Can Eli Lilly Stock Withstand the Threat of President Trump's New Sweeping Tariffs?

Globe and Mail

2 days ago

Key Points
President Trump has threatened to levy tariffs of up to 200% on pharmaceutical imports.
Lilly's margins could be negatively affected if the company absorbs the higher costs.
However, any effect on Lilly should only be temporary.
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The active ingredients of roughly 80% of prescription drugs sold in the U.S. are made in other countries. President Trump wants that to change.
Instead of a carrot-and-stick approach, the president plans to rely solely on a stick -- tariffs. Trump recently threatened to levy steep tariffs on all pharmaceutical imports to the United States.
As you might expect, the pharmaceutical industry doesn't like the idea. But can a top pharma stock such as Eli Lilly (NYSE: LLY) withstand the threat of Trump's new sweeping tariffs?
About the president's threatened pharmaceutical tariffs
First of all, firm details about Trump's pharmaceutical tariffs have not been released yet. However, the president said that tariffs on pharmaceutical imports will come "very soon." We do know, though, that Trump wants steep tariff levels. He said during a Cabinet meeting earlier this month, "They're going to be tariffs at [a] very high rate, like 200%."
Commerce Secretary Howard Lutnick provided further clarification in an interview with CNBC. He said that the details on pharmaceutical tariffs will be announced at the end of July. Lutnick noted that a Section 232 investigation related to pharmaceuticals and semiconductors will be completed at the end of this month. Once that investigation is finished, Trump will establish his tariff policies. Section 232 investigations are intended to assess the effect of imports on national security.
Trump doesn't plan for pharmaceutical tariffs to take effect immediately, though. He said, "We'll give them [drugmakers] a certain period of time to get their act together." He suggested that pharmaceutical companies would have "about a year, year and a half" to move manufacturing to the U.S. to avoid the tariffs.
How Lilly could be affected
Lilly CEO Dave Ricks addressed the issue of tariffs head-on in his company's first-quarter earnings call on May 1, 2025. Ricks stated, "We support the U.S. government's goals to increase domestic investment. However, we don't believe tariffs are the right mechanism." He suggested tax incentives as a better way to promote U.S. manufacturing of prescription drugs.
But Ricks acknowledged the possibility that pharmaceutical tariffs could be imposed. He predicted that they "would have a negative effect on Lilly and for our industry." Wall Street agrees with that view.
Analysts at Barclays wrote to investors, "A 200% tariff would inflate production costs, compress profit margins, and risk supply chain disruptions, leading to drug shortages and higher prices for U.S. consumers." UBS analysts agreed, stating that tariffs could significantly hurt drugmakers' margins on products manufactured outside the U.S.
Lilly has three options in light of the steep pharmaceutical tariffs Trump has threatened. The option the president hopes drugmakers take is to relocate manufacturing to the Unites States. Lilly is already planning to build up its U.S. operations so that it can supply all products sold in the U.S. entirely from U.S. manufacturing facilities. However, it's doubtful that the company will complete this effort within the 12 to 18 months Trump mentioned. UBS said in a note to investors that four to five years is more reasonable for relocating manufacturing operations.
The second option for Lilly is to pass higher prices along to customers. The Pharmaceutical Research and Manufacturers of America (PhRMA) estimates that a pharmaceutical import tariff of only 25% would increase prices by as much as 12.9%.
Lilly's third option is to absorb the higher costs. Pharmaceutical tariffs of up to 200% could hurt the company's margins considerably.
Evaluating the threat
Let's return to our original question: Can Eli Lilly withstand the threat of Trump's new sweeping tariffs? I think the answer is "yes," albeit with a major caveat. The devil is in the details. Lilly's ability to navigate high tariffs depends on exactly what the Trump administration plans to do.
Ricks said in Lilly's Q1 earnings call that tariffs would "have a transient effect for Lilly, but probably not a long-term one." I suspect he's right.
The company already manufactures many of the products it sells in the U.S. inside the country. Those products wouldn't be affected. As Ricks mentioned, Lilly is already boosting U.S. production, which will also help.
Finally, don't discount legal challenges to the president's tariffs. An argument could be made that pharmaceutical products made in Ireland, the primary overseas source for Lilly, don't present a national security threat to the U.S., since Ireland is a staunch ally.
Granted, Lilly could face a bumpy ride for a while. But I don't think the threat of tariffs undermines the long-term investment thesis for this top pharma stock.
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