Indian pharma firms dread tariffs, but US may have the worst side effects

The US is India's largest export market for pharmaceuticals, accounting for 31 percent of total exports by the sector, according to industry body Pharmexcil (Pharmaceuticals Export Promotion Council of India). Meanwhile, several top Indian drugmakers are also heavily dependent on US exports for making up 10-50 percent of their overall sales.

With such a heavy dependence on the US drugs markets, the concerns of an adverse impact from tariffs seems legit. According to calculations by HSBC, a 10 percent tariff on pharma imports could significantly impact the earnings of Indian drugmakers, with Dr Reddy’s Laboratories expected to take the biggest hit at a 6.5 percent reduction in earnings per share (EPS). Zydus Lifesciences follows closely with a 6 percent impact, while Aurobindo Pharma and Lupin could see their EPS decline by 5.5 percent and 4.5 percent, respectively.

Cipla is projected to face a 4 percent dip, whereas Sun Pharma and Torrent Pharmaceuticals are likely to be less affected, with EPS reductions of 1 percent and 0.8 percent, respectively.

Shrikant Akolkar, vice president and pharma analyst at Nuvama Institutional Equities echoed a similar sentiment, anticipating firms like Zydus, Aurobindo and Dr Reddy's--basically companies with higher presence in the low-margin generics segment to be the worst hit.

In contrast, Akolkar feels that players like Cipla, Lupin and Sun Pharma will be much more safeguarded from the tariff impact, if any, due to their specialised, high-margin portfolios.

Is the fear outblown?

Most analysts expect an initial hit to pharma companies' profitability if tariffs are imposed but believe the long-term impact on earnings will be limited. Management commentaries from several drugmakers also hint at a relatively comfortable stance on Trump's tariff plans, indicating that companies intend to offset the impact by passing the costs to customers through price hikes.

Also, if tariffs on pharma imports are imposed across the board, Indian drugmakers would continue to enjoy their cost competitiveness over other players, helping safeguard market share as well as earnings. "Tariffs hurt when they affect price competitiveness, but since Indian firms already enjoy cost superiority, across-the-board tariffs will still position them at the lower end of the price spectrum," explained Surya Patra, Vice President at Philip Capital.

US--the real victim

The India-US pharmaceutical trade is mutually dependent—while Indian drugmakers generate 10 to 50 percent of their revenue from the US, the country, in turn, relies on India for nearly 45 percent of its generic medicines and 15 percent of biosimilars by volume. What this means is that, if the US does impose a 25 percent tariff on pharma imports, it will end up doing more harm to its healthcare system than good.

Akolkar warns that higher tariffs would inflate drug prices in the US, as Indian companies, the most cost-effective players, would raise prices to offset the impact. And if price hikes become unsustainable, Indian firms might exit the US generics market altogether, causing a drug shortage that US manufacturers might not be able to fill.

“Indian companies dominate the low-margin generic segment, a space largely unoccupied by US drugmakers,” Akolkar explained. “If Indian firms exit, it would leave a massive gap in affordable medicines, one that US players are ill-equipped to fill,” he added.

Patra shared a similar view, citing that the US is going to hurt itself more if it imposes tariffs on Indian pharma imports. Patra added another layer to the discussion, suggesting that Trump’s tariff threats may be more about targeting trade imbalances with Europe than India.

“The pharma import bill from Europe is far higher relative to its volume contribution,” Patra noted. “In contrast, India accounts for over 40 percent of import volumes, but its total bill is much lower.”

Ultimately, analysts believe these tariffs would strain the US healthcare system and burden consumers — a weak link that Indian drugmakers are hoping to strategically leverage to negotiate relief. For now, the sector remains under pressure, but if Trump pushes forward with tariffs, he may end up handing more pain to the US consumers than to Indian drugmakers.

The path ahead

With the uncertainty hanging over the imposition of these tariffs, pharma stocks, particularly those with higher exposure to the US are expected to reel under pressure in the near term. In such a scenario, analysts suggests investors to look for investment opportunities in the contract development manufacturing (CDMO) space.

CDMO players are better placed to weather through the tariff storm due to their high margins and long-term contracts for drug manufacturing with US innovators, Alkolkar said. A recent report by global investment firm also highlighted that India's CDMO sector is benefiting from secular growth as well as regulatory tailwinds.

"India's CRDMO sector is at a turning point, driven by rising pharmaceutical outsourcing amid drug pricing pressures and global supply chain shifts. Currently valued at ~$7bn, the industry is projected to grow at a 14 percent CAGR to reach ~$14bn by 2028. Regulatory tailwinds like the US Biosecure Act could further accelerate growth to a high-teens CAGR, pushing the market to ~$22bn by 2030," Macquarie said.

To that effect, Macquarie believes the valuation premium of CDMO pharma players like Divi's Labs and Suven Pharma are justified, thanks to their near 2x EBITDA growth CAGR over the next three years and around 2x ROIC compared to global and regional peers.

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