Pharma Inc mulls offshore strategy as US tariff fears hit sentiment

Business Standard

2 days ago

Pharma Inc is brainstorming ways to weather the tariff storm — even though drugs are currently exempt from US tariffs.
Several companies that Business Standard spoke to said they were engaged in scenario-building exercises involving mid- and long-term strategies such as offshore manufacturing, diversifying raw material sources, and exploring contract manufacturing in the US.
The Nifty Pharma index dipped in early trade but recovered by market close, ending in the green. Aurobindo Pharma closed lower, while most pharma stocks rebounded after the initial decline. (See chart.)
US President Donald Trump has imposed an additional 25 per cent tariff on Indian exports over the purchase of Russian oil, effectively raising tariffs to 50 per cent. Pharmaceuticals, however, have been excluded under the recent US Executive Order, as the sector is under review through a Section 232 investigation.
On April 14, 2025, the US Department of Commerce's Bureau of Industry and Security (BIS) launched a Section 232 investigation into the pharmaceutical sector. The inquiry aims to assess the impact of specific pharma imports on US economic and national security interests.
The Indian industry believes that since generic medicines are critical for affordable healthcare in the US and typically operate on razor-thin margins, ensuring their consistent availability is vital. 'The India–US partnership is key to securing active pharmaceutical ingredient (API) supply chains and enhancing healthcare resilience,' said Sudarshan Jain, secretary general of the Indian Pharmaceutical Alliance.
An executive director of a leading Indian drugmaker with a strong US presence told Business Standard, 'Generics are about access to medicines, and India is about low-cost manufacturing. China is not interested in generics, and currently, there's no viable alternative to India for the US.'
He added that companies are evaluating multiple options to safeguard interests, with the US accounting for 35 per cent of India's total pharma exports.
'In the short term, discussions revolve around how much of the tariff—if imposed—can be passed on. This will vary across molecules. Where some Indian players slash prices, others may find the market unviable and exit, which could lead to drug shortages in the US,' he said.
Another strategic consideration is offshore manufacturing. 'Indian companies are actively evaluating the feasibility of shifting some manufacturing to the US. Some firms already have a presence there, but such moves have long gestation periods,' said an industry veteran.
He elaborated that conversion costs — the cost of turning raw materials into finished products — are nearly 3–4 times higher in the US, largely due to labour. 'Manpower accounts for nearly 70 per cent of conversion costs. Shifting manufacturing to the US raises overall production costs by 1.5 times compared to India,' he said, adding that firms are also exploring contract manufacturing models.
'One option is to split the contract — processes A to X in India, and Y and Z completed in the US,' the official explained.
Another idea circulating within the pharma sector is whether India should increase its alignment with the European Union. 'It doesn't make sense to manufacture in every country — Europe can't be painted with one broad brush. But expanding the footprint in the EU to reduce exposure to US policy shifts is under serious consideration,' said a senior executive. A potential advantage is that US–EU tariffs may differ significantly from India–US rates.
Raw material security is another priority. 'If tariffs are imposed, Indian exporters won't be replaced overnight, but they'll be disadvantaged. China may opportunistically raise bulk drug prices. Companies are therefore working to diversify sourcing,' said one exporter.
India supplies over 40 per cent of the generics used in the US, including for chronic, infectious, and oncological conditions. 'Tariffs on Indian pharma would be counterproductive, ultimately burdening US consumers. Indian companies manufacture low-cost generics — not high-margin products — so any additional cost will be passed on,' said Namit Joshi, chairman, Pharmexcil.
'Replicating India's pharmaceutical capabilities would take 3–5 years at minimum, with major challenges in achieving similar scale, cost efficiency, and talent availability. India has over 700 USFDA-approved facilities, and 12 per cent of industry earnings are reinvested in compliance. Around 55 per cent of Indian pharma exports go to tightly regulated markets like the US, UK, and EU,' Joshi added.
What's causing unease is Trump's recent statement suggesting a potential 250 per cent tariff on pharmaceutical imports in future — a move that most in the industry believe is unlikely but alarming.
'A 250 per cent tariff isn't just economically unviable — it's commercially absurd. While it may never materialise, even the threat sends shockwaves through a sector where India supplies the bulk of generics to the US. Anything beyond 25 per cent is a red line. Indian companies won't absorb that cost — they'll pull back, cut volumes, or pass it on. That means fewer drugs and higher prices for US patients. This isn't protectionism — it's self-sabotage. Right now, it's sentiment-driven damage, but if this threat lingers, it could fracture a deeply interdependent supply chain,' said Nirali Shah, pharma analyst, institutional research, Ashika Group.