Big Pharma’s big tariffs

0:00Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. Listen at schwab.com slash Washington Wise. Today on the show, we're talking about tariffs. Like 200 percent. Like really big tariffs. If they have to bring the pharmaceuticals into the country, the drugs and other things into the country, they're going to be tariffed at a very, very high rate. U.S. President Donald Trump is taking a big swing at drugs made overseas.

0:43That much is obvious. But why he's doing that and the impact that it'll have, that's a lot harder to figure out.

0:55This is Swamp Notes, the weekly podcast from the Financial Times, where we talk about all the things happening in U.S. politics, finance and the economy. I'm Mark Filippino. And this week we're asking, will big pharma change under Donald Trump? Here with me to discuss is Hannah Kuschler, the FT's global pharmaceutical editor. Hey, Hannah. Hey, thanks for having me. Good to have you back. And we've also got Patrick Temple West. He's the FT's U.S. pharmaceutical correspondent. Hey, Patrick. Hey, Mark. Hey, Hannah. So the big news in the farmer world this week was this 200 % tariff the president suggested he might implement soon.

1:32Hannah, describe the scene for me. Did he give a lot of details? What was it like? Oh, yes. Famously a detail man. No, not really. I mean, so he was at a cabinet meeting. And it's funny because, you know, farmer has so far been excluded from the big tariffs that have been announced. But he's always hinting that they're coming. and there'd been maybe, I don't know, Patrick will have to correct me here, but two, three, maybe even four weeks where he hadn't said something about farmer tariffs. And then suddenly he comes out and he says, you know, not only that they are still on his agenda, but that they might be as high as 200%.

2:07But he did put a caveat in there that they would have a year or a year and a half to bring back manufacturing to the US and that might help them escape tariffs. And what happened when he made the announcement, guys? Did shareholders go running for the hills? No, quite the contrary. It was a momentary dip as there usually is whenever tariffs come out of his mouth. But share prices rebounded and the pharmaceutical companies, they actually ended up a little bit for the day. So investors totally shrugged this off. Why was that? I'm so curious because, as you said, it's kind of counterintuitive. Well, I hate to keep using this term, but I think it was the taco traders.

2:50Taco, of course. Trump always chickens out. Coined by our colleague, Rob Armstrong. Yeah. So you think it was a taco thing, Hannah? Yeah, yeah. And actually, analysts and investors said that. They just, I mean, this is really complex stuff. If you were going to try and price in what the impact would be, I mean, for a start, like it would be gigantic because 200 % is huge. But also, these things, you know, it depends what part of the value chain it's on and all this kind of incredibly detailed stuff. And I think instead of doing that, investors have almost just got fed up and just said, yeah, well, you know, ring me when it actually happens.

3:23All right. I think we're going to start implementing a dollar in the jar rule every time the word taco gets mentioned on this show. And pay Rob. That's right. Take him out for lunch. Let's take a step back for a minute, because I think the context here is important. I wonder if you guys could walk us through a bit of Donald Trump's history with pharma, because while this is an explosive announcement, he does have a little bit of a history here. How have they gotten along in the past, like in his first term? Well, I actually had Patrick's job in his first term. So I had a bit of a front seat to watch.

3:58That's right. We spoke a lot during COVID. Oh, yeah, we did. And well, actually, you could almost divide it in two, right? Pre-COVID, he didn't have a great relationship with them, actually, you know, both sides of aisle quite like to bash pharma and say that drug prices are too high in the US. And he did try and lower prescription drugs. He also tried to right near the end of his tenure to implement something. It's called Most Favoured Nations, a way of pegging drug prices to other countries, all of which have much lower drug prices than the US. But on the other hand, you know, he at that point wasn't in bed with loads of vaccine skeptics.

4:39He actually, you know, put a lot of money and a lot of effort behind Operation Walk Speed that helped make the COVID-19 vaccine. And that, of course, benefited some pharma companies like Pfizer. So the whole point of these tariffs is to bring down the price of everything, right? They bring back manufacturing to U.S. shores. And that way, the products are cheaper for Americans. Would manufacturing drugs in America actually bring their prices down? It seems like any change in price would actually go in the opposite direction, at least at first. I mean, I think one of the big stumbling blocks is the reason why drug prices are really high is because of the intellectual property.

5:19And, you know, the fact that companies get this kind of government-granted monopoly to charge what they like, right? That is nothing to do with the production process. It's not like bringing back manufacturing would really affect prices. It might have the other effect of actually making the U.S. more secure on a sort of national security basis. This was something that came up a lot during COVID was we should have our own supplies of essential medicines. And that's a totally legitimate reason to do it. But it's not going to bring pricing down. What will it do then? Well. Take a deep breath. So to understand what you will do, you have to understand it's kind of an industry of two halves.

6:02right? So the branded drug makers, you know, they have very expensive, you know, new fancy cancer drugs or whatever. They can swallow some kind of tariff because they have a lot of pricing power. But the generics industry, which actually makes up 90 % of all medicines that Americans consume, those are your antibiotics, they're actually some of the older cancer drugs, there's all sorts of things in there. They have really thin margins, they already experience tons of shortages, especially in the U.S. These are often being imported from places like India. They are not going to be able to swallow 200 percent or even maybe 25 percent tariffs.

6:42So you're going to see more and more shortages of those medicines. And I don't think that those are headlines that Trump really wants to see. Patrick, what do people in the pharmaceutical industry think of Trump? Obviously, they have a complicated relationship, given all that we've talked about, but is he any different compared to any other kinds of political pressure that they've weathered in the past? That's a good question. I don't think the pharmaceutical sector is too different from other sectors that are being tariffed. I mean, there was a discussion among Washington lobbyists after Trump made this initial announcement back in May that he would get distracted.

7:21You had the LA riots. You had the US involvement in Iran that people were kind of hoping that this issue would just kind of go away on its own and that he would move on to other things. And then we had this announcement this week. I know it's back on the front burner. I mean, you do hear people in Washington expressing frustration saying, you know, what is the dollar amount that company X, Y, and Z needs to announce of building manufacturing in the U.S. that will get the White House applause. There is also a conversation about what drugs pharmaceutical companies might be able to offer, the low-hanging fruit, what can they lower the price on of things that are going off patent already, where the price is already coming down on some of these older drugs that the companies have already made a lot of money off of and are about to hit the generics market.

8:21So pharmaceutical companies don't actually have to do anything yet, but they are kind of in negotiations to maybe avoid tariffs coming down the road. Yeah. Yeah. Patrick, I'm really glad that you brought up the patents expiring, you know, these patent cliffs. The two Two of you wrote a story about that subject for the FT. And basically, a lot of the industry in the next few years are going to face patent expirations. And they're going to have to really invest heavily in new drug research to make up the profits. That's going to be difficult because Trump has been cutting federal funding for scientific research for months now.

8:59And I wonder, those things combined, is this going to impact these companies and the industry as a whole that's already bracing for less revenue? I think that the early stage cuts, right? So if you're funding, the government's funding stuff through NIH or direct grants to universities or things, that's really early stage basic research. And it is essential to the sector. The NIH, the National Institute of Health. Yeah, they, you know, that's really essential. Like the pharma companies don't go out and discover more about like how our body works. They rely on the fact that academics have worked out something more about how our body works and then they go and find a drug to apply to it that's the most basic way of looking at it but the thing is is that this is a process that takes like 20 years so the cuts now we won't feel or notice 20 years and how will we be able to pinpoint that oh the reason why we've got fewer drugs that are revolutionary and in in 20 years time is because we didn't invest in science now.

9:59It's really, really hard to draw that line. Do you think, either of you, that the pharma industry will really change under Trump, like to a point where we won't recognize it five years from now or so? No. I mean, I think there will be some changes. I think we've seen a lot of very splashy announcements from big drug manufacturers saying, we'll invest 50 billion in the US, etc. And so I think you will see and balance some more production moving to the US, but it will be nothing like the whole supply chain and it will be not for every drug. And I also think you will see maybe a little bit more pressure on European governments, because the pricing policy is about trying to peg it to countries with GDP of sort of 60 % per capita of what the US has.

10:55So we're drug makers are playing harder ball with those guys in their negotiations because they're scared that whatever they agree to in those countries will affect U.S. pricing. So those are the two main changes I can see coming. I can't see a transformed industry that operates entirely differently. Exactly. I will add for pharmaceutical companies to change radically, I think Trump would have to do an Obamacare rewrite of the U.S. health care system because these sectors, these industries are so interconnected. You have the whole U.S. insurance aspect to this, Medicare, Medicaid, the hospital systems.

11:35Drug prices can't be targeted in isolation. I would say there's one thing we also haven't mentioned if we're looking at the entire sector, which is RFK which I think is an area where there is a lot of nervousness so you know RFK Jr he comes in as U.S. Health and Human Services Secretary and he's a vaccine skeptic and so there's immediately a lot of worry at the vaccine companies and we've seen this recently with some big overhaul he made of a key committee that sets the guidance for vaccines has a big impact on who takes them, what insurers cover. So I think they've been worried by it. And then there's also been concerns that the cuts at the Food and Drug Administration will slow down approvals or approvals of clinical trials.

12:24And, you know, for pharma, that's really important. They're on this ticking clock with their patents. And so things need to happen as fast as possible. So those things have worried them a bit. But overall, yeah, when it comes to the really big things that could change the business model forever, like tariffs and pricing, they're still in wait and see mode and they're getting more and more skeptical about them actually happening. All right. I want to thank our guests. Hannah Kuchler is the FT's Global Pharmaceuticals Editor. Thanks so much, Hannah. Thank you. And Patrick Temple West is the FT's U.S.

12:56pharmaceutical correspondent. Thank you, Patrick. You're welcome, Mark. All right. We're going to take a quick break. And when we come back, we're going to answer some listener questions.

13:32Thank you.

13:38We are back to answer some of your questions. And we're here with Lauren Fedor, the FT's Deputy Washington Bureau Chief. Hi, Lauren. Hi, Mark. So, Lauren, this question comes from Michelle in the state of Illinois. During the first Trump administration, leaks were, I guess, the best way to describe them were commonplace. In contrast, very few leaks have come from the second administration. What caused this change? I think that's a great question. I think the first thing to say is that this administration is far more disciplined and professionalized across the board than Trump 1.0 was. And we saw that from the get go came with the president's appointments to keep cabinet positions.

14:22It also manifested itself in their kind of legislative agenda. Look, the big, beautiful bill. They muscled that through in pretty much record time. So a lot of discipline in this team. And that carries on to leaking, too. It's not completely gone, though, right? I mean, I don't know if you would consider this a leak, but SignalGate, right? Operation Rough Rider were a bunch of national security conversations where a journalist was accidentally brought on Signal, the app, about military operations against the Houthis in Yemen. That got publicized. Yeah, absolutely. Look, I'm not saying there are no leaks, and I don't think necessarily that our listener was saying that either.

15:03But it just means there's fewer of them. Now, SignalGate is obviously one that is a huge embarrassment to the administration and caused them a lot of turmoil. I think when it comes to intentional, clearly intentional leaks, though, of members of the administration passing along damaging information, we see far less of that. All right. Thank you, Lauren, for that very detailed and thorough answer. I appreciate it. Thanks for having me, Mark. And I want to thank Michelle for her question. I hope we answered it. If you have a question about Washington and the global economy, send a message to the email in the show notes.

15:39It's my name. There's a bunch of weird letters in there. I would just look it up. And we'll try to answer it next week.

15:51This was Swamp Notes, the U.S. politics show from the FT. If you want to sign up for the Swamp Notes newsletter, we've got a link to that in the show notes. Our show is mixed by Sam Giovinco and produced by Henry Larson. We had help this week from Lauren Fedor. Special thanks, as always, to Pierre Nicholson. I'm your host, Mark Filippino. Our acting co-head of audio is Topher Forges. Original music by Hannes Brown. Check back next week for more U.S. political analysis from the Financial Times.

16:41Or perhaps you pick up a few farm-fresh trades while you peruse. You can even get help from a dedicated advisor. That's full-service wealth management. Mix, match, and change your mind whenever you want. Because at Schwab, you can invest your way. No matter your goals or appetite for investing, Schwab has everything you need, all in one place. Visit schwab.com to learn more. What does fall smell like at your house? Warm cashmere? Crisp apple? something like a pumpkin patch at golden hour. Pura's whole home scenting lets you build a different scent story for every room, controlled entirely from your phone.

17:20This is Pura's new era of fragrance. Explore scents of place at Pura.com.