Impact of Tariffs on the Generic Drug Market

In a video interview with Pharma Commerce, Geoffrey Joyce, PhD, director of health policy at the Leonard D. Schaeffer Center for Health Policy & Economics at the University of Southern California (USC, describes how the 10% tax on Chinese goods and a potential 25% tariff on pharmaceuticals could have notable effects on the price, quality, and safety of generic drugs. He explains that while branded and generic drug markets operate differently, the cost of generics is typically much lower, with intense competition driving prices down. A 10% tariff on generics might not significantly impact costs because most of the price is tied to distribution, not manufacturing. However, the COVID-19 pandemic highlighted the risks of relying on countries like China and India for essential generics, which has led to a push to bring production back to the U.S.

A 25% tariff would likely make domestic production more attractive, but generics are low-margin products, so this may result in higher consumer prices. Joyce suggests that tariffs could disrupt supply chains but not lead to significant changes in US production in the short term. Additionally, the low-profit nature of the business could encourage foreign manufacturers to cut corners, potentially reducing drug quality. California's failed attempt to create its own generic drug industry illustrates the challenges in stimulating domestic production for these low-margin drugs.

While tariffs might encourage some domestic production, it could come at the cost of higher prices and possibly lower drug quality. The overall impact on the drug supply chain remains uncertain, with concerns about reliability and safety, especially if foreign manufacturers face increased production costs.

Joyce also describes what makes the generic drug market susceptible to supply chain disruptions; how the tariffs can affect price or competition within the branded drug space; health policy developments that coming down the pike that the pharma supply chain should prepare for; and much more.

A transcript of his conversation with PC can be found below.

PC: How will the 10% tax on goods from China—along with the potential 25% tariff on pharmaceuticals—impact the price, quality, and safety of generic drugs? Would the aforementioned tariff encourage domestic production?

Joyce: We're speculating, but people don't realize there's two very different markets for branded drugs versus generics, different players, as you're aware. We have some of the highest branded drug prices in the world and some of the lowest generics. Generic competition in most cases—there are exceptions—is fierce. If you’ve been on the Mark Cuban website, Cost Plus Drugs, you look at the ingredient costs, it's a penny to five cents a pill for a lot of very common generics. Someone mentioned a 10% tariff on that where most of the cost of the drug is getting it from the manufacturer to the patients for generic drugs. I didn't think 10% would move the needle, even though, during COVID, we did see shortages of essential drugs. There was more of a realization in the US that we have to repatriate drug production for essential medications, because we could be vulnerable if we rely on India and China, etc., for supplying generic but essential medications.

The question is, would a 25% tariff encourage domestic production? It clearly tips the balance more so in the favor of domestic production, but these are really low margin products, so I think really the losers would be consumers in this case. Supply of drugs I think could be disrupted. I don't think we would see in the short term. We wouldn't see significant changes in production in the US. You do worry about if it's really a low margin business, and you've added tariffs that these foreign manufacturers are going to cut corners, and, like you mentioned, quality declines, and we've seen that. We have evidence of foreign manufacturers cutting corners and having less than high quality standards.

I think that's been the argument for repatriating, and California has tried to do that unsuccessfully. They said they're going to have their own generic industry. They basically get approval for two drugs, and really have not had great production of those to start with. So again, it's a low-margin business, making that attractive to the US. To US manufacturers: prices are going to be higher for sure. You worry that even if that's not enough to stimulate domestic production, it's going to have repercussions for the supply, the reliability of supply, and potentially the quality of drugs made overseas.