The Trump administration just levied tariffs on China, Mexico, and Canada with a message: it’s not about trade, it’s about fentanyl. Fentanyl is a deadly scourge, but as I previously wrote, AI can now “onshore” production of the drug to U.S., so what then? Also, few details outline the parameters of what happens on April 2nd when reciprocal tariffs kick-in possibly bringing pharmaceuticals manufactured in India into the mix which could raise the stakes to a completely different level.
The American public lacks transparency regarding the origin of their medications, and the assumption that their drugs come from domestic producers is largely inaccurate. The U.S. pharmaceutical supply chain is highly globalized and complex, with 80% of drug ingredients sourced from overseas. China alone operates 230 (13%) active pharmaceutical ingredient (API) manufacturing facilities for the U.S. market. (An additional 62% of API manufacturing facilities are also offshore.)
The Trump administration has advocated a goal of returning pharmaceutical manufacturing to the U.S.. And recent steps like the Eli Lilly announcement of a $27B commitment to build four new manufacturing facilities in the U.S. to make its weight loss and diabetes injectables and for innovative research in new drug development are important. But this commitment does little to address the critical need of generic and especially antibiotic manufacturing today.
Generic drugs, which account for about 90% of all prescriptions dispensed in the U.S., will be particularly vulnerable to these tariffs. Approximately 50% of generic medications consumed in the U.S., including cancer treatments, antibiotics, and anticoagulants, are produced overseas, with lower production costs.
In the short term, because of the U.S.’s dependence on foreign manufacturing, experts predict that tariffs will raise drug prices in the coming months. While the full impact may take some time to materialize due to existing contracts and inventory stockpiles, price increases are expected to be substantial. About seven in ten experts predict drug costs will rise by at least 10%.
As China swiftly responded with retaliatory tariffs on select American imports these actions could if applied to manufactured drugs drive up the cost of prescription medications and worsen existing drug shortages.The tariffs could likely exacerbate existing drug shortages in the U.S. as companies struggle to absorb the additional costs. Some may discontinue certain products or reduce production, leading to supply chain disruptions and potential shortages of critical medications.
Tariffs could likely have far-reaching effects on the pharmaceutical industry and the healthcare system. Reduced profit margins for drug manufacturers could lead to decreased investment in research and development, and increased pressure on healthcare providers will force insurers to reduce drug coverage and raise consumer out-of-pocket expenses to maintain their profit margins.
A Reminder Of Hoarding
Remembering the realities of Covid-19, any tariffs imposed are likely to lead to hoarding behavior in the pharmaceutical industry at multiple supply chain levels. This behavior is driven by concerns about potential drug shortages, expectations of rising drug costs, and the desire to ensure continuous patient care at the hospital and pharmacy levels. It is reasonable to assume that drug distributors and manufacturers may also engage in hoarding-like behaviors, such as stockpiling raw materials and APIs to mitigate supply chain disruptions and increasing inventory of finished products to buffer against potential shortages.
Hoarding behavior by hospitals, pharmacies, and individuals leads to artificial scarcity of certain medications, worsening existing shortages or creating new ones. As some entities stockpile drugs, it can result in an imbalanced distribution, leaving some areas or facilities with insufficient supplies. Hoarding can drive up prices due to reduced availability and increased demand. In extreme cases, this leads to price gouging, making medications less affordable and accessible for patients. Large-scale hoarding disrupts normal supply chain operations, making it difficult for manufacturers and distributors to forecast and meet demand accurately.
Stockpiling large quantities of drugs increases the risk of medications expiring before they can be used, leading to waste and financial losses. As supplies become concentrated in the hands of hoarders, patients who genuinely need certain medications face difficulties obtaining them. Hoarding behavior in one country can have ripple effects on the global pharmaceutical supply chain, potentially affecting access to medicines in other nations, particularly in lower and middle-income countries.
It’s important to note that while hoarding may provide short-term security for individual institutions, it can contribute to systemic problems in the pharmaceutical supply chain and potentially worsen overall drug accessibility and affordability for patients. As is often the case, those most affected by the tariff wars are the most vulnerable.
It is a critical reality that the U.S. must return to a self-sufficient status in making critically needed drugs. But any pronouncement that the American people “may have a little short-term pain, and people understand that” must make sure that the pain also addresses the ability to fix the long-term consequences of the lack in US drug manufacturing. This resolve must focus on the impact of drug availability, accessibility, and affordability, which also has the potential to inflict severe pain, both in the short-term and the long-term, if a trade war takes place.
