Tariffs and the Pharma Industry
Headlines about impending tariffs have been a fixture in recent weeks and yesterday, the White House announced details of their sweeping plans that will go into effect April 5th and 9th. See the full White House Fact Sheet here.
In positive news for the pharmaceutical industry, the administration exempted “pharmaceuticals” from reciprocal tariffs. However, pharmaceutical manufacturers must still remain vigilant and follow along for changes or updates. The “devil will be in the details” for pharmaceutical products, specifically in any definitions around pharmaceutical products. For example, a definition could ultimately exempt finished goods but still add tariffs to active pharmaceutical ingredients (API). We have identified three main discussion topics that should be factored into scenario planning by manufacturers.
1 - Review the impact of the World Trade Organization (WTO) Pharmaceutical Agreement
Manufacturers may decide to take the stance that the 1994 Agreement on Trade in Pharmaceutical Products will protect both API as well as finished product. This agreement, more commonly referred to as the Pharmaceutical Agreement, was signed by Canada, the European Union, Japan, Macao, Norway, Switzerland, the United Kingdom and the United States with the intention to ensure pharmaceutical products were not subject to customs or any other international trade duties. Historically, manufacturers relied on this agreement to shield product from tariffs; however, the manufacturer will need to assess whether the current administration will continue to abide by this agreement based on previous precedents. We have seen this administration step away from international agreements in the first term as well as this term when it suits their end goals.
2 - Evaluate the costs of a “tech transfer”
Many manufacturers have created cross-functional tariff taskforces to assess the impact of potential tariffs. One of the stated goals of the tariffs is to bring more manufacturing directly to the US. The tariffs are not the only government initiative aimed at this goal. For example, we have also seen initiatives like the recent Federal Supply Schedule (FSS) “US Made” modifications from the Department of Veterans Affairs that would create potential opportunities for products manufactured in the US. One of the avenues to achieve US manufacturing is a technology transfer moving the manufacturing from overseas to the US. Depending on the manufacturer's current supply chain, they may need to transfer both the pharmaceutical finishing as well as the packaging. Tech transfer costs can be prohibitively high depending on the drug as well as the volume of product. The primary assessment point here is the cost of tech transfer for the product and/or the product portfolio. Manufacturers also must account for capacity or “line time” available in the event of contracting with a new manufacturing entity.
3 - Assess the potential (and the downsides) of a price increase
In the event that current guidance changes, and tariffs are implemented on pharmaceutical products, a price increase may be suggested to absorb some of the tariff. While this would initially offset the tariff, it would negatively impact the manufacturers gross to net calculation primarily due to the government books of business. All of the primary government pricing calculations (AMP, ASP and NFAMP) generally start at WAC, and then remove various price concessions. A WAC increase typically raises the calculated pricing, and subjects manufacturers to price penalties across all government programs.
- Medicaid - AMP will increase, exposing the manufacturers to increased Medicaid rebates as well as potentially higher 340B chargebacks. Dollar-for-dollar penalties are enforced based on the Baseline AMP in effect from the original launch of the drug. These penalties are permanent until the CPI-U catches up and eliminates the penalty or the AMP decreases (e.g. due to price concessions, or a WAC redux).
- Medicare (Part B and D) - due to the 2022 Inflation Reduction Act (IRA), manufacturers are now penalized via rebates on both Part B as well as Part D drugs that raise price faster than inflation.
- Federal (i.e. VA/DoD) - NFAMP would increase, potentially triggering the price penalty, as values for current year Q3 are compared to previous year Q3. This is a one year only penalty, but would impact all of the next year's volume through increased FSS chargebacks.
One area to focus on prior to determining a price increase is to assess the basis and ultimate cost of the tariff. As a manufacturer, you will want to effectively “dollarize” the potential tariff to relate it to WAC and your GTN waterfall. There are many different pricing and modeling components around this topic so if you or your team have any questions, please feel free to reach out. Woven Data is always available to share our expertise and learning to help manufacturers successfully navigate the current commercial landscape.
Published on April 3, 2025 by Scott Hoffman