A time of sickness or health? ING checks pharma’s pulse

If human DNA is defined by complexity and stitched together by different constituent parts, the same can be said of the pharmaceutical industry. Its supply chain runs across borders, connecting the US to India and China – with the US and China now tangled in a trade war. So whatever anxiety existed before around the over-reliance on offshore production, these concerns have found new urgency in the Trump administration.

Amidst the uncertainty of a US tariff on the sector, ING can support clients in navigating a way forward. Our pharma and healthcare sector expertise combines a macro-level view of industry dynamics with an ear to the ground on the needs of different parts of the supply chain. In this article, we assess the implications of a potential US tariff on pharma, how companies can increase their manufacturing capacity in the short term, and why financing healthcare advances the ‘S’ in ESG.

As has become clear, an exemption from the Trump administration’s swathe of tariffs today does not mean an exemption from tariffs tomorrow. The pharma industry is bracing itself for impact, following suggestions that levies on imports could soon arrive. The fact that the tariffs would apply predominantly to India and China reveals the geographical fragmentation of the pharma supply chain and the strategic dependence the US has on offshore production.

Since the 1990s, there’s been a reversal in the share of branded vs. generic drugs. In 1984, Opens in a new tab19% of all drugs were generic; by 2024, that figure had risen to over 90%. Due to cost pressures, production was shipped to specialised factories in China and India, which, while convenient, has thrown up questions about the lack of control over such a vital supply chain. This became particularly apparent after Covid delivered a shock to the system. The desire to restore US manufacturing capacity chimes with President Trump’s ‘America First’ political and economic agenda. Yet hitting this objective might hinder another – namely, to lower costs. Should a 25% tariff on pharmaceutical products from India come into effect, for example, we expect this could add an Opens in a new tabadditional cost of roughly $42 per year to low-cost generic drugs.

This is because for generic pharmaceuticals, where the gross margin profile sits around 30-40%, there is little room to absorb the impact of tariffs. Costs have to be passed onto consumers, as the alternative is a risk of drug shortages. In a post-Covid world, one in which the US relies overwhelmingly on generic drugs, that’s a risk few are willing to take. 

The story takes a different shape for proprietary pharma. These companies have a financial profile that makes them naturally resilient to volatility, and if needed, they can curtail investments in R&D. This would free up capital while also resulting in fewer new medicines coming to the market in the medium term. At the same time, because of their patents, these companies often benefit from a pricing power that allows them to pass through costs in the medium term, which would mean consumers end up paying more for branded drugs.

Stephen Farrelly, global lead of the pharma and healthcare sector, says:

In the longer term, we expect investments to flow in the direction of the US to build up the country’s manufacturing capacity. The likes of Johnson & Johnson, Eli Lilly, and Novartis have all committed to expanding local drug production, with more capital likely to follow to reshore the supply chain to the US.

If there is consistency across the sector, it is the general uncertainty around whether, and when, these pharma-specific tariffs might arrive. At the time of writing, there had been no confirmation from the administration, only strong Opens in a new tabindications that tariffs would come soon. From an investment perspective, this means that decisions around capital expenditure remain on pause until there is confirmation from the administration on what it intends to do.

There are three primary ways ING can support pharma clients through times of uncertainty. The first is our advisory role, using our sector expertise to explain how we see market volatility developing and the potential impacts it might have across the supply chain. We can offer both a macro and micro view, sharing what our economists are seeing and what other clients are telling us.

The second is helping clients navigate the short-term risk dynamics of any volatility. For example, there have been significant swings in the 10 Year Treasury recently, which impacts the potential profile from a bond issuance perspective. We can advise clients of when they’d have the best window of opportunity to raise capital.

The third has to do with structuring. We talk to clients and get a sense of how they should position themselves going forward. We ask questions such as:

• Does the volatility create a shift in liquidity needs?
• Do companies have increased working capital needs as a result of stockpiling?
• How can we assist them in putting facilities in place to get through the next 6-12 months?

The pharmaceutical supply chain is inherently complex. It has huge skills, capital and regulatory needs – with FDA sign-off also required in the US. So if you were to build a new greenfield in the US tomorrow, for example, it would take around five years or more. While big pharmaceutical companies have committed to the US in the long-term, the ability to reshore existing production is a different challenge. To do so within the tenure of the current US administration is unrealistic.

Where there are time constraints, a potential solution is to tap into the CDMO (contract development of manufacturing organisation) market. There has been a shift over the decades of outsourcing pharma, especially for companies that may not need to maintain all of their own manufacturing capacity. This frees up funds to invest in R&D and allows companies to pursue their primary goal of innovating and bringing the next blockbuster drug to the market.

Novo Nordisk successfully went down this path in 2024 with the acquisition of outsourced partner Catalent for $16.5 billion. As a major player in the weight loss and diabetes prevention market, Novo had to quickly keep up with surging demand and create more capacity. Given the unfeasibility of building that capacity from scratch, it explored ways to acquire existing infrastructure that might need investments but that could ultimately prove to be a shorter pathway to meeting its needs.

If companies make those acquisitions in the US, then it offers an opportunity to avoid tariffs. However, this approach would fall short of fulfilling the administration’s stated ambitions of incrementally expanding capacity specifically to generate employment opportunities.

Given the US makes up Opens in a new tab44% of the pharmaceutical market, it is naturally intertwined with discussions on other regions. Nevertheless, there are shifts happening beyond the country’s borders that point to a changing landscape when it comes to innovation. What we’re seeing is a higher proportion of biotech investments heading to China and away from legacy hubs such as San Diego or Cambridge (Massachusetts). A lot of new medicines are starting to come from Asia rather than the US, and so the region is beginning to shake off its identity as solely a manufacturer of generic pharmaceuticals.

In the EU, the recently proposed Opens in a new tabCritical Medicines Act is indicative of the bloc’s desire to produce more generic drugs at home. It’s a positive move, though one that could be undermined should US pharma tariffs against India and China take hold, leading to a potential influx of generic drugs into Europe from these two countries. Domestic producers may struggle in that case to compete on price. The question would then be whether Europeans would be willing to pay more for locally produced medicines.

We’ve spoken to companies all along the value chain, and each agrees that acting more sustainably is good business.

- says sector economist Diederik Stadig.

There are a number of ways it can help to achieve better financial results. One interesting trend is the digitalisation of care: with healthcare providers under increasing strain from ageing populations and a rise in chronic diseases, integrating digital solutions into healthcare can alleviate that pressure. Telemedicine and at-home care, for example, frees up hospital beds, contributing to a more efficient operating model that saves on energy and saves on costs.

To move a step beyond remote care, one of the best guarantees of a more sustainable healthcare delivery is if people don’t become patients in the first place. Taking a preventative rather than a reactive approach means, in theory, fewer people needing any kind of treatment. Soon, this will turn from being merely an ambition to a necessity: too few doctors and nurses serve too many patients. The WHO even predicts that there will be a shortage of 4 million health and social care workers in Europe by 2030.

We can already point to real-world examples of preventative care in action. Advancements in colorectal cancer screening has meant that its success rate in the right population is in excess of 90%. And by getting ahead of disease profiles, healthcare professionals can direct their attention to those in unavoidable situations. ING is working with a number of clients pushing for innovation in this space.

Stephen says:

The pharmaceutical industry is, in essence, manufacturing with highly valuable patents wrapped around it. As in any manufacturing dynamic, it’s understandable that the ‘E’ in ESG takes precedent – but that shouldn’t be the end of the story. The healthcare industry fits neatly into the ‘social’ category by delivering on a universal need. Our capital allocation can be purpose-driven by supporting clients in advancing science, contributing to innovation, and increasing access to medicines. We can continue, for example, to support our clients’ endeavours in developing the next pipeline of drugs. This can assist in potentially accelerating the shift to preventative healthcare, improving the efficiency of the healthcare system, practically, economically and environmentally.

Society is transitioning to a low-carbon economy. So are our clients, and so is ING. We finance a lot of sustainable activities, but we still finance more that’s not. See how we’re progressing on Opens in a new tabour climate approach.