On April 2, 2025, President Donald Trump signed an executive order introducing a 10% baseline tariff on all U.S. imports and country-specific “reciprocal” tariffs. Following over 75 countries approaching the administration for negotiation discussions, the administration later announced a 90-day freeze on all trading partners—excluding China.
There is still much to discover about the long-term effects of these tariffs, but financial markets have already reacted. Shares of major pharmaceutical firms declined sharply following the tariff announcement, reflecting investor concerns over potential disruptions to global supply chains and increased production costs. While waiting to see how the situation develops, companies in the biotech and pharmaceutical industries have either increased prices in anticipation of changes or have decided to pause any further adjustments.
The 90-day freeze may give organizations a temporary chance to evaluate the impact of tariffs on the entire U.S. market. This is particularly significant for the biotech and pharmaceutical sectors, which are highly vulnerable due to their heavy reliance on global supply chains and international production. In light of this uncertainty, here are some potential effects of tariff increases and key strategies for mitigating them.
Expect Supply Chain Disruptions:
The U.S. pharmaceutical industry relies extensively on global sourcing. According to the FDA, over 70% of active pharmaceutical ingredients (APIs) used in the U.S. are manufactured abroad. These global supply networks are at risk as tariffs on essential materials escalate, especially considering the industry’s reliance on just-in-time delivery systems for everything from raw materials to finished products.
Increased Costs Across the Board:
The immediate effect of these tariffs is expected to be an increase in raw materials, manufacturing, and production costs. For example, tariffs on steel and aluminum have already raised concerns about the availability and price of critical materials used in medical device manufacturing. Companies may face higher operational expenses as a result. While larger corporations might be able to absorb these additional costs, smaller firms may have to pass them on to consumers, leading to higher medication prices.
This situation is particularly concerning for generic drug manufacturers, which typically operate on thin profit margins and are vulnerable to significant cost pressures. Some pharmacists have begun to echo these concerns, as many fear that higher tariffs could limit the availability of certain prescription medications.
Impact on Research and Development
One major consequence is the potential delay in innovation and drug development. Rising costs and supply chain disruptions may hinder clinical trials and postpone the approval process for new treatments. Increased expenses for raw materials and difficulties in sourcing essential ingredients could slow down drug research and development. Organizations may find it challenging to maintain or accelerate their R&D pipelines as they allocate resources to address tariff-related issues, which could ultimately delay the introduction of new therapies to the market.
Strategies for Mitigating the Impact
While the tariffs pose significant challenges, biotech and pharma companies can adopt proactive strategies to navigate this new reality:
- Diversify Sourcing Options: Companies should explore alternative suppliers in countries exempt from the new tariffs, such as USMCA-member nations, or increase their reliance on domestic suppliers to reduce exposure to higher import costs.
- Optimize Inventory Management: Strategic stockpiling of key raw materials can help hedge against potential supply chain disruptions and price increases. Additionally, advanced inventory management tools can help companies track usage and minimize waste.
- Engage in Strategic Contractual Adjustments: For flexibility, companies can negotiate escalation clauses in contracts with suppliers and customers, which will allow for more predictable cost management.
- Explore Domestic Production: While shifting production to the U.S. could take years to fully implement, companies like Eli Lilly and Johnson & Johnson have already made substantial investments in domestic manufacturing. This long-term strategy may offer relief from tariff-induced supply chain issues.
- Communicate with Stakeholders: Transparent communication with key stakeholders—including customers, healthcare providers, and investors—is essential for managing expectations around potential price hikes and supply chain delays. Ensuring that all parties are aligned will help maintain trust and minimize disruptions in the market.
Agility and Adaptability Are Key:
As tariff and trade news unfolds near-daily, organizations’ agility will be essential. Companies that proactively evaluate their exposure, explore alternative sourcing options, and remain informed about shifting trade policies will be better positioned to navigate this turbulent landscape.
For more tailored guidance on how these tariffs may impact your operations or how you can better prepare for the future, contact Brendan McCarthy, Partner, or a trusted Grassi Advisor.
