Just like the rest of the stock market, pharmaceutical stocks are in a funk approaching the midweek mark, and it's looking like things might be about to get even worse for this particular pocket of the stock market. On Wednesday, Reuters reported that President Donald Trump is preparing to unveil a new series of tariffs on pharmaceutical imports.
Investors are nervous. As of 9:55 a.m. ET Wednesday morning, shares of Roche Holding (RHHBY 0.54%) are down 2.3%, Eli Lilly (LLY 1.60%) stock is off 3.2%, and AstraZeneca (AZN +0.00%) is doing worst of all -- down 4.9%.
NASDAQ: AZN
Key Data Points
A rough week for big pharma
Today's announcement could potentially add to a string of bad tariff news that has cost Roche 10.9%, Lilly 14%, and AstraZeneca stock 14.4% over the past week. Still, it remains to be seen precisely how bad this news will be.
Up till now, the president has kept pharmaceutical imports free from the "reciprocal tariffs" he announced last week, applying 10% minimum tariffs to all imports into the U.S., and significantly greater than 10% tariffs to imports from specific countries. Believe it or not, and despite the number shown above, this may have dulled the pain pharmaceutical investors have suffered so far.
However, the U.S. imports "vast quantities of finished medicines" from abroad, as the BBC explains, with much of these imports coming from China, a particular target of Trump's ire. In total, mostly tariff-free pharmaceutical imports were valued at $213 billion last year, and this makes a tempting target for an administration hoping to swell government coffers through the imposition of tariffs. Accordingly, Reuters reports that today's tariff announcement will be "major" and will target imports of pharmaceuticals into the U.S., with the secondary aim to "incentivize drug companies to move their operations to the U.S."
This gives at least a starting point for gauging whether today's stock price declines make sense in light of the goal the president is laying out. In theory at least, stocks that already have significant manufacturing operations in the U.S. should suffer relatively less from the imposition of new pharmaceutical tariffs -- and those with relatively more foreign assets, suffer relatively more.
Image source: Getty Images.
Who's at risk, and who is not?
Of the three big pharma stocks named above, AstraZeneca looks most at risk. According to data from S&P Global Market Intelligence, nearly two-thirds of AstraZeneca's productive assets are located outside U.S. borders, with a heavy concentration in Europe, home to more than 50% of the company's assets. That said, only 40% of the company's revenue comes from U.S. sales, so despite what the raw numbers might suggest, even AstraZeneca's position might not be so bad, with U.S. assets roughly in balance with production demand.
Roche's position is similar, and perhaps even a bit better. Fifty-six percent of the company's assets are located in the U.S., and 48% of the company's revenue is collected here, implying that Roche may actually export more drugs from the U.S. than it imports, and be relatively safe from the effect of tariffs. (Albeit these numbers are rough, and don't provide a whole lot of granularity regarding which particular drugs are produced abroad, and imported, and which are produced domestically.)
Likewise with Lilly, which has 71% of its assets in the U.S., and collects 68% of its revenue here. Were pharmaceuticals a fungible commodity, the balance between Lilly's productive assets and the places it gets its revenue would look just about perfectly balanced, such that one might anticipate little need to import drugs from abroad, and pay tariffs on those imports.
In practice, of course, I doubt this is how things actually work out. Were I to guess, I'd suspect that all three companies tend to produce cheaper, more generic medicines abroad and then import them into the U.S. for sale at lower prices, and do more of their more advanced work domestically, for shipment abroad. And assuming this is how things work in practice, tariffs could still bite all three of these pharmaceutical stocks severely, as investors are surmising will happen. Still, with substantial assets already established in the U.S., I'd think all three companies have the ability to shift certain drug lines to the U.S. for domestic manufacture if tariffs make this the right business decision to make.
Long-term, I suspect the tariff risk here is less severe than investors fear it to be.
