Drug tariffs cast cloud over smaller biotechs

• They're intended to pressure the firms to enter into more "most favored nation" drug pricing deals, but could just as easily convince some companies to sell out to Big Pharma companies or scale back operations, according to industry watchers.
• Some manufacturers could also pass through the added cost in the form of higher list prices or lower rebates to purchasers.

Driving the news: 100% tariffs on certain patented drugs and ingredients took effect on Tuesday, in the latest action stemming from President Trump's April order on adjusting pharmaceutical imports to the U.S.

• The duties hit at a time when more than half of branded drug products have at least one manufacturer outside of the U.S. The Department of Commerce says that poses a national security threat and justifies the kind of sectoral tariffs that it's levied on autos, steel and aluminum.

• The first phase of the tariffs took effect at the end of July on large drug manufacturers. This stage takes aim at smaller companies with limited resources that are more at risk, because of their heavy reliance on overseas manufacturing.

The administration is offering three-year exemptions from tariffs to companies that enter into voluntary MFN agreements and commit to onshoring production.

• Those that just agree to onshore manufacturing would face a 20% tariff until 2030.
• Last week, the Commerce Department clarified that nine categories of specialty drugs from jurisdictions that have trade agreements with the U.S. — including the European Union, the U.K., Switzerland, Japan and South Korea — would also be exempt.
• Other products could win carve-outs, if manufacturers demonstrate that they meet an urgent public health need.
• Generic drugs are for the most part exempt.

That still leaves more than 100 firms that have products that are subject to the duties and may not have the resources to shift production to the U.S., according to Marta Wosińska, a senior fellow in economic studies at the Brookings Institution.

• Some of the firms may not have any production facilities and simply contract with manufacturers in pharma hubs like India or Singapore.
• "The question is how easy is it for these companies," she said. "If it isn't possible, the easier thing might be to merge [with a big drugmaker] or sell the product."

Drug and biotech manufacturers say new duties will siphon money away from R&D and erode companies' competitiveness.

• "With these tariffs, the United States has reversed decades of sound trade policy, creating new uncertainty for biotech innovators, and increasing the burden on the small- and mid-sized companies responsible for many of tomorrow's breakthrough medicines," a spokesperson for the Biotechnology Innovation Organization said.
• The trade group's CEO, John Crowley, this month urged the administration to withdraw the tariffs or create broad exemptions, citing the risk of "inconsistent and unpredictable decision-making" that could compromise patient access.

What we're watching: It's not clear how quickly the Commerce Department will make exemption decisions, how it will define an urgent public health need, or whether manufacturers that win a carve-out will get the tariffs they paid during the review process refunded.

• Some industry observers say there could be legal challenges to the tariffs and the national security rationale for levying them.
• Those smaller firms that do opt to onshore production to avoid tariffs could strike deals with domestic contract manufacturers, since investing in new facilities and hiring workforces could be prohibitively expensive.