Indian pharmaceutical firms have spent decades supplying American patients with affordable medicines. That dominance will be difficult to challenge, despite President Donald Trump's threat to impose steep tariffs on imported generic drugs.
His pledge last month to apply a 100% levy on companies making off-patent medications by 2028 (rising to 200% a year later) unless they move production to the US faces formidable commercial and political obstacles. Instead of rushing to fire up new manufacturing facilities, the likes of Sun Pharmaceutical Industries Ltd. and Dr. Reddy's Laboratories Ltd. would be better off biding their time. The duties may never fully materialize.
That's because generic medicines play a crucial role in the healthcare system. Once patent protections on branded drugs expire, other manufacturers can produce equivalent versions, introducing competition that drives prices sharply lower. The difference can be enormous. According to one US Food & Drug Administration study, the price of an HIV medicine, Truvada, fell from about $50 to $3 a tablet shortly after generic versions became available.
Generic drugmakers operate on high volumes and low margins. Asia's five-biggest players have an average EBITDA margin, a measure of operating profitability, of around 22%, considerably less than the world's top five innovative drugmakers. That reflects the economics of a business in which off-patent medicines account for more than 90% of US prescriptions but only a fraction of spending as they are so cheap. With less profit at stake, manufacturers have little incentive to shift production to the US - and no room to absorb tariffs.
That means the levies, if imposed, could be borne by American patients and the wider healthcare system, and ultimately feed into already stubbornly high inflation. Spencer Perlman, a healthcare analyst at Veda Partners, a consultancy firm based in Bethesda, Maryland, estimates that the threatened tariffs could increase total prescription-drug spending by roughly 8% to 15%.
And if the extra cost can't be passed on to patients, some drugs could become unprofitable to produce, potentially leading to shortages - an even less acceptable trade-off than higher prices. A policy that would make the cheapest medicines much more expensive or unavailable would be politically unpalatable in 2028, a presidential election year.
There's another reason why Indian drugmakers should resist the pressure to set up manufacturing in the US. Recent history hardly makes a compelling case for investing there. Consider Dr. Reddy's. In March last year, it shut a generic-drug factory in Shreveport, Louisiana, after years of losses. The plant, which had produced medicines including ibuprofen and aspirin, lacked a "clear path to profitability," a spokesperson told a local newspaper.
For years, the generics trade had been moving out of the US. India's industry was born out of a 1970 decision to abolish pharmaceutical product patents, which encouraged domestic companies to master the art of reverse-engineering Western medicines. By the time India restored product patents in 2005, those companies had spent three decades building the expertise and scale that allowed them to pivot toward off-patent drugs for export. America's own embrace of generics came after a 1984 law opened the door for the FDA to approve the drugs on a shorter timeline, ultimately turning India into the pharmacy of the world.
To be sure, some Indian firms have invested in US manufacturing as part of a push into higher-margin treatments. Sun Pharmaceutical, India's largest drugmaker, and Aurobindo Pharma Ltd. have separately announced such investments. But these are commercial decisions intended to improve profitability, not responses to the threat of tariffs.
Washington has legitimate reasons to worry about relying so heavily on overseas suppliers for essential drugs. But levies are an unusually blunt way of addressing that vulnerability. If the goal is greater resilience, then targeted incentives for strategically important medicines, diversified supply chains and guaranteed purchasing contracts would attack the problem more directly than taxing every imported generic.
The US spent four decades building a system that rewarded whoever could supply safe medicines most cheaply, and Asian companies became extraordinarily good at it. Until Washington proves it's genuinely willing to undo all that, Indian drugmakers have little reason to panic.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.