Expert: Pharma Tariffs Won't Move Generic Production From India, China

Dr. Reddy’s Laboratories CEO Erez Israeli, who used to manage active pharmaceutical ingredient sourcing for the second-largest generic drugmaker in the world, explained at the Center for Strategic and International Studies that the API industry started in Italy, due to its talented chemists and chemical engineers, and said that 25 years ago, 90% of APIs in American drugs were manufactured in Italy.

A change in patent law led to a shift to China and India, and those countries' availability of talent and cost advantage have made them dominant. Part of that cost advantage, Israeli said, is that their environmental laws are "very, very different" than in developed countries.

According to the Atlantic Council, 17% of APIs are imported from China, but India also imports APIs from China to make generic drugs there, so dependence is greater than that.

Israeli said that producing APIs or completed generic drugs is five or 10 times more expensive in the West than it is in India and China. "A 10% tariff or 20% tariff will not change that," he said June 16.

He also noted that if his firm were to plan an API plant in the U.S., the first production would not come off the line until 2030. "And this is a low-tech facility," he said.

Navin Girishankar, CSIS president for economic security and technology department, opened the program by saying the U.S. needs rational strategies for an orderly transition for the generic supply chain to reduce dependence on China.

"Someone’s going to have to pay for the transition in the supply chain," he said, a point underscored by many panelists. For instance, Israeli said that while there have been repeated shortages in the U.S. of generic Lipitor, and there is no domestic production of the statin, there is plenty of global supply.

To build a plant in the U.S. would cost "tens of millions of dollars," he said. "Who’s going to pay for it? We don’t need it. This will be ten times more expensive than a kilo we make in India."

Girishankar said that tariffs are on everyone's mind. "Sometimes you hear slapping on tariffs will automatically lead to reindustrialization," he said. "Tariffs are a tax on importers, and likely on consumers."

CSIS Economics Program Director Philip Luck, an economist who served in the Biden administration's State Department, said the federal government has "a criminal lack of understanding" of precisely what the country's dependencies are on APIs or key starting materials (KSMs) from China.

He said it's easy to look at which APIs are exported from China in trade data, but to figure out what those APIs are used for, government analysts tried for months, and couldn't figure it out. "We need to get beyond admiring the problem," he said.

Amneal Pharmaceuticals Chief Commercial Officer Andy Boyer said the president is right to focus on onshoring rather than nearshoring, because those foreign partners would have to be reliable for 15 years to make them safe. Still, he acknowledged that a domestic supply chain does not equal a resilient one, pointing to the baby formula shortages.

The panel's moderator, former senator from North Carolina Richard Burr, said that we are not going to be onshoring the whole pharmaceutical sector. He said that while pieces can be onshored, we should also rely on APIs from trusted partners. Panelist Janine Pallone, president of strategic global sourcing at Cencora, said the U.S. should coordinate with the EU, which has identified 11 products that it wants to derisk. She said there's a lot of overlap between that list and what the U.S. should pay attention to.

Luck said that you can't talk about the need for reliable foreign sources of API when the U.S. market is unreliable. "You want to provide them with the certainty that the trading relationship will be relatively stable.

"That’s a problem when you think about [Section] 232 tariffs, or [Section] 301 or IEEPA tariffs," he said.