Pharma outlook – tariffs & healthcare reform

Major pharmaceutical companies face pressure both on tariffs, and a remodelling of the healthcare system in their largest and most profitable market, the US. Healthcare is not one of our preferred sectors, but amid depressed valuations and sentiment we see opportunities in selected areas.

The pharmaceutical sector still faces the threat of fresh tariffs that could be imposed under ‘Section 232’ of the US’s Trade Expansion Act. This allows the US president to restrict imports if they are deemed a threat to national security. A recent investigation under the Act was initiated by the Department of Commerce to determine whether pharmaceuticals meet this definition. In May, President Trump had talked of a 25% tariff on pharmaceutical imports, and then in July threatened “a very, very high rate” of as much as 200% within 12-18 months. An announcement here is expected in the coming weeks. Meanwhile, there is also uncertainty over how some existing levies will apply, for example if the new EU tariffs will apply to active ingredients, finished drugs, or both. 

The pharmaceutical sector still faces the threat of fresh tariffs that could be imposed under ‘Section 232’ of the US’s Trade Expansion Act

Reshaping US healthcare

A 1994 agreement by major economies, including the US and China, had largely exempted drugs and their ingredients from tariffs. The European Federation of Pharmaceutical Industries has said that tariffs will now “disrupt supply chains, impact on investment in research and development and ultimately harm patient access to medicines on both sides of the Atlantic.”

Pharmaceutical companies also face wider uncertainties that could weigh on earnings growth and valuations. The US president is demonstrating a willingness to overhaul the US healthcare model, which spends 16.6% of GDP on healthcare, compared with a 9.2% OECD country average, but delivers relatively poorer healthcare outcomes. This situation looks unsustainable, and suggests that the pharmaceutical industry faces significant change in the coming years in its largest and by far its most profitable market.

Drugs are not the main healthcare costs in the US; prescription drugs accounted for just 9% of US healthcare spending in 2023, according to the Centers for Medicare and Medicaid Services. Yet reform of the system is hugely complex. In the meantime, uncertainty over such important issues and the risk to pharmaceutical companies’ margins is likely to continue to weigh on share prices.

The new US administration is attempting to radically reshape the country’s healthcare landscape

The new US administration is attempting to radically reshape the country’s healthcare landscape, across manufacturing, regulation and pricing. In late July, President Trump increased pressure on the sector, writing to 17 global pharmaceutical companies urging immediate action to lower drug prices, with a deadline of 29 September for some specific price cuts and the launch of a ‘direct-to-consumer’ channel. This would bypass ‘pharmacy benefit managers’ or PBMs who are the intermediaries responsible for administering prescription drug benefits for health insurers and employers. The action follows a May 2025 executive order which promised to align US drug prices with the lowest charges in other developed nations, and to enable direct-to-consumer sales. 

While lower drug prices would weigh on drug companies’ profit margins, bypassing PBMs could potentially be positive for both the industry and patients. The current US model, with many intermediaries between the manufacturer and the patient, absorbs a high proportion of healthcare spending. Indeed, in their second quarter earnings calls, several pharma management teams reported constructive dialogue with the US administration.

Another uncertainty is potential disruption related to changes at the US Food and Drug Administration (FDA), which reviews and approves new drugs. Here, job cuts by the Trump administration threaten to slow drug approval processes. For drugs companies, time to market from patent approval – which is filed when a drug is being tested – is crucial, since any delays can reduce market exclusivity and hence potential revenues for a new product.

So far, drugs companies have been quick to react to the changing US landscape, including announcements of billions of dollars in US investment. But such investments will take years to build, and while some of the manufacturing of active pharmaceutical ingredients for branded drugs will be repatriated to the US, question marks remain over the manufacturing of generic drugs, where much takes place in China and India. In the absence of tariff certainty, many generic producers will look to build additional resilience into their supply chains, including through diversification of suppliers, which may increase costs. Still, this does not affect large pharmaceutical companies manufacturing, only that of branded products.

So far, drugs companies have been quick to react to the changing US landscape, including announcements of billions of dollars in US investment

How will tariffs impact Switzerland, which exports around 40% of its pharmaceutical production to the US? While the most recent threats exclude pharmaceuticals, if the US imposed punitive tariffs on the sector’s products, we see downside risks. We had revised our 2025 real GDP forecast for Switzerland to 1.1% (from 0.7% previously) to incorporate a stronger-than-expected first half, but President Trump’s 39% tariff announcement and associated uncertainties on US-Switzerland trade prompt us to adopt a more conservative assumption at 0.9%. The longer such tariffs stay in effect, the bigger the risks for the Swiss economy, until it adjusts to the shock. We expect Switzerland to intensify its trade talks with the US administration. If Switzerland can negotiate a tariff closer to 15% then the Swiss National Bank (SNB) should be able to maintain its zero percent policy rate. However, if the 39% tariff were confirmed, or we see separate sectoral tariffs on pharmaceutical exports, the likelihood of negative SNB rates would increase.

Trading at a discount, selective opportunity

Policymakers’ efforts to reduce US healthcare costs are a clear negative for both investor sentiment on the sector and its earnings outlook. In the absence of more clarity over sector tariffs and wider US healthcare reform, we believe many investors are likely to remain on the sidelines. With this uncertainty in mind, healthcare is not one of our preferred sectors.

With this uncertainty in mind, healthcare is not one of our preferred sectors

However, a lot of negativity is now reflected in share prices. Large-cap global pharma companies are currently trading at around 12.4 times earnings, an 18% discount to their 10-year average. We see selective opportunities among suppliers, and in pharmaceuticals and biotech stocks with strong pipelines that can drive earnings growth regardless of today’s uncertainties. Furthermore, any resolution of current uncertainty for the Swiss pharmaceutical sector could also see the Swiss Market Index recover lost ground, after lagging other developed market indices year to date.