Indian Pharma may stand to gain market share due to potential impact of US tariffs, according to JPMorgan.
In an expert call, the brokerage addressed possibilities of pass-through of tariffs to consumers, and the feasibility of manufacturing relocation to the US.
This, even as the Nifty Pharma ended in the red for the third session on Thursday.
Here are some takeaways from the call.
Reciprocal Tariffs Might Pass On To Customers
Tariffs of 25% or higher on pharmaceuticals are improbable due to the significant increase in cost for consumers and the limited availability of alternative suppliers, JPMorgan said.
In the event of a 10% tariff, a substantial portion, estimated at 50-80%, is expected to be passed on to customers. This is attributed to the consistent demand for drugs.
The remaining portion of the tariff will likely be absorbed by manufacturers or Pharmacy Benefit Managers. Since pricing contracts for manufacturers are typically based on the landed cost of drugs, this supports the likelihood of a higher pass-through to consumers.
The tariff increase is anticipated to result in higher drug costs and, in the medium term, increased insurance premiums for patients in the US. If tariffs persist, larger Indian pharmaceutical companies might consolidate to enhance their negotiating power, but they are unlikely to exit the market, the brokerage said.
Biosimilars Likely To Be Exempt From Tariffs
Biosimilars will likely be exempt from tariffs, due to the limited manufacturing infrastructure for these products in the US, according to the brokerage's expert. This results in about 70% import dependence.
Imposing tariffs on biosimilars would likely lead to a quick and significant increase in costs for patients. Regarding Contract Development and Manufacturing Organizations or CDMOs, tariffs on Active Pharmaceutical Ingredients or intermediates are unlikely, JPMorgan said.
This would increase the cost of manufacturing formulations within the US. However, if tariffs are imposed on CDMOs, these companies are expected to pass the costs on to their customers.
Manufacturing Relocation To US Unlikely
While the US administration aims to reduce import reliance, particularly for critical drugs, and boost domestic production, tariffs may not lead to the relocation of manufacturing to the US, especially in the near future, JPMorgan said.
Several challenges hinder such a move, including higher manufacturing costs in the US — estimated to be around 75% higher for small molecule drugs compared to China or India.
More costly environmental compliance requirements in the US and the globally distributed nature of existing pharmaceutical manufacturing operations, add to the cause. The time needed to establish an API or formulations manufacturing plant is not practical as well.
Bump Up In India's Pharma Sector
In addition to India, import tariffs on generic drugs from Israel and Switzerland are highly probable, according to the JPMorgan expert. This is due to significant manufacturing presence of Teva and Sandoz in these countries.
According to the expert, these companies operate with lower profit margins compared to Indian firms and would therefore be more negatively affected by potential tariffs.
Essentially, Indian pharmaceutical companies have the potential to gain market share at the expense of their global competitors, due to their superior cost competitiveness, JPMorgan said.
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