Industry Urged To Watch And Wait For US/China Tariff War To Blow Over
Executive Summary
Don’t do anything rash to avoid US tariffs on drug products, ingredients and supplies from China, consultants advise. It would be better to just wait to see if the tariff war blows over.
Because of the uncertainty surrounding the Trump administration's tariff war with China, supply chain advisors are cautioning firms that import drug products and ingredients from China to take a wait-and-see approach.
There's no point yet for firms to try to avoid tariffs by building manufacturing facilities in the US or even rerouting supply chains through existing facilities in the US or India.
Even though these taxes on imports could challenge the profitability of marginally priced generic and over-the-counter drugs sourced from China, they would not squeeze margins enough to justify investing in new facilities. They won’t even make it worthwhile to request FDA approval to switch to contract manufacturers or suppliers outside of China.
It is the regulatory framework that makes it so time consuming and expensive for the pharmaceutical sector to change suppliers, explained Catherine Geyman, director of enterprise risk management at London-based Intersys.
“The strict validation requirements (that often vary by country/regulator) constrain every material that could influence the quality of the final product,” Geyman told the Pink Sheet.
Geyman, who led the firm’s development of a supply chain risk management software tool, said these regulatory constraints mean “that equipment or suppliers cannot be simply replaced if they fail to perform or fail catastrophically.”
The same goes for contractors, suppliers or equipment located in countries subjected to high tariffs, she said. With respect to tariffs, I would expect that the cost of qualifying non-Chinese facilities might outweigh the uplift caused by the tariff.
Hedley Rees, managing consultant, PharmaFLow Ltd., Bridgend, UK, agreed there is simply no point in mapping out alternative supply chains to avoid the Trump administration’s proposed China tariffs: “the lead time and cost to change suppliers is completely prohibitive.”
How should pharmaceutical companies be responding? “Watching and waiting,” he said. “It will all blow over.”
The Trump Tariffs Timeline
Drug products, active ingredients and excipients have appeared on and disappeared from lists of new 25% and 10% US tariffs on goods from China in a flurry of activity over the past few months.
The uncertainty may persist for some time as the Trump administration uses tariffs as weapons in a trade war with China. It is possible that some marginal drug products may have to be sold at a loss until firms can renegotiate prices.
Here is the timeline so far for US tariffs on China pharmaceuticals:
April 6
On April 6, US Trade Representative Robert Lighthizer’s office published a notice in the Federal Register proposing a 25% tariff on a list of products imported from China.
On that list were a number of drug products, active ingredients and related materials, including: amphetamine, lidocaine, droperidol, somatotropin growth hormone, certain aromatic drugs derived from carboxylic acids, certain aromatic monoamine antidepressants and tranquilizers, polypeptide hormones, protein hormones and glycoprotein hormones, estradiol benzoate, estradiol cypionate, prostaglandins, thromboxanes and leukotrienes, epinephrine, levothyroxine sodium, vaccines, antibiotics, insulin, immunological products, fetal bovine serum, pseudophedrine, antimalarials, penicillins, streptomycins, medicines containing adrenal cortical hormones, certain vitamins, hyaluronic acid, and adhesive dressings coated or impregnated with pharmaceutical products.
June 20
After generics, over-the-counter and active pharmaceutical ingredient firms complained, (Also see "Generics, OTC AND API Groups Object To Proposed US Tariffs On Goods From China" - Pink Sheet, 23 May, 2018.) the USTR on June 20 published a revised list of products subject to the proposed 25% tariff – from which all the pharmaceutical products and ingredients had been removed.
July 10
After the USTR on July 6 began imposing the 25% tariff on the revised list of products, China imposed retaliatory tariffs. President Trump then ordered the USTR to work on imposing 10% tariffs on additional Chinese imports.
On July 10, the USTR proposed to subject a list of products to the 10% tariff.
On that list are a number of drug products and ingredients, none of which had been on the list previously proposed for the 25% tariff.
Included on the proposed new 10% tariff list:
- Ibuprofen, the active ingredient in Advil and Motrin nonsteroidal anti-inflammatory drugs;
- Valproic acid, an anticonvulsant used in treating epilepsy and bipolar disorder;
- Benzoyl peroxide, an acne treatment active ingredient;
- Salicylic acid, used topically for acne, dandruff, psoriasis, corns, calluses and warts;
- Salol (Phenyl salicylate) suitable for medicinal use;
- Anthraquinones, used for constipation, but not quinone drugs, which had been on the 25% tariff list;
- Imidazole, a key component of the active ingredient of some antifungals that is also used to elute proteins from chromatography columns; and
- Methacrylic acid, which the website Drugs.com says is a precursor for many ester products used as excipients for enteric-coated and delayed release drug products.
Also on the new list are pharmaceutical ingredients such as lactic acid, maleic acid, malic acid, adipic acid and sucralose.
As pharmaceutical companies and their trade groups prepare requests for removal from the 10% tariff, they may be mindful of the possibility for additional retaliation from both China and the US. (Also see "U.S-China Trade War Heats Up; Should Health Sector Start Worrying?" - Pink Sheet, 11 Jul, 2018.)
From the editors of the Gold Sheet.