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Indian drugmakers supply 47 per cent of the generic medicine requirements in the US, and tariffs would have increased prices in the US domestic market for patients, who are already dealing with drug shortages.
In a major relief for Indian drugmakers, US President Donald Trump has exempted pharmaceuticals from a reciprocal tariff of 27 per cent, acknowledging the vital role the Indian drug industry plays in the US generic medicine market.
Indian drugmakers supply 47 per cent of the generic medicine requirements in the US, and tariffs would have increased prices in the US domestic market for patients, who are already dealing with drug shortages.
The Nifty Pharma reacted positively to the news, rising 2.25 per cent. Companies with significant US exposure, such as Sun Pharmaceutical Industries, Cipla, and Lupin, saw their shares rise between 3 per cent and 6 per cent during the day.
The Indian Pharmaceutical Alliance (IPA), which represents the country's large research-driven drug firms that together constitute around 80 per cent of India's exports, said that the decision to exempt pharmaceuticals from tariffs underscores the critical role of cost-effective medicines in public health.
"The decision underscores the critical role of cost-effective, life-saving generic medicines in public health, economic stability, and national security," said Sudarshan Jain, secretary-general of IPA.
"India and the US share a strong and growing bilateral trade relationship, with a shared vision to double trade to $500 billion under the Mission 500 initiative.
"Pharmaceuticals remain a cornerstone of this partnership, as India plays a vital role in global and US healthcare by ensuring a steady supply of affordable medicines," he added.
The IPA had requested the government to consider removing Customs duties on drug imports, which range between 5 per cent and 10 per cent.
India exports $8.7 billion worth of drugs to the US while it imports around $800 million worth of medicines.
However, two major uncertainties loom over the sector for now -- the risk of future tariffs on the industry and the impact of raw material (bulk drug) price fluctuations, given India's dependence on China for supply.
Analysts said that even if a 10 per cent tariff were imposed (as India imposes an import duty of 5-10 per cent on drugs), the impact might not be substantial.
BNP Paribas analysts noted that any incremental tariff (if imposed) would have to be absorbed by the manufacturer or members of the supply chain (retailers, distributors, pharmacy benefit managers), along with consumers.
"We believe Indian generic companies will bear only a small proportion, as they operate at a low margin compared to innovators.
"With a 10 per cent baseline tariff cost, we see a 1-2 per cent impact on 2026-27E (FY27/E: Estimates) earnings before interest, tax, depreciation, and amortisation (Ebitda) in our base case," the analysts observed.
In fact, for companies with 17-45 per cent revenue exposure to the US for FY27E, analysts felt they would absorb 20-40 per cent of the cost, resulting in a 1-2 per cent adverse impact on FY27E Ebitda.
Aurobindo Pharma, Zydus Lifesciences, and Dr Reddy's Laboratories are likely to see the highest impact if a tariff is imposed.
Another risk is bulk drug price volatility. India imports nearly 70 per cent of its bulk drug requirements from China.
"For US products, most companies have captive production of active pharmaceutical ingredients (APIs); however, we still need some chemicals or key starting materials from China.
"We have to wait and see how API prices move," said a midsized exporter from Gujarat.
He explained that China may keep prices competitive as it now faces high tariffs to enter the US market with bulk drugs.
However, with currency fluctuations, if the rupee weakens, the cost of raw material imports will rise.
Bhavin Mukund Mehta, vice-chairman of the Pharmaceuticals Export Promotion Council of India (Pharmexcil), told Business Standard that "China's API producers will face pressure, which may force them to sacrifice part of their profits to retain orders from the US.
"In response, they may ramp up their research and development efforts to strengthen US reliance on their products and technologies".
"Additionally, China is likely to focus on expanding into traditional markets like Europe and emerging economies.
"As China is expected to lower its prices, this shift presents a valuable opportunity for India to take a prominent role in the formulations space.
"With its strong capabilities and growing market presence, India is well-positioned to lead and effectively meet global demand," he added.
Experts thus felt that India needs to focus on increasing its competitiveness and self-reliance.
Saurabh Agarwal, tax partner at EY India, said that to fully leverage the potential of Indian pharmaceutical manufacturing, the Indian government should expand existing production-linked incentive schemes in these sectors to cover a wider range of products and extend their duration by two years.
Feature Presentation: Ashish Narsale/Rediff.com
