Tariffs could drive drug and medical-device prices higher

If President Donald Trump continues to drive up the cost of Chinese imports through new tariffs, it could roil the healthcare industry, particularly embattled generic-drug manufacturers, experts said.

Trump has imposed tariffs of 25% on steel and 10% on aluminum imported from China, as well as a few other countries. While they have only affected a small portion of the Chinese steel sector, threats to expand the taxes would affect manufacturers of more than 1,300 goods. Come June, additional levies could be placed on raw drug ingredients, insulin, epinephrine and vaccines.

Generic-drug manufacturers, which source most of their active ingredients from China and India and are already enduring massive spending cuts amid the deflationary market, could be hit the hardest, said Edward Allera, with Buchanan, Ingersoll & Rooney. Higher manufacturing expenses could inflate prescription prices and insurance premiums. Also, if more generic-drug manufacturers close, it could exacerbate the persistent drug shortage problem in the U.S., Allera said.

"Changing suppliers for drug companies is very hard and takes a long time to get approved," he said. "In a competitive, deflationary industry where it is a race to the bottom, the impact could be significant."

Generic drugs make up more than 80% of the total pharmaceutical market, which has helped slow the trend of rapidly rising drug spending.

But plummeting drug prices and consolidation among buyers have buffeted generic-drug manufacturers. The situation is dire enough that a group of health systems—Intermountain Healthcare, Ascension, SSM Health and Trinity Health—are planning to launch their own generic-drug operation.

The leading generic-drug producer, Teva Pharmaceuticals, is laying off more than a quarter of its workforce, about 14,000 employees, and closing about half of its 80 manufacturing plants. Endo Pharmaceuticals has cut about half of its employee base as its generic-drug division slashes its product portfolio.

The three biggest wholesale drug distributors, which have closely aligned with large retail pharmacies, control about 90% of the generic market.

"The good news is the buying power brought prices down enormously and provided enormous savings for patients, but the sustainability of the business model is at stake and these proposed tariffs would provide yet another hit to the generic industry," said Jeffrey Francer, senior vice president and general counsel for the Association for Accessible Medicines, which represents generic manufacturers. "We are also concerned that eventually companies could continue dropping products, which would increase the potential for shortages."

The Advanced Medical Technology Association, which represents medical-device companies, said in a statement that it is disappointed by the proposed tariffs, which could affect the health and well-being of patients.

The U.S. is also renegotiating the North American Free Trade Agreement. The Trump administration is pushing for 12 years of exclusivity for new biologics, which could cut off competitors.

The Food and Drug Administration has approved only nine biosimilars and only three are on the market. These actions could stymie their growth, despite regulators' guidance that increasing generic and biosimilar competition is an effective tool to bring down drug prices, Francer said.

"That type of guidance doesn't appear to be followed in the trade agreement," he said.