Revisiting Pharma’s tariff reality

0:00You're listening to The Top Line, brought to you by Fierce Pharma and Fierce Biotech. I'm your host, Ayla Ellison.

0:20For months, the pharmaceutical industry has been trying to decode the Trump administration's approach to tariffs. Since early April, the White House has paired threats of sweeping import taxes with carve-outs for companies willing to strike pricing agreements or commit to new U.S. manufacturing investments. And somewhere in the middle of all of this is a question that's become increasingly important. What happens to the companies that don't have the scale, leverage, or political access of

0:52big pharma? This week on The Top Line, Fierce Pharma's Fraser Kansteiner speaks with Chris Young, principal in KPMG's Trade and Customs Practice, about the new tariff reality facing the drug industry following President Donald Trump's 100% tariff announcement in early April. They discuss why the landscape looks very different for small and mid-sized drug makers, what companies are doing to adapt, and how pharma is navigating a trade environment that still seems to shift

1:24by the week. Let's get into it. We've been tracking the White House's tariff policy for around a year now, and after several twists and turns, we finally got what seems like a bit of closure in early April, or maybe at least a little bit more clarity. With that in mind, we thought it'd be a great time to sit down with Christopher Young, principal in KPMG's Trade and Customs Practice, as we sort of try to wrap our heads around President

1:56Trump's tariffs and how they affect the pharmaceutical industry specifically. Chris, thanks so much for taking the time to chat today. Yeah, it was a pleasure. So, you know, maybe just to level set at the top here, as I said, there was a lot of kind of commotion around these tariffs as they pertain to the pharmaceutical industry beginning last year, but it, you know, was early April when we finally got some information here. So with this late of tariff announcement, where does the industry sort of stand? And also, does it sort of seem like this is conclusive in terms of any potential, you know,

2:26developments or evolutions of this policy down the line? Yeah, it's a great question. I mean, I think the one thing off the bat that struck me about the rules as they were set, as you said, in early April is their complexity, right? So I think it's really difficult to sort of give sort of blanket statements about it, but also I think for companies, for them to figure out the impact just from sort of reading the headlines, right? I think you really need to get under the surface of the rules, understand them, and then get to know your own business, of course, and figure out how it's going to impact them,

3:00right? I mean, there's really, the complexity really sits in terms of, for example, different countries have different rates if the drug products are from there. Obviously, there's various exemptions that have been allowed for generics, for example, aren't hit, patented pharmaceuticals are. But then there are seemingly certain drug types that will also get some exemptions too. So yeah, looking, there's some uncertainties about how those exemptions will be applied, et cetera. But yeah, there is a variety of different products that won't be hit.

3:33And also, you know, looking at the executive order, there's various annexes, you really got to dive into those annexes and understand, you know, some of the companies that are impacted. And then there is a large list of exempted products by tariff code. So for those that don't know, you know, every product imported into the United States has to be classified to a tariff code. And there's the two different annexes with the tariff code to really sort of tell an interesting picture about the products that are in and the products that are out of the tariff. So yeah, really complex.

4:04And obviously, it's going to take a little bit of work for companies to figure it out before the deadline day when these go into effect. Yeah, absolutely. I mean, one of the takeaways I think we got when we saw the announcement was just how loaded it was with caveats. And, you know, are you able to maybe shed any more light on any sort of trends in terms of where we're seeing those exemptions? Yeah, they're sort of spelled out in the order. So, you know, things like orphan drugs, nuclear medicines, cell and gene therapies. As I said, there's a couple of question marks about how those exemptions will be obtained

4:35by companies and how those exemptions will be implemented. But in principle, those are the types of sort of treatment areas that are being exempted. Again, you know, countries that have these sort of trade and security agreements with the US, the UK, the EU, there's a few other countries in the list as well. So if your product originates from those countries, you will also get a lower rate between 10 and 20%. So, yeah, it really varies on your supply chain. So I guess that's what I would really recommend to companies, whether you're small, medium or

5:09large, is really get to know your business, understand from a trade and customs trade compliance perspective how your products are classified, what treatment areas you're in. And yeah, get ready because those rules for most companies will apply as of September. So, you know, seems like a long way away, but it's going to come quickly. Yeah, absolutely. And, you know, we've talked a little bit about therapeutic areas. You mentioned also the sort of geographic component here. We've seen, you know, country specific deals that confer different rates of immunity. But, you know, I think more broadly, can you touch a bit on what parts of the pharmaceutical

5:41value chain are more insulated from this policy and which are more exposed? Maybe even thinking, you know, broader than just, you know, modalities themselves. Yeah. Yeah. Again, you really go dig in. But I think, you know, obviously the biggest one is generics, right? Clear exemption. Any generic drugs. So things that are not patented, things that are not on the orange book, the purple book with the FDA, right? So generics clearly exempted, you know, the ingredients for those, you know, we mentioned certain therapeutic areas, the ingredients for those two, you know, and I think again,

6:12you know, back to sort of the trade and customs trade compliance knowledge that you need to have to understand how these rules will impact you. So there's also an exemption for any US origin drugs, right? And what does that mean? Generally speaking, that means if you've got a pharmaceutical product, it is where the API was made. So if you have an API made in the US and you export that overseas for formulation and it comes back to the US, then you'll get an exemption as well. So there's a few different ways you can sort of insulate from these tariffs.

6:45And again, you know, I know it's not easy to shift supply chains around in a sort of heavily regulated environment like the pharmaceutical industry, but, you know, looking at those supply chains, what tweaks you can make to try and insulate yourselves from these tariffs using the rules as they're written. Yeah, absolutely. And I, you know, I totally hear you on the point that this really comes down to company by company considerations. It's hard to make these kind of broad statements, but I would maybe like to think about sort of, you know, how companies should be strategizing a bit now. Maybe we can attack this from a few different angles, but, you know, you had mentioned smaller

7:16and medium sized companies. You know, we've seen a lot of movement from the larger companies in terms of making these, you know, publicly telegraphed investment pledges in the US and things like that. But, you know, what are sort of the realities of this, this tariff policy for smaller and medium sized drug makers who may not have the same caliber of, you know, like resources to invest or stand up infrastructure? Yeah, yeah, it's, it's going to be tough. No question. You know, if, if you sort of, you miss out on all those exemptions, you don't fall into one of those, then yeah, you know, the rate is a hundred percent, right?

7:49So it's really going to come down, I think, to, to those smaller things that you can do. So, you know, obviously it's not just farmer that's been hit with tariffs, right? It is in a lot of other industries, metals industries, auto industries. So there's a lot of areas where, where tariffs are hit. And what we've seen is a lot of success in terms of sort of the more tactical trade compliance, tariff mitigation levers that you can pull, right? So how do you value your product when you bring it in? What does that supply chain look like? How do you unbundle certain costs from your, from your value chain, right?

8:22Legitimately in line with customs valuation rules, right? If you're processing things within the U S and then exporting again, you know, there are, there are measures that you can, you can put in place. There's a program called duty drawback, and that is allowed for these, these pharmaceutical tariffs. You can bring things in. If you export them again, you can claim back these tariffs or at least the large, vast majority of them. There's other things like foreign trade zones. And these are not, these are not huge investment of, of capital, et cetera. You know, they're, they're, yeah, I use the word tactical because they are tactics that

8:55you can use to try and minimize the effect of them. But yes, I mean, ultimately, if you don't apply, if you don't qualify for any of the exemptions and the products stay within the U S yeah. I mean that, that, that, that 100% tariff is, is going to be fairly impactful. So you mentioned some of the, the mitigation strategies companies can work through to, you know, potentially navigate this, this tariff rate, but, you know, I'm, I'm curious if there's any other recourse that the companies may have legal or otherwise, or does this sort of seem to be the, the law of the land at this point, you know, cause I just, again,

9:25there was a lot of kind of shifting and movement and, and sort of some uncertainty on the final shape of what this was going to look like as of last year. Yeah. Yeah. I think again, looking at it in, in the context of, of the broader sort of use of tariffs as a, as an economic policy tool, right. I think, you know, you look around and you can see the pathway, not just from, you know, this last 12 months or so, right. Of, of tariffs being a common policy tool, but I think you can look back all the way to, you know, to 2016 and the use of tariffs from that point as well.

9:58Right. So some have stuck around and, you know, we've had tariffs from 2016 for 10 years now, you know, a 25% tariff on China, for example, on many Chinese products, you know, steel tariffs have stuck around as well in the main with some, with some variations. So, I mean, to my mind, I don't see that this being very different, right. I mean, obviously we can look at the, the IEPA tariffs, right. Which I think you've got to really be careful and draw a distinction between what those were, what they exempted, how they've now obviously been ruled against and what replaced them,

10:30right. Which is the section 122 tariffs, right. So there's been a fairly continuous stream of tariffs with pharma products being exempted. And so I think what that tells us is that the section 232 tariffs, which is that national security provision, that seems to be a surer legal footing, shall we say, for the administration, right. There's not really been the challenges around that, that we've seen against the other tariffs. So I've certainly have no reason to think that these will go away. I mean, obviously it's quite a long runway, I would say, between when they were announced

11:01April 2nd versus when they're supposed to go into force, you know, 180 days later, as I say, for most companies, there's a 120 day deadline for some of the companies in the annexes. But yeah, I think to, to get to your question, I don't, I don't see that these will be rolled back in any way, given the history, given precedent, but, but yes, I mean, I think you've really got to keep an eye on, on the news. You've got to really monitor this, get ready, be ready, model out your impacts. And certainly that's a lot of work that we've been doing with clients is to help them do

11:33that. I was kind of wondering how companies should maybe interpret the gap we see sometimes between the announced rates and then how the policies are ultimately implemented. And then again, maybe just how companies should be sort of thinking about their strategy moving forward. Yeah. I mean, there's certainly no reason to think that the rates will change, right? I mean, as, as we know, the, as you mentioned at the start of the conversation, we've been hearing about this investigation for a long time. So now they've come out, I've no reason to think that the rates will alter, right? You know, they are very high, obviously a hundred percent, but no reason to think that

12:05they won't stick around. So I think, yes, planning a lot. We just talked about, you know, planning ahead, right? Getting ahead. I think understanding your supply chain, knowing the flows, obviously it's a little bit easier for pharmaceutical companies, right? You know, the regulatory requirements, knowing what goes in, where things are processed at each different stage, you know, grabbing that information, understanding what that means in terms of country of origin, right? As we talked about before, the rules are relatively complex around country of origin, but we've got some guidance that we can fall back on. So, you know, stepping in, understanding your flows, getting the data around those flows,

12:40applying those rules of origin. I think we talked about tariff codes, right? I think that's so important to really understand where your product sits on those tariff codes. The Annex 1, Annex 2 of the order really clearly set out the tariff codes that are in and the tariff codes that are out, right? As well as all the exemptions that you can potentially get from the order itself. So, you know, really getting now to the nitty gritty around the origin, the tariff codes. And then I think the third thing I would say is then, you know, it's the value chain, right?

13:11You know, these, these percentages, the tariffs are applied to a value. So what is that value? You know, so you looking at the customer's valuation rules, you know, if you're buying a product, what is that purchase price? What is it made up of? Are there any legitimate ways to, to lower that value? So, you know, a lot of these companies that I think are going to be impacted by this have maybe not looked at those three elements, right? Origin, classification, value, in as much detail as perhaps they need to, to really know that they're doing what they can to mitigate these tariffs down as much as possible.

13:42Would those have sort of been on the companies? I mean, you know, I think broadly, yes, but would those sort of been on companies' radars leading up to this? Or was there sort of a need to wait to see how the final policy was framed? They are a, a baseline compliance requirement. So yes, I would expect all companies to have that on their radar. I think it's just deserves a second look, right? A deep, a deeper dive, making sure that something that you did a few years ago or a policy that you implemented or a decision that you made, just going back and double checking. But yeah, I mean, those are the requirements to import.

14:14So obviously highly regulated companies, in my experience, generally get that, get that right, but I do believe, you know, it does deserve some extra attention. Absolutely. It was really great talking to you. It's always nice to connect with the KPMG and I'm glad we could kind of close the loop on this after sort of tracking this for, for so many months. Yeah, my pleasure. Great talking to you.

14:38That's it for The Top Line. I'm your host, Ayla Ellison. You can find out more about this topic in our show notes at fiercepharma.com. Look for podcasts. And that's The Bottom Line from The Top Line.