Will Tariffs Affect Branded Drug Prices?

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: Do you anticipate the tariffs affecting price or competition within the branded drug space?

Joyce: Why are brand drugs so expensive on patent drugs? Well, it's typically pharma companies— whether people are fond of them or not—they've made big investments, maybe a billion or a couple billion dollars before that drug makes it to market. When they hit home runs and they develop a good drug, they charge us whatever the market's willing to pay. What it means is the cost of producing the drug—the marginal cost—is quite low, even for branded drugs.

Why are prices high? Because it's a successful drug with little competition, let's say, in that therapeutic class. And all your costs are fixed. There are research and development costs. In addition, the ones that make it to market and are successful have to pay for all the losers that don't make it to the market. Like generics, the cost of producing an additional pill tend to be quite small. If the tariff is on the active ingredients and the import from overseas, it may not be that consequential to the end price, but yet it can throw disruptions on who's producing and the incentives of producers. I think during COVID, we realized we should have some drugs that we produce domestically, because we're vulnerable if we don't.