With pharmaceutical tariffs looming, guidance on compliance is still lacking

With tariffs on patented pharmaceuticals and input materials set to take effect for all companies on Sept. 29, the lack of clarity about rules and exemptions is complicating business decisions and creating uncertainty for investors.

What does seem certain is that pharmaceutical tariffs will reduce the funds biotechnology firms have to develop treatments, discourage investors, and threaten patients’ access to drugs. For these reasons, pharmaceuticals have traditionally been considered off-limits for tariffs.

“At a time when the U.S. is competing to maintain global leadership in biotechnology, policies that raise costs, discourage innovation, and weaken our competitive position ultimately make it harder to deliver for patients and strengthen the economy,” warns Kelly Seagraves, VP of National Security & International Affairs at the Biotechnology Innovation Organization (BIO). “We urge the Administration to consider alternative policies for bolstering U.S. manufacturing and resilient supply chains.”

For now, BIO continuously seeks guidance on tariff compliance and potential exemptions, to inform the industry.

On Sept. 14, with two weeks until implementation, BIO’s experts say much of the necessary federal guidance is still missing, and the lack of information adds further challenges to an already challenging situation.

What is known

Based on a Presidential Proclamation signed April 2, 100% ad valorem tariffs on patented pharmaceutical products and associated input materials go fully into effect on Sept. 29.

There are several potential reductions or exemptions for specific companies, countries, and products:

•  Countries of origin matter: The tariff is reduced to 15% for non-exempt products from Japan, the EU, Korea, and Switzerland/Liechtenstein. Tariffs on U.K. imports are 0% following an August 4 Federal Register Notice from the Department of Commerce.
• Companies can reduce tariffs to 20% or 0%, by negotiating an onshoring plan with the Department of Commerce or by negotiating both an onshoring plan and a Most Favored Nation (MFN) pricing agreement with the Department of Health and Human Services. These reductions are temporary, expiring April 2, 2030 and January 20, 2029, respectively.
• Products that are exempt include generics and biosimilars until April 2, 2027, with a mandate to reconsider generic eligibility in 2027. The Proclamation also notes several classes of drugs that may be exempt, but only if they originate from a country with a trade and security framework agreement or they meet an urgent U.S. health need.

What is unknown

The lack of specific guidance for the industry on what products will be exempted and how exemptions will be granted means both industry and the U.S. government will be under immense time pressure, making it highly unlikely the pharmaceutical tariff regime can be fully implemented on Sept. 29. Implementation will require further guidance, including:

• Specifics on product exemptions: Companies need to know whether their products qualify for Clause (3)(d) exemptions. These may include orphan drugs, nuclear medicines, plasma-derived therapies, fertility treatments, cell and gene therapies, antibody drug conjugates, and medical countermeasures for public health threats. However, there is uncertainty about the details of qualifying for these exemptions. Other questions concern importing branded, off-patent drugs, or the input materials to manufacture in the U.S. patented pre-commercial products that are not yet making money.
• Case-by-case product decisions for an “urgent U.S. health need”: The Commerce Department has indicated decisions about exemptions for meeting an “urgent U.S. heath need” will be made on a case-by-case basis. Yet companies are still awaiting Commerce guidance on the process to request an exemption.
• Preparing the requested information undoubtedly increases compliance and administration costs—a particular challenge for smaller and mid-size biotech companies with small teams and limited capital. Further, application and government review could be time-consuming, adding to uncertainty about when tariffs apply and how much they will be.
• Countries with trade and security framework agreements: The second avenue for a Clause 3(d) exemption is that the product originates from a specific set of countries. The U.S. government has still not shared which countries these are. 
• MFNs and onshoring: There are no clear parameters for MFN or onshoring deals, which are apparently handled case-by-case.

This continued uncertainty raises questions about short-term implementation. In one scenario, all eligible pharmaceutical products would be charged tariffs based on country of origin, and companies granted exemptions might receive refunds later. Alternatively, the government could delay collection of tariffs on potentially exempt products but collect retroactively. A final option would be a Presidential decision to forego or delay implementation, giving both companies and the government sufficient time to determine eligibility for exemptions.

Impacts on biopharma and patients

Impacts are hard to predict with so many unknowns about the total amount of tariffs that will be collected and what companies and products will be charged, BIO experts say.

For many companies, an exemption could be the difference between 100% tariff rates and no tariffs. The resulting uncertainty around costs for the industry and individual companies is an impact itself. It frightens investors and complicates business planning, making companies hesitant to spend on R&D when their capital needs are uncertain.

The challenge is particularly acute for the small- to medium-sized companies that are responsible for 71% of the industry’s output and 54% of the new drug applications, according to BIO. The smaller innovative companies generally have less available capital to adjust to shocks like tariffs.

The anticipated impact on patients will be two-fold. First, out-of-pocket costs can be expected to rise when importing drugs is 100% more expensive. Second, there will be negative impacts on innovation as companies that lose income due to tariffs spend less on R&D. Access challenges may arise if some companies stop importing certain drugs into the U.S. altogether.

What to do instead of tariffs

The tariffs are being implemented after a Department of Commerce Section 232 investigation determined that global supply chains are risky, and that onshoring drug production bolsters national security. But BIO experts note that tariffs actually create new disturbances in the existing supply chain.

There are better ways to protect global supply and attract manufacturing back to the U.S., according to BIO. These include strategic incentives, such as tax credits for building domestic manufacturing, and investments in U.S. biotechnology and biomanufacturing workforce development.

Appropriately targeted, non-tariff measures could secure supply chains while freeing small- and medium-sized biotechs to invest more in innovation. The improved clarity and certainty would benefit biotechs, investors, and patients.

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