Potential US tariff exemption for Swiss pharma is not necessarily a boon

For smaller drug manufacturers, even a 10% increase in operating costs can be fatal. Keystone / Gaetan Bally

American President Donald Trump is pressuring the pharma industry with tariffs, from which Swiss manufacturers might be exempted. But experts say that tariffs will have less impact on the industry than pricing.   

Rumours of preferred treatment for Swiss pharmaceutical exports to the United States have been circulating online over the last few weeks, as the two countries are finalising an agreement on Washington’s reciprocal tariffs, which is expected by August 1. The US would refrain from imposing tariffs on an industry vital for Switzerland, according to anonymous sources speaking to Bloomberg. 

But President Trump made no mention of a Swiss exemption when he declared two weeks ago that from August 1, US customs will gradually impose tariffs on pharma imports that will eventually reach 200% over the next year-to-year-and-a-half. 

This was the conclusion of an investigation which the US administration launched mid-April to determine whether the country’s pharmaceutical imports posed a threat to its national security. Drugs have historically been exempt from tariffs, thanks to a 1995 World Trade Organization agreement.

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Pharmaceuticals account for 40% of total Swiss exports by value, making it the largest exporting industry. Over half (60%) of those pharma exports are to the US. In what some analysts said were attempts to woo the Trump administration, Swiss and international manufacturers have pledged to invest billions of dollars in the US since the beginning of the year.  

But beyond the headlines, experts Swissinfo spoke to say that whether Swiss pharma is included or not in the final tariff deal, will make little difference to the industry. They say large pharma companies, which have important profit margins on drugs, can swallow higher tariffs. They add tariffs are a better option than lowering drug prices, which is another of Trump’s goals and an argument he is using to negotiate.

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“The potential Swiss preferential treatment is of course headline grabbing, but it’s less relevant than we think, because it’s not a guarantee of exemption from tariffs which will still be used if manufacturers don’t give in to price concessions,” explains Fabian Wenner, equity research analyst at Julius Bär. 

President Trump has been using tariffs as a leverage to pressure the industry into relocating manufacturing plants to the US. His goal is to allow the US to control the drug supply chain and boost local manufacturing.

‘Tariffs are the lesser evil’  

President Trump has also been focusing on lowering US drug prices, which are the world’s highest. In the US a cancer treatment with Merck’s Keytruda drug costs about $191,000 (CHF152,476) annually, more than doubleExternal link the price in France of $91,000. This is due to deals secretly negotiated between pharma groups and governments based on a mix of economic, regulatory and clinical criteria, like a country’s revenue and the number of doses it orders. 

The reason for such high prices is that manufacturers often register their products in the US first (the world’s biggest pharmaceutical market) and guarantee that Americans always access the latest medicine before other countries. Pharma companies also need to cover high costs incurred by class action suits and settlements, which are more frequent in the US than in other countries, according to Wenner.

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In a bid to lower prices, President Trump has been attempting since 2020 to introduce a Most Favoured Nation (MFN) domestic policy to align US drug prices to those of the lowest-paying countries. Experts say lowering prices would chip at pharma companies’ profits and harm them in the long term. 

“It’s very likely that these tariffs are the lesser evil of the two and they will more easily be accepted by pharma companies than price reductions,” explains Wenner. “This is because once prices are lowered, it’s very hard to raise them again”. The introduction of the MFN policy requires Congress’ approval, which will be difficult to o obtain, according to the analyst; lowering prices would have far-reaching consequences and could even impact US employment. 

“The industry doesn’t seem to be majorly anxious about tariffs, because they will be introduced gradually and most pharma groups already have capacity to produce in the US,” says Wenner, “This includes Roche and Novartis because a large percentage of their sales were already going to the US compared to Merck, Bayer or Sanofi”. Stocks were up 1% according to the NYSE Pharmaceutical Index, which tracks big pharma, a week after the announcementExternal link. 

Roche CEO Thomas Schinecker told the media during the company’s first-quarter earnings call in April that four drugs in its portfolio accounted for 92% of the company’s tariff exposure. Their manufacturing will be moved to the US, where the company has been operating at 50% of capacity until now. 

Early April, Novartis announcedExternal link plans to invest $23 billion in the US over the next five years. It added it will set up two innovation hubs, four manufacturing facilities and create 1,000 jobs at the company, so that “all key Novartis medicines for US patients will be made in the United States”.

Foreign raw material in pharma 

In the medium term though, moving production to the US won’t shield pharma companies from the cost of importing active pharmaceutical ingredients (API), the core components that make drugs effective. APIs are often manufactured in countries others than those in which drug companies are based, including for US producers. Generally, U.S. Customs and Borders Protection consider where the API is manufactured to be the country of origin of a drug.  

“Until pharmaceutical companies are really able to ramp up production in the US, they’re heavily dependent on foreign raw material production,” says Jonathan Baumeler, director of Indirect Tax/Global Trade, at consultancy EY’s Swiss branch.   

Over half of the API manufacturing volume was based in India (32%) and the EU (20%) in 2024, according to data by US Pharmacopeia (USP). Excluding IV fluids, of which the US produces significant volumes, only 12% of total API volume is made domestically. 

According to Baumeler, the 18 months or so deadline for the tariffs to come into full force isn’t sufficient to transpose all production to the US. Pharma companies EY has been speaking to are instead considering a five-to-six-year timeline. Not only is changing supply chains complex, it also requires a series of regulatory approvals. 

For now, it seems producers will continue to import finished drugs into the US, a cost larger players can cover without impacting the final price for the consumer. For smaller producers, however, even a 10% increase in operating costs can be fatal, especially for generic producers who operate with much smaller margins than branded drug manufacturers. If smaller manufacturers are unable to cover costs, experts have warned this could lead to drug shortages.

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Based on 2024 imports, EY estimates tariffs of 10% to lead to $14.39 billion additional costs for the whole industry. Several scenarios exist to cover price hikes: international manufacturers that import products into the US absorb the costs, customers take the hit with higher prices, or American companies buying imported goods cover the expenses because they can’t find other manufacturing partners. 

Until the situation with tariffs is clearer and prices are negotiated with the American government, international manufacturers are the ones who will need to cover fees if they want to continue to access the market, according to the EY consultant. For now, ahead of a final decision, companies are stock building in the US. “They want to make sure they have products in free circulation in the US,” says Baumeler. But experts warn that even if tariffs will likely reshore manufacturing and create jobs in the US, President Trump will use other tools to push them to lower drug prices.

Edited by Virginie Mangin/ac