly shield Indian firms from US tariff threat.
The US heavily relies on Indian generics due to their low-cost, high-volume nature, making it challenging to replace them with higher-cost local production.
This somewhat shields Indian pharma firms from future US tariffs, as they help reduce US health care costs by around $15,000 per capita.
Ind-Ra said the price gap between generic and patented products in the US is about 95 per cent.
Issues such as price erosion, regulatory challenges, and substantial R&D costs result in low Ebitda margins for many Indian pharma firms in the US generic market.
Although the generic market represents just 11 per cent of the total US pharma market ($753 billion) in value terms, it accounts for 90 per cent of US prescriptions.
India commands a 45 per cent share of these prescriptions due to its low-cost, high-volume production.
Indian firms are crucial for US healthcare, manufacturing at 25-30 per cent of the US cost.
According to IQVIA, Indian firms provided over half of the prescriptions in five of the top 10 therapies by volume, including hypertension and mental health.
Indian generics saved the US healthcare system $219 billion in 2022 and $1.3 trillion from 2013 to 2022, with expected savings of another $1.3 trillion over the next five years.
Companies, nonetheless, are considering long-term plans to have production at multiple locations.
Several firms that Business Standard spoke to said they were engaged in scenario-building exercises, which include options for mid-term and long-term solutions like developing offshore manufacturing, securing raw material supplies from multiple sources, exploring contract manufacturing in the US, etc.
The executive director of a leading Indian drug firm, which has a strong presence in the US, told Business Standard that companies are indeed considering multiple options to safeguard their interests as America is the largest market for Indian pharma exports.
“As for immediate purposes, the discussion is around how much of the tariff, if imposed, can be passed on.
"This will vary greatly across molecules. In those molecules where some Indian players will slash prices, others may find them unviable and exit, leading to drug shortages in the US,” he said.
Another option being considered is whether it is prudent to have offshore manufacturing.
“Indian companies are indeed studying the options about shifting some manufacturing to the US.
"Already some companies have a presence. However, this has a gestation period,” said another industry veteran.
He further elaborated that as the cost of conversion (money you spend turning raw materials into finished products) is almost three-four times more in the US due to manpower costs.
“Manpower costs would be almost 70 per cent of this.
"If one shifts manufacturing to the US, then the overall cost of production goes up 1.5-times vis-à-vis India,” he said, adding that companies are considering contract manufacturing.
“One could split the contract — do processes A to X in India and complete processes Y and Z in the US,” he further said.
