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US tariffs likely to mostly affect US generics makers
19 April 2018Sophie Cairns
On 3 April, the Trump administration threatened to place tariffs of
25% on more than 1,300 Chinese goods worth approximately USD50
billion annually. The proposed tariffs - which would apply to a
wide range of products, including active pharmaceutical ingredients
(APIs) and medical devices, as well as several treatments including
vaccines, antidepressants, insulin, and antibiotics - was met with
a threat of retaliatory tariffs from the Chinese government.
"As the Chinese saying goes, it is only polite to reciprocate," the
Chinese embassy in the United States said, according to CNN. This
led the US government to propose an additional USD100-billion's
worth of tariffs on Chinese goods.
For the time being, the tariffs are just proposals, not policy. But
what would US tariffs on imported Chinese APIs mean for
drugmakers?
Who would US tariffs on Chinese-made APIs hurt
more?
According to the China Chamber of Commerce for Import & Export
of Medicines & Health Products, in 2017, the United States
imported USD3.9-billion-worth of Chinese-made APIs, representing an
increase of 23.8% year on year. This has lead to an increasing
number FDA approvals for Chinese generics, culminating in a
near-doubling of approvals in 2017. While public health concerns
still linger over the quality of Chinese generics - this has been
the case since faulty imported Chinese heparin led to several
deaths in the US in 2008 - US demand for low-cost Chinese-made
generics and APIs continues to rise.
However, the proposed US tariffs are expected to have minimal
impact on Chinese generics manufacturers. It is well-known that
China's pharmaceutical market is a sea of generics. However, only
about 10% of Chinese generics makers sell to the US. The rest make
their income purely by selling to the domestic market, the world's
second-largest pharma market in the world.
The numbers back it up: Chinese API exports to the United States
reached USD3.9 billion in 2017, accounting for 82.5% of China's
total API exports, according to the China Chamber of Commerce for
Import & Export of Medicines & Health Products. However,
only slightly more than 500 of China's approximate 5,000 drug
makers are registered to export APIs to the United States. This
indicates that if the US tariffs do become a reality, only a small
fraction Chinese generics makers will be affected and possibly
re-direct themselves to meet growing demand at home. Chinese
generics makers are already benefiting from several favourable
policies announced by the Chinese authorities earlier this year.
(It's also worth noting that while the Trump administration's
tariffs would deliberately target China's strategic growth
industries, the tariffs are not going to deter the Chinese
authorities from their ambitions of developing their pharmaceutical
sector as part of a wider "Made in China 2025" campaign. Nor has
the threat of tariffs deterred China from its plan of slashing
import taxes on imported cancer treatments.)
For US drugmakers, however, the situation looks slightly
different.
Tariffs on Chinese APIs would be expected to punish US generics
makers, rather than companies focusing mainly on high-cost
innovative treatments. API costs typically make up a small
proportion of the overall cost of developing an innovative or
prescription treatment, given their high research and development
and marketing costs, as well as typically higher list prices. US
generics makers, on the other hand, may be more significantly
affected the proposed tariffs. This is due to the substantially
lower cost and relative lack of innovation involved in
manufacturing generic treatments, with manufacturers potentially
expected to pass the cost on to patients to preserve their
typically thin profit margins.
Any US tariffs that come into force would not do so until at least
May. US President Trump has indicated that his administration would
"probably" come to an agreement with China, according to Bloomberg.
Overall, it is anyone's guess what happens next.
