Details on the tariffs

In the executive order, President Donald Trump stated that he had "determined it is necessary and appropriate to impose a 100 percent ad valorem duty rate on the import of patented pharmaceuticals and associated pharmaceutical ingredients."

The tariffs will be enacted under Section 232 of the Trade Expansion Act and are unaffected by the February Supreme Court ruling that struck down the Trump administration's tariffs enacted under the International Emergency Economic Powers Act.

A senior administration official on Thursday said companies who commit to manufacturing drugs in the United States will be subjected to a lower tariff rate of 20%. Companies will be entirely exempt from tariffs if they commit to onshore manufacturing and enter a "most favored nation" agreement.

In addition, drugs from the European Union, Japan, South Korea, and Switzerland will face a 15% tariff while drugs from the United Kingdom will face a 10% tariff.

The tariffs will only apply to branded drugs and their active ingredients. The administration noted that tariffs on lower-cost generic drugs and biosimilars will be reassessed in a year.

The senior official told reporters they anticipate "the lion's share" of patented drugs consumed by Americans will be made in the United States. "We need to make sure our drug supply is protected, secure, and domestic," the official said.

The tariffs will take effect in 120 days for certain large companies and 180 days for smaller ones.

Reaction

In a statement, U.S. Trade Representative Jamieson Greer said Trump's executive order will ensure "our trading partners pay their fair share for innovative pharmaceutical products, so that American patients are not shouldering the burden of funding research and development for the next generation of life-saving medicines."

HHS Secretary Robert F. Kennedy Jr. specifically called out the administration's deal with the United Kingdom that will result in the U.K. paying a lower tariff rate.

"President Trump's agreement with the United Kingdom is another big step toward ending a system that forces Americans to pay more so others can pay less," Kennedy said. "American patients deserve the same affordable access to the medicine they need as patients in the U.K."

In a note to clients, RBC Capital Markets analyst Trung Huynh wrote that the tariff announcement "removes a policy overhang" on biopharma companies that has existed ever since the U.S. Department of Commerce started its investigation almost a year ago. "The policy is designed to reward cooperation, and almost every major drugmaker cooperated," Huynh wrote.

Overall, Huynh said he believes the sector will largely be spared major damage. "This is a positive relative to investor sentiment and our prior expectations," he wrote. "Smaller companies pursuing large indications may be most vulnerable, but overall we think given high margins, potential carve-outs, and time to adjust, the overall threat to the sector should be low."

Huynh also noted that the exemption for companies entering most favored nation deals and manufacturing investments is slated to sunset at the end of Trump's term on Jan. 20, 2029, which leaves the potential for future harm to drugmakers.

"Companies are making 20-year [property, plant and equipment] investment decisions based on three-year policy certainty," he wrote. "If the next administration reverses course, $400 [billion] becomes stranded cost. Even if the exemptions are extended, there's no guarantee new concessions won't be demanded, creating a perpetual 2029 overhang."