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The Costs of Innovation

From the series Industry and pharmaceuticals

The Trump administration wielded the sword of tariffs against pharmaceutical companies, with the declared aim of bringing productive activities back to America. The largest multinational life sciences firms responded with investment announcements — estimated to total $400 billion. It is not always clear whether these are entirely new allocations or whether they include capital already committed to earlier expansion plans in the US market. In any case, the expected increase in pharmaceutical manufacturing capacity in the US will take a few years to materialise. The administration nevertheless emphasised the Trump effect.

The relocation of production lines to existing or newly built plants relates to some branded drugs protected by patents. Generics, which account for 90% of prescriptions in America, are not affected.

Global supply chains

As already noted, the supply chain of medicines is long and complex. Consequently, the imposition of customs tariffs is equally complicated. In most cases, the production process does not occur entirely in a single country. Raw materials and active ingredients can come from different countries, as well as the formulation of the medicine and its final packaging (fill & finish) in tablets or solutions. A drug can pass through different plants and countries during its processing before eventually reaching the consumer. For example, AstraZeneca’s COVID-19 vaccine was produced in the Netherlands and Belgium and packaged in Anagni (Italy) by the US company Catalent.

US Pharmacopeia (USP) — a non-profit scientific organisation that tracks medicines and monitors their compliance with quality standards — has traced the origin of the active ingredients of drugs prescribed in the United States. For branded medicines, 15% of the active ingredient is produced in the US, 43% in the EU, 2% in India, and 3% in China, while the remaining 37% are classified as other or of unknown origin. In the case of generic medicines, the picture changes radically: 12% comes from the US domestic market, 18% from the EU, 35% from India, and 8% from China.

Branded drugs remain protected by patents, which last twenty years (plus any extensions that companies, often through various ruses, obtain from regulators). They therefore tend to include the most innovative products and, increasingly, biological treatments. Moving from active ingredients to finished drugs, considered as a whole, USP found that 22% of orally administered prescription medicines in the US are domestically produced, 6% come from the EU, 60% from India, and 3% from China.

On the other hand, almost half of injectable medicines are produced in the United States, with 45% of the total; 19% are produced in the EU, 15% in India, and 9% in China [The New York Times, August 23rd].

Unlikely self-sufficiency

The United States therefore depends on foreign countries primarily for generic drugs, which, as mentioned, account for nine out of ten prescriptions. For some medications, the dependence is almost total. For example, according to the analytics company Clarivate, China and India produce nearly all the active ingredients for the anti-inflammatory ibuprofen and the antibiotic ciprofloxacin, as well as the widely used amoxicillin. Just 19% of the anti-hypertensive losartan is produced as a finished drug in the US, while 78% is imported from India, and both countries rely on China for the active ingredient [The New York Times, April 4th].

According to a Clarivate survey, more than 80% of active ingredients for essential medicines do not have production facilities in the United States. This has caused shortages which peaked in 2011, when 267 medicines were unavailable on the national market [Center for Analytics and Business Insight-Washington University, “The US Active Pharmaceutical Ingredient Infrastructure: The Current State and Considerations to Increase US Healthcare Security”, August 1st, 2021].

It is understandable why active ingredients and generic drugs, at least for now, are not subject to US tariffs: not only could they cause price increases, but they could exacerbate existing shortages.

The Trump administration aims to bring pharmaceutical production back to the United States, including generics and active ingredients. It will be a complex endeavour. According to an analysis of data collected by the Food and Drug Administration (FDA), the number of US facilities formulating generic drugs has decreased by 27% since 2013, and plants producing active ingredients have fallen by 38% [The New York Times, November 4th]. Lower production costs in other countries have led to the closure of plants that are no longer competitive. Modernising them, or building new ones, requires years, significant investment and technological innovation to remain competitive. Moreover, the average cost of an American worker can be more than ten times higher than their Indian counterpart.

Tariffs vs prices

Branded medicines, being more recent and expensive, and generating higher profit margins, are the ones targeted by tariffs (currently at 15%). On drug prices, the Trump administration resumed a battle that the president had already undertaken, without success, during his first term. The Biden presidency had previously reached a historic agreement with Big Pharma.

In the United States, branded drugs cost two or three times as much as in Europe. The policy of multinational companies, so Trump accuses, is to load their high profits and their research and development (R&D) costs, which benefit the entire world, onto American consumers. The executive order of May 12th, which announced an aggressive price reduction plan, also targeted the bargaining system practised in the United States along the supply chain, among manufacturers and intermediaries, hospitals, insurance companies, and pharmacy chains, offering confidential discounts on list prices. The consulting firm Berkeley Research Group estimates that approximately half of pharmaceutical sales proceeds in the US are lost along the distribution chain [Handelsblatt, September 12th, 2025].

A lowering of prices in the United States is seen favourably by major pharmaceutical companies, as long as it reflects a realignment between the two sides of the Atlantic. We agree with Donald Trump’s goal of making medicines cheaper in the US, declared Christopher Boerner — the CEO of Bristol-Myers Squibb (BMS) — to the financial newspaper Handelsblatt. However, without a corresponding price increase in Europe, it would be a severe blow for European producers, as the American market is their main source of profits.

This is also the opinion of other multinational companies. I personally believe that the president is right to say that price equalisation should happen [...]. The cost of R&D in our industry should be shared more fairly across rich countries, says Pascal Soriot — the CEO of AstraZeneca — [The New York Times, July 31st]. The Anglo-Swedish company, which has its headquarters in the UK, halted the £450 million expansion of a vaccine factory in Liverpool earlier this year and has now decided not to expand its research site in Cambridge. US companies Eli Lilly and Merck have also suspended multi-million-dollar investments in research centres in London. Richard Torbett of the Association of the British Pharmaceutical Industry told Handelsblatt on September 25th that other companies are critically reviewing their investments in the UK and their future product plans.

New distribution models

According to Soriot, in hyper-regulated Europe, medicines are underpaid. You still see a large industrial base in Europe, for historical reasons. A problem is future products rely on new technologies that require new manufacturing tools. And these technologies are going to the US, and they’re going to China and other parts of the world, so in 15-20 years, Europe could easily lose its health sovereignty. At this rate, Soriot believes, companies will invest elsewhere and some European countries will only have access to generic drugs, over ten years old, and not to the new therapies [Financial Times, November 7th].

In the US Big Pharma — faced with tariffs and the threat of punitive measures, such as the accelerated approval of generic versions of highly profitable biological drugs — hurried to negotiate voluntary price reductions. Among the companies, the line of direct sales to the public, under medical prescription, is gaining ground, reducing the earnings of other operators in the distribution chain.

Among the first companies to adopt the new distribution model, Pfizer and AstraZeneca have reached an agreement with the administration for a reduction of up to 50% on some of their medicines, in exchange for a three-year moratorium on tariffs. These products will be sold directly online to consumers through TrumpRx, a platform specially created by the government which will be operational from January 2026. Other companies such as Novartis, BMS, Merck KGaA (Germany) are about to move to direct sales.

The enthusiasm is exaggerated, according to The New York Times, and it is not certain that the new distribution model will benefit the consumer. The few AstraZeneca drugs mentioned that will be sold on TrumpRx are not among the most prescribed in the United States. In the complex US distribution system, it can happen that an insured patient has a co-payment charge on a prescription which is lower than the new price if purchased directly.

The latest agreement was signed with the Danish company Novo Nordisk and Eli Lilly, the fiercely competing producers of the now famous, widely used and expensive GLP-1 anti-obesity drugs. A triumphant White House fact sheet announced on November 6th the latest in a series of most significant actions ever taken by the federal government to lower prices. Under the agreement, the price of Novo Nordisk’s Ozempic and Wegovy (semaglutide) will drop from $1,000 and $1,350 respectively to $350 for a monthly treatment. The price of Eli Lilly’s Zepbound (tirzepatide) and Orforglipron (still experimental) will drop from $1,086 to an average of $346 per month. The drugs can be reimbursed by the Medicare and Medicaid public health insurance programmes, if prescribed to obese patients with co-morbidities, with a co-payment of $50.

In the battle over prices, in the US as in Europe, what is at stake is the return (meaning profits) on capital invested in R&D, i.e., in innovation. This is where Asia comes into play.

Lotta Comunista, November 2025
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