AstraZeneca Leads Big Pharma Tariff Response With $50 Billion Announcement
Challenges are mounting for the pharma giants that have come to rely on foreign imports.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
New tariffs are going into effect as we commence trading in the month of August and firmly enter the dog days of summer.
Changing tariff policies are just one of the ways the new administration is roiling most sectors of the economy. This is making it more challenging to get an accurate read on the economy. American firms largely front ran the initial wave of tariffs by front loading their imports in the first quarter. This helped keep the impact on profit margins lower than what they would have been on second quarter results. The longer-term ramifications of new tariffs should be more fully reflected in third and fourth quarter numbers.
This front loading was a big factor in the negative half of a percent contraction in GDP in the first quarter of this year as well. Subsequently, much lower imports in the second quarter played a good part in the initial 3% growth reading for second quarter GDP that posted earlier this week.
Obviously, the change in trade and other policies by the administration is impacting industries across the economic spectrum. Few sectors have been more impacted than big pharma. The industry has become substantially dependent for many of the precursors for pharmaceutical manufacturing on imports for China. How the U.S. allowed a critical part of the economy to become this reliant on inputs from its primary economic and military rival over the decades borders on political malpractice. However, the industry is now in an adjustment period on this front.
Over time, and with tariffs going into place across the board on all U.S. trade partners, I expect a significant uptick in the building of pharma manufacturing capacity in the U.S. over the next few years. Foreign based firms will be a major part of this manufacturing re-shoring. AstraZeneca AZN recently announced $50 billion in new U.S. investments.
The industry is also being challenged on numerous other fronts. The administration possibly ending direct-to-consumer (DTC) advertising seems to be gaining some traction. This would kibosh an important marketing channel for many major drug concerns. It would also impact media revenues significantly. It should be noted that outside of the U.S., only New Zealand allows DTC advertising for pharmaceuticals.
Changes at the FDA could have long lasting impacts to the approval process, especially for niches in the market like vaccines. An executive order came out on Thursday that resulted in letters going out to 17 large drug companies, like Pfizer PFE, Merck MRK and Novartis NVS, giving them directive to lower prices of brand-name drugs to the level of those in OECD countries.
If implemented, this could have major impacts on profit margins as drug prices in Europe and Canada are much lower than in the U.S. as Americans have been bearing most of the global burden for pharma R&D via higher drug prices for decades. This is going to be a major potential issue for the industry until resolved.
In summary, big pharma has rarely been under such duress on so many fronts. Ending on a brighter note, these policy changes could trigger a notable uptick in M&A activity in the coming quarters and years. Large drug concerns might become more motivated to acquire promising small- and mid-cap biotech/biopharma firms to expand their product portfolios. Niche drugs might become more attractive as they may be able to avoid some of the new challenges big pharma is facing.
In Monday’s column, I will highlight some potential logical buyout targets in the industry.
At the time of publication, Jensen was long PFE.
