US President Trump’s proposed tariffs on China could ignite a US-China trade war and destabilise an already shaky pharma industry.

With prescription drug costs and healthcare spending at all-time highs, calls for cost control measures have come from the public, patient advocacy groups, and the President himself. Yet the President’s plan to tax a long list of pharmaceutical products originating from China will only serve to exacerbate the problem of high healthcare costs and create uncertainty over the future direction of US-based generics.

Some of the main impacts of the proposed tariffs, if enforced, would be the discouraging of US-based generics manufacturing.

Rising costs for raw material acquisition from China will cut into the already-slim margins of generics manufacturers, which import active pharmaceutical ingredients (APIs) from China. The FDA estimates that 80% of APIs used in the US originate from China or India.

Trump proposes a 25% tariff on Chinese-produced APIs, which will encourage generics manufacturers to look outside of China to acquire APIs, but also spur an overall increase in the prices of APIs in general.

Healthcare costs increase

The tariffs will also signal increase healthcare costs. The increase in the manufacturing costs of generic medicines could be passed on to the end-user.
Prescription drug price increases could affect patients and healthy individuals enrolled in healthcare plans alike in the form of increases in healthcare premiums, deductibles, and/or copays.

An estimated 30%-40% of US patients are covered under Medicare/Medicaid; both are government subsidised healthcare programmes that have sought to cut costs via substitution of branded drugs with generic forms.

An increase in costs of generic medicines would increase Medicare/Medicaid costs, creating additional pressure at a time when the government is trying to cut healthcare spending.

Quality concerns from alternative sources

Lastly, the tariffs will encourage generic medicine imports, raising quality concerns for generic drugs. US-based generics manufacturing is becoming less viable from a profit standpoint, even without the proposed tariffs.

Generic giants like Teva and Mylan have been looking to other ventures outside of the generics space to maintain profitability in the face of increasing competition from foreign generic products. India is one of the emerging players in the US generics market, which is the largest in the world India will take an estimated 25% of market share in 2018, aided by low manufacturing costs that enable aggressive pricing tactics.

Despite an advantage over US-based manufacturers in terms of cost, Indian generics manufacturers have had a checkered history of run-ins with the FDA relating to quality control issues including data integrity and poor manufacturing practices, among others. The proposed tariffs will likely fuel generic imports, adding to quality concerns for generic medicines consumed in the US.

If the proposed tariffs come into effect, there could be a turning point in the US generics market, with major players exiting and an increase in reliance on generic imports from countries like India.

US generics manufacturers are already struggling to maintain profitability in a competitive environment, and an additional tariff that adds to manufacturing costs could significantly speed up their decline.