The latest salvo in the emerging global tariff tiff has set its sights on the pharma sector. Aiming to stabilize US drug supplies, tariffs may have the opposite effect while posing a number of key risks to pharma companies large and small. Mitigating these supply chain, operational, business and financial risks will require measured yet nimble responses and out-of-the box thinking. Leveraging advanced manufacturing technologies such as continuous manufacturing (CM) could help pharma companies mitigate risks while seizing a competitive advantage.
The specter of tariffs looms large over the global economy, and that uncertainty poses enormous risks to businesses large and small, cutting across many sectors including pharma. The stakes are particularly high for pharmaceutical manufacturing where the potential for supply chain disruptions of critical drugs and rising drug costs could shatter an already fragile market. Tariff threats if realized pose significant threats to pharma manufacturers so understanding how to assess and mitigate potential risks to supply chains, operations and cash flow is critical as is identifying opportunities to gain a competitive advantage during this economic turmoil by considering investment in advanced manufacturing systems such as CM. In light of recent announcements by firms such as Eli Lilly and Pfizer to make significant investments in US drug production, are tariffs a boon or a bust to pharma manufacturers?
Risks and Impacts from Tariffs on Pharma Manufacturing
With a recent announcement that the pharma sector could be subject to tariffs, ostensibly to incent more US production of pharma products, the risks to the entire pharma supply chain and its stakeholders are enormous. The vulnerability of the global pharma supply chain to unexpected shocks in the US are well documented, particularly following the pandemic and so actions that would reduce that exposure would certainly be beneficial to consumers and other market participants.
The United States has an over dependence on foreign production of pharma products where about 40% of our finished drugs come from overseas manufacturers. Much of that in turn is produced in China and India. Reducing that concentration risk would reduce risk to the supply chain, however, it also poses other risks along the way. It is likely that tariffs could push up drug costs and/or further destabilize the pharma supply chain. It is well-established that tariffs by nature are economically inefficient and can lead to higher prices for consumers (reducing what’s called consumer surplus) and lowering supply. Such disruptions would undoubtedly lead to significant political risk for the administration, which begs the question of what the staying power of any tariff on the pharma sector would be. Answering that question lies at the heart of any pharma manufacturing investment analysis.
Pharma manufacturers in the short run would be adversely impacted from tariffs and would have limited options to make significant adjustments in their operations. The effects on pharma from tariffs depend in part on which segment of the business we are talking about. Biopharma and brand drug producers, for example, tend to have wider margins than generic drug manufacturers. The greatest impact would be felt on generic drug producers that comprise about 80% of US prescriptions. Generic companies already face significant pressure on their profitability and tariffs would force firms to consider dropping underperforming generics from their product lines and/or raising prices where feasible as a short-term risk response. It would be highly unlikely that generic producers of finished drug products would shift meaningful production to the US for several reasons.
One of the biggest impediments to reshoring pharma products to the US isn’t the manufacturing of finished drug products but access to the active pharmaceutical ingredients (APIs) and excipients that go into drug production. Today, 72% of APIs are produced overseas, largely a reflection of lower costs, established economies of scale in their production and lighter environmental regulations.
Increased development of APIs in the US would be needed as a catalyst for any serious shift in global drug manufacturing toward the US. And even then, the long timelines required to reestablish supply chains and shift manufacturing to the US add to the uncertainty management teams will face in making long-term decisions based on great uncertainty over the duration and level of any tariffs. Unwinding facilities abroad and setting up new ones in the US is a multi-year effort, involving various considerations on the relative cost and availability of labor, potential for higher costs due to inflationary pressures from tariffs, new versus retrofit manufacturing facilities, regulatory impacts from relocation, sourcing of APIs and excipients, and product line selection, among others.
Investment horizons are in decades and hence making a long-term critical business decision based on what could be temporary policy would not be in the best interest of the company. In other words, deciding whether to relocate manufacturing to the US should be based on fundamental economics and not tariff policy where it has been acknowledged that it would be used as a negotiating tool rather than as long-standing economic policy.
Gaining a Competitive Advantage Via CM Technology
Notwithstanding these issues, tariffs present a viable opportunity to pharma manufacturers to consider leveraging advanced manufacturing capabilities such as CM. CM has been used for decades in other industries such as petrochemicals and yet its adoption in the pharma sector has been slow. For years an impediment to pharma’s adoption of CM was regulatory burden, however, in recent years the FDA has been a champion of CM. It may now be an appropriate time for pharma companies and contract development and manufacturing organizations (CDMOs) to consider leveraging CM technology given the fluid economic environment for several reasons.
First, as detailed in a study I conducted on CM versus batch manufacturing, CM wins hands down on all but a few financial scenarios based on its demonstrated greater efficiency and automation that improves quality and reduces defects and scrap. It also provides greater flexibility in production than batch processing which enables companies to shift lines and schedules to meet changing demand better than under batch processing. For companies contemplating moving some production to the US, CM is likely to be a winning strategy in the long-term given the multiple benefits over batch processing that flow to the bottom-line.
Parting Thoughts
The pharma sector faces a multitude of risks from potential tariffs largely in the form of supply chain, operational and business/financial (cash flow) risk. While some large pharma companies may ultimately make the move to increase US drug production, the calculus to do so is unlikely to be focused on tariffs alone given the long lead times required in resetting supply chains and manufacturing capabilities. Other considerations such as leveraging CM technologies create significant financial opportunities to mitigate a number of these risks during a period of tariff-imposed instability.
Clifford Rossi (PhD) is the Academic Director of the Smith Enterprise Risk Consortium at the University of Maryland (UMD) and a professor of the practice and executive-in-residence at UMD’s Robert H. Smith School of Business. Before joining academia, he spent 25-plus years in the financial sector, as both a C-level risk executive at several top financial institutions and a federal banking regulator. He is the former managing director and CRO of Citigroup’s Consumer Lending Group.
