Pharmaceuticals

The global pharmaceutical industry rebounded in 2024, with prescription drug sales rising 7.7%, driven by innovation, demographic shifts and improved healthcare access in emerging markets. Growth is being increasingly fuelled by biologics and biosimilars, supported by expanding cold-chain infrastructure and a rising share of novel drug launches. Key therapeutic areas such as oncology, immunology, endocrinology and GLP-1-based treatments continue to lead, with strong demand in both developed and emerging markets such as India. Meanwhile, emerging technologies like digital health, personalised medicine, cell and gene therapies, and mRNA platforms are opening new avenues for long-term industry expansion.

However, the sector faces a major patent precipice: over USD 350 billion in branded drug sales are at risk between 2025 and 2030, primarily among blockbuster therapies. The top 20 firms account for roughly 80% of this exposure. While this opens opportunities for generics and biosimilars, it also pressures companies to replenish pipelines—prompting acquisitions of late-stage biotech firms and partnerships with Chinese biotechs, supported by strong cash reserves.

US tariffs pose a significant threat across the industry. The US imports a large share of its pharmaceuticals, resulting in a USD 118 billion trade deficit (HS03, 2024), or 9% of the total. Tariffs would squeeze margins for generics and distributors, who rely heavily on low-cost APIs from China and India. Rising costs could lead to market exits and drug shortages.

Large pharmaceutical firms are also vulnerable due to high transfer prices and potential tax strategy shifts. Tariffs are levied on transfer prices, not manufacturing costs, forcing firms to choose between higher tariffs or increased US tax exposure.

Additionally, pricing scrutiny and regulations such as the IRA and potential Most Favoured Nation (MFN) policies will restrict future price increases. The IRA allows Medicare to negotiate prices nine years post-approval for small molecules and 13 years for biologics, targeting peak profitability. MFN policies could further reduce US prices by pegging them to lower international benchmarks. This scrutiny may threaten Pharmacy Benefit Managers (PBMs), but could ultimately lower consumer drug costs.

Sector returns to rapid growth

After two years of sluggish activity, the global pharmaceutical industry has returned to growth, supported by sustained innovation, demographic shifts and improved healthcare access in emerging markets. This rebound builds on the sector’s inherent resilience, underpinned by its non-cyclical demand that acts as a hedge against economic fluctuations. Global prescription drug sales rose by 7.7% in 2024 (Evaluate) and are expected to maintain this momentum in the coming years. This recovery is not only broad-based but is also being increasingly shaped by high-growth segments. Biologics continue to gain ground over small molecules, accounting for 42% of novel active substance launches over the past five years (up from 39% in the previous period, IQVIA). The expansion of cold-chain infrastructure in developing economies is accelerating the use of biosimilars, which is further fuelling growth. Therapeutic areas such as oncology, immunology and endocrinology remain central to industry expansion, which are driven by rising global disease burdens and continued innovation.

GLP-1-based treatments remain a standout segment, with surging demand in both developed and emerging markets, India being a notable example due to a growing population living with diabetes.

mRNA technology, initially propelled by Covid-19 vaccines, is now being explored for a broader range of applications – cancer immunotherapy, rare diseases, and infectious disease prevention to name three – positioning it as a promising platform for future drug development. At the same time, digital health integration, personalised medicine, and cell/gene therapies are opening up new frontiers for growth, especially in markets with supportive regulatory frameworks and reimbursement models.

Patent precipice on the horizon

Nevertheless, the industry is facing a major patent precipice, with over USD 350 billion in branded drug sales at risk between 2025 and 2030 (Evaluate). The wave of expirations is concentrated among blockbuster therapies, including biologics, with the top 20 pharmaceutical firms accounting for approximately 80% of the potential revenue exposure (BCG). The Loss of Exclusivity (LoE) cycle harbours both strategic opportunities and significant risks. On the one hand, it has opened the market up to generic and biosimilar manufacturers that are actively filing to enter markets previously dominated by branded drugs. On the other, it has compelled companies to rapidly replenish their pipelines by acquiring biotech assets (late-stage assets for those seeking speed), intensifying in-licensing activity, and implementing LoE strategies.

Big pharmaceutical companies have already started replenishing their pipelines. J&J, Merck, Pfizer, BMS held an estimated USD 67 billion in cash at the end of 2024 and are already deploying it (e.g., Merck acquired Verona, J&J acquired Caplyta, Pfizer acquired Seagen, BMS acquired Karuna). The acquisitions took place amid lacklustre M&A activity since 2019 and a rather attractive biotech market, with many firms trading at half their 2021 value. Moreover, Chinese biotech firms are also emerging as credible and competitive partners. They are gaining scientific credibility, securing regulatory approvals in global markets, and are maintaining cost advantages. This is reflected in their expanding role in global drug licensing, where their share of deals in year-to-date in 2025 currently stands at 40%, which is a sharp rise from a mere 5% in 2020 (Evaluate).

US tariffs pose a significant risk for the sector

Irrespective of their size, US tariffs will pose a significant challenge for the sector, from big pharmaceutical companies to distributors. The US imports a large share of its pharmaceutical products from abroad, generating a trade deficit of USD 118 billion in this sector alone (HS03, 2024), or roughly 9% of the total trade deficit. The main contributors to the deficit were: (A) Packaged medicines: constituting around USD 95 billion in imports, mostly small-molecule drugs — both branded and generic, from the EU, Switzerland, and India (especially for generics, which are lower in value but higher in volume) and (B) Serums and vaccines: constituting around USD 110 billion in imports and increasing rapidly. These are primarily biologics and biosimilars, sourced from the EU, Switzerland and Singapore. Key manufacturing ingredients, such as hormones, genetic materials, and ring compounds also add to this deficit, largely imported from Ireland and Singapore.

Tariffs will squeeze the margins of generic manufacturers and distributors. US generics manufacturers already operate on razor-thin margins in a highly competitive market. They depend highly on importing low-cost raw materials and active pharmaceutical ingredients (APIs) from countries such as China and India. Any increase in those costs will result in lower margins, prompting companies to exit such markets (resulting in drug shortages). Importers of finished products, on the other hand, will fight to pass these higher costs onto the end client, which will either push drug prices up or their profits down.

Tariffs on generic drugs could also have a pronounced ripple effect on domestic pharmaceutical distributors. Unlike branded drugs, which offer a very limited mark-up for distributors, generics are typically purchased in bulk at low unit prices, allowing distributors to generate meaningful margins through volume-based sales. Consequently, any tariff-induced increase in procurement costs would significantly erode these margins. Despite their comfortable margins, some big pharmaceutical companies are also at risk. In 2017, the US introduced the Tax Cuts and Jobs Act (TCJA) which lowered the corporate tax rate from 35% to 21% and offered an even lower 10.5% rate on foreign income related to intangible assets such as drug patents. For pharmaceutical companies selling branded drugs, this created a clear incentive: shift production abroad to benefit from the 10.5% rate instead of the higher 21%. Pharmas chose Ireland and Singapore for their lower corporate tax and infrastructure. In addition, these companies booked most of their profits to their Irish affiliate and losses to the US affiliate, thereby minimising their paid taxes. Using high transfer prices (or the price paid by the US affiliate to import drugs from the Irish affiliate), companies such as Pfizer, Abbvie, or BMS even reported losses in 2024.

But these high transfer prices could now be subject to tariffs, challenging this tax strategy. Because tariffs are assessed on the transfer price rather than the actual manufacturing cost, higher transfer prices now mean higher tariffs will have to be paid. This creates a trade-off: firms will have to choose between maintaining high transfer prices (and incurring higher tariffs) or lowering transfer prices (and increasing US tax exposure). Moreover, adjusting transfer prices is not straightforward. Unless they repatriate their IP and onshore their production, any changes to transfer pricing could result in a significant tax risk (e.g., audits and IRS scrutiny) or may simply be impossible to make.

Increased regulation will limit passthrough

Moreover, increased pricing scrutiny (e.g., Most Favoured Nation drug pricing) and regulatory policies (e.g., IRA) will challenge drug price increases in the future, limiting any passthrough of the sector. By allowing Medicare to negotiate prices (nine years after approval for small molecules and 13 for biologics), the IRA reduces prices at a stage when drugs are typically most profitable. Moreover, any version of the MFN, if implemented, would add to the risk by pegging US prices to lower international benchmarks. In response, firms are ramping up lobbying efforts to delay or soften implementation, while adjusting strategies: front-loading revenues, focusing R&D on therapies with high unmet need or shorter development cycles, and shifting portfolios toward biologics, which benefit from longer protection. Despite strong industry resistance, these reforms mark a turning point in US pricing dynamics by forcing Big Pharma to adapt both commercially and politically.

Growing scrutiny over drug pricing may pose an existential threat to Pharmacy Benefit Managers (PBMs), but stand to reduce prices paid by the consumer. Companies like CVS Caremark, Express Scripts and OptumRx (accounting for 80% of the market) negotiate confidential rebates with drug manufacturers in exchange for a favourable position on insurance reimbursement forms. These rebates are often based on list prices rather than net prices, which incentivises manufacturers to raise list prices to remain competitive in rebate negotiations. As a result, PBMs may prioritise high-cost branded drugs over more affordable generics or biosimilars. These concerns have drawn closer attention from regulators, with US lawmakers and agencies investigating PBM practices. In addition, pharmaceutical companies such as Roche have expressed interest in bypassing PBMs entirely by selling directly to insurers or patients. This distortion has also enabled the rise of companies like Cost Plus Drugs which offer low-priced generics directly to consumers using a transparent pricing model that bypasses both PBMs and insurers.